nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2018‒10‒22
nine papers chosen by
Georg Man

  1. Systemic Banking Crises Revisited By Luc Laeven; Fabian Valencia
  2. The Differential Impact of Bank Size on Systemic Risk By Amy Lorenc; Jeffery Y. Zhang
  3. Structural credit ratios By Bianchi, Benedetta
  4. The role of FDI in structural change: Evidence from Mexico By Escobar, Octavio; Mühlen, Henning
  5. Measuring Real-Financial Connectedness in the U.S. Economy By Erhan Uluceviz; Kamil Yilmaz
  6. Quel impact de la libéralisation du compte capital sur le développement financier en Tunisie ? Les enseignements d'un modèle ARDL By Ilyes Gritli; Serge Rey
  7. Dollarization and Financial Development By Geoffrey J Bannister; Jarkko Turunen; Malin Gardberg
  8. Banking in a Steady State of Low Growth and Interest Rates By Qianying Chen; Mitsuru Katagiri; Jay Surti
  9. Rare Disasters, Financial Development, and Sovereign Debt By Sergio Rebelo; Neng Wang; Jinqiang Yang

  1. By: Luc Laeven; Fabian Valencia
    Abstract: This paper updates the database on systemic banking crises presented in Laeven and Valencia (2008, 2013). Drawing on 151 systemic banking crises episodes around the globe during 1970-2017, the database includes information on crisis dates, policy responses to resolve banking crises, and the fiscal and output costs of crises. We provide new evidence that crises in high-income countries tend to last longer and be associated with higher output losses, lower fiscal costs, and more extensive use of bank guarantees and expansionary macro policies than crises in low- and middle-income countries. We complement the banking crises dates with sovereign debt and currency crises dates to find that sovereign debt and currency crises tend to coincide or follow banking crises.
    Date: 2018–09–14
  2. By: Amy Lorenc; Jeffery Y. Zhang
    Abstract: We examine whether financial stress at larger banks has a different impact on the real economy than financial stress at smaller banks. Our empirical results show that stress experienced by banks in the top 1 percent of the size distribution leads to a statistically significant and negative impact on the real economy. This impact increases with the size of the bank. The negative impact on quarterly real GDP growth caused by stress at banks in the top 0.15 percent of the size distribution is more than twice as large as the impact caused by stress at banks in the top 0.75 percent, and more than three times as large as the impact caused by stress at banks in the top 1 percent. These results are broadly informative as to how the stringency of regulatory standards should vary with bank size, and support the idea that the largest banks should be subject to the most stringent requirements while smaller banks should be subject to successively less stringent requirements.
    Keywords: Bank failures ; Bank size ; Financial regulation ; Systemic risk ; Tailoring
    JEL: G21 G28
    Date: 2018–09–28
  3. By: Bianchi, Benedetta
    Abstract: This paper studies the relation between the credit-to-GDP ratio and macroeconomic trends. We estimate a long run equation on a sample of EU countries; our findings suggest that the macroeconomic factors with which the credit ratio associates most strongly are economic development, the investment share in GDP, and inflation. We then obtain projections for past and future trends. First, we study the evolution of the credit ratio in the past. We find that most of the increase starting in 1985 is associated with economic development and falling inflation, while the decrease of investment may have slowed down this trend. Second, we offer a forward-looking estimate of the structural credit ratio, defined as the long run, or sustainable, component. We offer band estimates based on two alternative assumptions on future economic outcomes, which can be interpreted as a structural and a cyclical view of current macroeconomic dynamics. Estimates of structural credit ratios based on this method are useful to policy makers having to decide on the activation of the countercyclical capital buffer, especially when assessing the sustainability of credit growth. JEL Classification: E51, G01, E44
    Keywords: credit gap, equilibrium credit, long run modelling, macro-prudential analysis
    Date: 2018–10
  4. By: Escobar, Octavio; Mühlen, Henning
    Abstract: Foreign direct investment (FDI) flows to Mexico are substantial and play an important role in the Mexican economy since the mid-1990s. These investments reflect the activities of multinational firms that shape to some extent the economic landscape and sectoral structure in this host country. We illustrate that there is considerable variation in the amounts of FDI and structural change within the country and across time. Based on this, the paper's main purpose is to analyze whether there is a significant impact of FDI on structural change. We conduct an empirical analysis covering the period 2006-2016. We use the fixed-effects estimator where the unit of observation is a Mexican state for which we calculate structural change from the reallocation of labor between sectors. The results suggest that (if any) there is a positive effect from FDI on growth-enhancing structural change. This effect depends critically on the lag structure of FDI. Moreover, there is some evidence that the positive effect (i) arises from FDI flows in the industry sector and (ii) is present for medium- and low-skilled labor reallocation.
    Keywords: FDI,structural change,labor reallocation,Mexico,multinational firms,economic development
    JEL: F21 L16 O10 O54
    Date: 2018
  5. By: Erhan Uluceviz (Department of Economics, Gebze Technical University); Kamil Yilmaz (Koç University)
    Abstract: We analyze connectedness between the real and financial sectors of the U.S. economy. Using the weekly ADS index of the Philadelphia FED (the widely used business conditions indicator) to represent the real side, we find that during times of financial distress and/or business cycle turning points the direction of connectedness runs from the real sector to financial markets. The ADS index is derived from a model containing a measure of term structure along with real variables, therefore, it might not be the best representative of the real activity to be used in the connectedness analysis. As an alternative, we derive a real activity index (RAI) from a dynamic factor model of the real sector variables only. The behavior of RAI over time is quite similar to that of the ADS index. When we include RAI to represent the real side of the economy in the connectedness analysis, the direction of net connectedness reverses: financial markets generate positive net connectedness to the real side of the economy.
    Keywords: macro-financial linkages, connectedness, ADS index, dynamic factor model, volatility, vector autoregression, variance decomposition
    JEL: C38 E44 E37 G10
    Date: 2018–10–10
  6. By: Ilyes Gritli (CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour); Serge Rey (CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour)
    Abstract: On s'intéresse dans cet article à l'impact de la libéralisation du compte capital sur le développement financier en Tunisie, sur la période 1986-2014. En s'appuyant sur un modèle ARDL on estime les effets de court terme et de long terme des principaux déterminants du développement financier. Les résultats confirment en particulier l'existence d'une relation de cointégration/long terme qui lie positivement le développement financier au PIB par tête, à l'ouverture commerciale et à l'ouverture du compte capital, et négativement au taux d'inflation et à la mauvaise gouvernance/corruption Ces conclusions sont largement confirmées par des tests de robustesse qui reposent en premier lieu sur des méthodes d'estimation différentes (DOLS et FMOLS), et en second lieu sur une mesure alternative de l'ouverture du compte capital/financière (mesure de jure de Chinn et Ito, 2008). This paper addresses the empirical question of whether capital account openness/financial liberalization can help explain financial development in Tunisia over the 1986-2014 period. Various estimates were made by the autoregressive distributed lag (ARDL) model. Estimates show that the positive effect of capital account opening on financial development is much more important in the long term than in the short term, and these positive effects surpass those obtained for trade openness. Moreover, the results confirm the negative impact of corruption on the Tunisian financial system. Complementarily, robustness tests are realized. They confirm our previous results, on one side with DOLS and FMOLS alternative methods and on other side with an alternative measure of capital account openness proposed by Chinn and Ito (2008).
    Keywords: Capital account openness,Financial development,ARDL,Tunisia
    Date: 2018–09–24
  7. By: Geoffrey J Bannister; Jarkko Turunen; Malin Gardberg
    Abstract: Despite significant strides in financial development over the past decades, financial dollarization, as reflected in elevated shares of foreign currency deposits and credit in the banking system, remains common in developing economies. We study the impact of financial dollarization, differentiating across foreign currency deposits and credit on financial depth, access and efficiency for a large sample of emerging market and developing countries over the past two decades. Panel regressions estimated using system GMM show that deposit dollarization has a negative impact on financial deepening on average. This negative impact is dampened in cases with past periods of high inflation. There is also some evidence that dollarization hampers financial efficiency. The results suggest that policy efforts to reduce dollarization can spur faster and safer financial development.
    Date: 2018–09–11
  8. By: Qianying Chen; Mitsuru Katagiri; Jay Surti
    Abstract: A prolonged low-interest-rate environment presents a significant challenge to banks and is likely to entail major changes to their business models over the long-run. Lower returns to maturity transformation in the face of flatter yield curves and an inability to offer deposit rates significantly below zero combine to compress bank earnings in this environment. Smaller, deposit-funded, less diversified banks are hurt most, increasing consolidation pressures and reach-for-yield incentives, presenting new financial stability challenges.To the extent that such an economic environment reflects a new, steady-state with lower equilibrium growth driven by population aging and slower productivity growth, lower credit demand is likely to drive banking toward provision of fee-based, utility services.
    Keywords: Banking;Interest rates;Growth, Low-for-Long, Prolonged Low Interest Rates, Monetary Policy (Targets, Instruments, and Effects), Firm Performance: Size, Diversification, and Scope
    Date: 2018–08–27
  9. By: Sergio Rebelo; Neng Wang; Jinqiang Yang
    Abstract: We study the implications of the interaction between rare disasters and financial development for sovereign debt markets. In our model, countries vary in their financial development, by which we mean the extent to which shocks can be hedged in international capital markets. The model predicts that low levels of financial development generate a key feature of sovereign debt in emerging economies known as “debt intolerance”: high credit spreads associated with lower debt-to-output ratios than those of developed countries.
    JEL: G18 H63
    Date: 2018–09

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