nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2018‒11‒12
six papers chosen by
Georg Man

  1. Financial sector bargaining power, aggregate growth and systemic risk By Emanuele Ciola
  2. The long-run and short-run effects of foreign direct investment, foreign aid and remittances on economic growth in African countries By Njangang, Henri; Nembot Ndeffo, Luc; Noubissi Domguia, Edmond; Fosto Koyeu, Prevost
  3. Trade and Credit Reallocation: How Banks Help Shape Comparative Advantage By Keuschnigg, Christian; Kogler, Michael
  4. Conditional Divergence in the Post-1989 Globalisation Period By Kevin S. Nell
  5. Non-Performing Loans, Fiscal Costs and Credit Expansion in China By Huixin Bi; Yongquan Cao; Wei Dong
  6. Slow Post-Financial Crisis Recovery and Monetary Policy By Ikeda, Daisuke; Kurozumi, Takushi

  1. By: Emanuele Ciola (Economics Department, Università Politecnica delle Marche, Ancona-Italy)
    Abstract: During the last three decades Western economies have been characterized by an increasing role played by the financial sector. This process, called financialization, has been associated with lower economic growth, increased inequality and declining financial stability. In this article I develop a simple framework to study the effects of financialization on aggregate growth and systemic risk. The main driver of this mechanism is the bargaining power of intermediaries. Indeed, financial institutions, by absorbing a larger quota of income from their borrowers, can reduce the incentive for new entrepreneurs to enter in the market. Because of that, both the long-term potential growth rate and the overall stability of the system can be negatively affected by an overdeveloped financial sector.
    Keywords: financialization, entrepreneurship, firm financing, growth, systemic risk
    JEL: E44 G32 O43
    Date: 2018
  2. By: Njangang, Henri; Nembot Ndeffo, Luc; Noubissi Domguia, Edmond; Fosto Koyeu, Prevost
    Abstract: This paper investigates the long-run and short-run effects of foreign direct investment (FDI), foreign aid and migrant remittances on economic growth in 36 African countries over the period 1980–2016. Empirical evidence is based on Pooled Mean Group (PMG) approach. The following findings are established. First, while there is a positive and significant long-run relationship between foreign direct investment and economic growth in Africa as a whole, the effect of remittances and foreign aid is insignificant. Second, in the short-run there is no evidence of any significant impact of FDI, remittances and foreign aid on economic growth. Third, results are still robust in the short-run when the panel is divided in three subsamples. However, in the long-run the effects of FDI, remittances and foreign aid on economic growth depend on the income level.
    Keywords: FDI; Remittances; Foreign Aid; economic growth; PMG
    JEL: F23 F24 F35 F43 O55
    Date: 2018–10–28
  3. By: Keuschnigg, Christian; Kogler, Michael
    Abstract: Trade and innovation cause structural change. Productive factors must flow from declining to growing industries. Banks play a major role in cutting credit to non-viable firms in downsizing sectors and provide new credit to finance investment in expanding, innovative sectors. Structural parameters of a country’s banking system thus influence comparative advantage and trade patterns. The analysis points to the importance of insolvency laws, minimum capital standards, and cost of bank equity to determine credit reallocation, sectoral expansion and trade patterns.
    Keywords: Capital reallocation,banking,trade,comparative advantage
    JEL: F10 G21 G28
    Date: 2018
  4. By: Kevin S. Nell (College of Business and Economics, School of Economics, University of Johannesburg; cef.up, FEP, University of Porto)
    Abstract: This paper shows that conditional convergence in per capita income, as a robust empirical regularity across countries, may have dissipated in the post-1989 globalisation era. There is evidence of conditional divergence over the period 1990-2016, with growth-reducing structural change emanating from greater trade openness and a slower rate of technology catch-up in developing countries identified as potential explanations. The results further show that conditional divergence can only be ceased subject to some initial, efficiency-adjusted level of educational attainment. One implication of conditional divergence is that the growth accelerations observed in many developing economies since the late-1990s may not be sustainable.
    Keywords: Banking, conditional convergence; conditional divergence; education; structural change; technology catch-up.
    JEL: O11 O15 O33 O47
    Date: 2018–10
  5. By: Huixin Bi; Yongquan Cao; Wei Dong
    Abstract: This paper studies how the credit expansion policy pursued by the Chinese government in an effort to stimulate its economy in the post-crisis period affects bank–firm loan contracts and the macroeconomy. We build a structural model with financial frictions in which the optimal loan contract reflects the trade-off between leverage and the probability of default. Credit expansion is introduced in the form of the government's partial guarantee on bank loans to (i) general production firms or (ii) infrastructure producers. We show that in the case of general credit expansion, more persistent credit shocks lead to higher credit multipliers at all horizons, as the benefits of persistently alleviating firms' borrowing constraint outweigh the costs associated with higher non-performing loans. We also show that a more persistent targeted credit expansion raises the production of infrastructure goods. However, higher infrastructure production not only boosts the public capital stock and generates positive externalities, it also crowds out private investment and consumption. With a short-lived targeted credit easing, the expansionary channel of public capital dominates, boosting output. As the credit expansion becomes more persistent, the contractionary channel of lower private investment starts to outweigh the expansionary channel in the medium term.
    Keywords: Credit and credit aggregates, Fiscal Policy, International topics
    JEL: E62 E44
    Date: 2018
  6. By: Ikeda, Daisuke (Bank of Japan); Kurozumi, Takushi (Bank of Japan)
    Abstract: Post-financial crisis recoveries tend to be slow and be accompanied by slowdowns in TFP and permanent losses in GDP. To prevent them, how should monetary policy be conducted? We address this issue by developing a model with endogenous TFP growth in which an adverse financial shock can induce a slow recovery. In the model, a welfare-maximizing monetary policy rule features a strong response to output, and the welfare gain from output stabilization is much larger than when TFP expands exogenously. Moreover, inflation stabilization results in a sizable welfare loss, while nominal GDP stabilization works well, albeit causing high interest-rate volatility.
    JEL: E52 O33
    Date: 2018–10–01

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