nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2018‒11‒26
eleven papers chosen by
Georg Man

  1. The Inverted-U Relationship Between Credit Access and Productivity Growth By Aghion, Philippe; Bergeaud, Antonin; Cette, Gilbert; Lecat, Rémy; Maghin, Helene
  2. Comparison of economic development and banking loan activities on a case of Croatian counties By Jak?a Kri?to; Alen Stojanovi?; August Cesarec
  3. Does financial development reduce the size of the informal economy in Sub-Saharan African countries? By Njangang, Henri
  4. The effects of foreign direct investment on regional growth and productivity By Park, Jaegon
  5. Macroeconomic Effects of China's Financial Policies By Kaiji Chen; Tao Zha
  6. Bank Capital in the Short and in the Long Run By Mendicino, Caterina; Nikolov, Kalin; Suarez, Javier; Supera, Dominik
  7. Credit Crunches, Asset Prices and Technological Change By Araujo, Luis; Cao, Qingqing; Minetti, Raoul; Murro, Pierluigi
  8. Inequality, ICT and Financial Access in Africa By Vanessa S. Tchamyou; Guido Erreygers; Danny Cassimon
  9. Financial intermediation cost, rents, and productivity: An international comparison By Guillaume Bazot
  10. The Financial Innovation Hypothesis: Schumpeter, Minsky and the sub-prime mortgage crisis By Eugenio Caverzasi; Daniele Tori
  11. Fostering green investments and tackling climate-related financial risks: which role for macroprudential policies? By Paola D'Orazio; Lilit Popoyan

  1. By: Aghion, Philippe; Bergeaud, Antonin; Cette, Gilbert; Lecat, Rémy; Maghin, Helene
    Abstract: In this paper we identify two counteracting effects of credit access on productivity growth: on the one hand, better access to credit makes it easier for entrepreneurs to innovate; on the other hand, better credit access allows less efficient incumbent firms to remain longer on the market, thereby discouraging entry of new and potentially more efficient innovators. We first develop a simple model of firm dynamics and innovation-base growth with credit constraints, where the above two counteracting effects generate an inverted-U relationship between credit access and productivity growth. Then we test our theory on a comprehensive French manufacturing firm-level dataset. We first show evidence of an inverted-U relationship between credit constraints and productivity growth when we aggregate our data at sectoral level.. We then move to firm-level analysis, and show that incumbent firms with easier access to credit experience higher productivity growth, but that they also experienced lower exit rates, particularly the least productive firms among them. To confirm our results, we exploit the 2012 Eurosystem's Additional Credit Claims (ACC) program as a quasi-experiment that generated exogenous extra supply of credits for a subset of incumbent firms.
    Keywords: credit constraint; firms; growth; interest rate; productivity
    JEL: G21 G32 O40 O47
    Date: 2018–09
  2. By: Jak?a Kri?to (University of Zagreb Faculty of Economics and Business); Alen Stojanovi? (University of Zagreb Faculty of Economics and Business); August Cesarec (University of Zagreb Faculty of Economics and Business)
    Abstract: Banking credit policy is an important pillar of the economic development of a country as well as countries narrower territorial units. Regional development is often based on comprehensive government and municipal policy, geographical and demographic characteristics, statistical classification, a role of different government agencies but also of a financial institutions business policy. The goal of this paper is to compare level of economic development with a banking loan activities in case of Croatian counties. The paper is analysing banking loan activities based on loan to deposit ratio, relative size of banking loan activities on a county level as well as currency and type of a loan structure of banking loan portfolio. Indicators of banking loan activities are compared with counties economic development using non-hierarchical k-means cluster analysis. Research in a paper is looking for an answer to what extent are seen similarities of economic development of Croatian counties and total banking loan activities. In this sense paper is comparing two methodologies, regional development measurement and characteristics of banking loan business.
    Keywords: regional development, banking loans, regional financial intermediation, counties, Croatia
    JEL: G21 O16 R10
    Date: 2018–10
  3. By: Njangang, Henri
    Abstract: This paper contributes to the understanding of the other neglected effects of financial development by investigating the relationship between financial development and the size of the informal economy using an unbalanced panel data of 41 Sub Saharan African countries over the period 1991-2015. Empirical evidence is based on Ordinary Least Squared, Fixed effects and system Generalized Method of moment. The results show that financial development measured by broad money and domestic credit to private sector have a negative and statistically significant effect on the informal economy. This clearly suggests that financial development reduces the size of the informal economy.
    Keywords: Financial development, the informal economy, panel data, SSA
    JEL: G20 O17 O55
    Date: 2018–11–04
  4. By: Park, Jaegon
    Abstract: To promote regional economic growth in the current global environment, nations have begun methodically combining internal assets with external capabilities. Against this backdrop, this paper demonstrates how foreign direct investment (FDI) — a major channel for participating in the global production network — influences regional economic development. Its key findings are as follows: 1) Korea has reached the stage where outbound overseas investments outpace inbound FDI, 2) FDI in Korea is heavily concentrated in a handful of regions and in particular the Seoul capital region, 3) inbound FDI has a statistically significant positive impact on regional growth and productivity and 4) outbound foreign investment weighs negatively on regional growth and productivity. The paper concludes by arguing the necessity of utilizing a global perspective in regional policymaking.
    Date: 2018–11
  5. By: Kaiji Chen; Tao Zha
    Abstract: The Chinese economy has undergone three major phases: the 1978-1997 period marked as the SOE-led economy, the 1998-2015 phase as the investment-driven economy, and the new normal economy since 2016. All three economies have been shaped by the government's financial policies, defined as a set of credit policy, monetary policy, and regulatory policy. We analyze the macroeconomic effects of these financial policies throughout the three phases and provide the stylized facts to substantiate our analysis. The stylized facts differ qualitatively across different phases or economies. We argue that the impacts of China’s financial policies work through transmission channels different from those in developed economies and that a regime switch from one economy to another was driven mainly by regime changes in financial policies.
    JEL: E5 G1 G28 O2
    Date: 2018–11
  6. By: Mendicino, Caterina; Nikolov, Kalin; Suarez, Javier; Supera, Dominik
    Abstract: How far should capital requirements be raised in order to ensure a strong and resilient banking system without imposing undue costs on the real economy? Capital requirement increases make banks safer and are beneficial in the long run but carry transition costs because their imposition reduces aggregate demand on impact. Under accommodative monetary policy, increasing capital requirements addresses financial stability risks without imposing large transition costs on the economy. In contrast, when the policy rate hits the lower bound, monetary policy loses the ability to dampen the effects of the capital requirement increase on the real economy. The long-run benefits of higher capital requirements are larger and the transition costs are smaller when the risk that causes bank failure is high.
    Keywords: Bank Fragility; Default Risk; effective lower bound; Financial Frictions; macroprudential policy; Transition Dynamics
    JEL: E3 E44 G01 G21
    Date: 2018–09
  7. By: Araujo, Luis (Michigan State University, Department of Economics); Cao, Qingqing (Michigan State University, Department of Economics); Minetti, Raoul (Michigan State University, Department of Economics); Murro, Pierluigi (Luiss University)
    Abstract: We investigate the effects of a credit crunch in an economy where firms can retain a mature technology or adopt a new technology. We show that firms' collateral eases firms' access to credit and investment but can also inhibit firms' innovation. When this occurs, a contraction in the price of collateral assets squeezes collateral-poor firms out of the credit market but fosters the innovation of collateral-rich firms. The analysis reveals that the credit and asset market policies adopted during recent credit market crises can boost investment but slow down innovation. We find that the predictions of the model are consistent with the innovation patterns of a large sample of European firms during the 2008-2010 credit crisis.
    Keywords: Credit Crunch; Technological Change; Collateral
    JEL: E44 G01 G21
    Date: 2018–11–16
  8. By: Vanessa S. Tchamyou (University of Antwerp, Belgium); Guido Erreygers (University of Antwerp, Belgium); Danny Cassimon (University of Antwerp, Belgium)
    Abstract: This study investigates the role of information and communication technology (ICT) on income inequality through financial development dynamics of depth (money supply and liquid liabilities), efficiency (at banking and financial system levels), activity (from banking and financial system perspectives) and size, in 48 African countries for the period 1996 to 2014. The empirical evidence is based on Generalised Method of Moments. While both financial depth and size are established to reduce inequality contingent on ICT, only the effect of financial depth in reducing inequality is robust to the inclusion of time invariant variables to the set of strictly exogenous variables. We extend the analysis by decomposing financial depth into its components, namely: formal, informal, semi-formal and non-formal financial sectors. The findings based on this extension show that ICT reduces income inequality through formal financial sector development and financial sector formalization as opposed to informal financial sector development and financial sector informalization. The study contributes at the same time to the macroeconomic literature on measuring financial development and responds to the growing field of addressing post-2015 Sustainable Development Goals (SDGs) inequality challenges by means of ICT and financial access.
    Keywords: Inequality; ICT; Financial development; Africa
    JEL: I30 L96 O16 O55
    Date: 2018–01
  9. By: Guillaume Bazot (Université Paris 8)
    Abstract: Calculation of the unit cost of financial intermediation for 20 countries from 1970 to 2015 has produced the following results. (i) Most countries’ unit costs decline and converge in the long run. (ii) Unit costs were much higher in the 1970s and 1980s, coinciding with high nominal rates, as confirmed by panel cointegration tests. (iii) Countries’ unit cost aggregation suggests a slight decrease in international unit cost whatever the set of hypotheses used in the calculation. (iv) The break down of unit costs into labor costs, capital costs, and profits shows that most of the decrease stems from reduced input costs. Gross operating surplus and total compensation per output tend to decline while distributed profit per output rises, suggesting increasing intermediation rents per output. (v) The productivity of labor in finance compared to other sectors tends to increase in most countries. (vi) The evidence suggests that most productivity gains have been captured by the financial sector in Canada, the UK, and the US. Elsewhere, productivity gains have benefited the nonfinancial sector through unit cost reduction. (vii) Deregulation is either negatively or not correlated with unit cost. In other words, deregulation is not related to unit cost increases. Finally, the paper discusses the consequences of those results for current debates about finance relative wage changes and inequalities.
    Keywords: Unit cost, deregulation, convergence
    JEL: E3 E4 F3 G2 N2
    Date: 2018–11
  10. By: Eugenio Caverzasi; Daniele Tori
    Abstract: Neo-Schumpeterian economics inspired by the work of Schumpeter and the financial Keynesianism of Minsky are often regarded as unrelated theoretical strands. In this paper, we try to combine these two literatures building on a parallelism between non-financial and financial firms. We focus on recent financial innovations, highlighting how the evolution experienced by US financial institutions led them to transcend their traditional role of credit providers, shaping as 'producers' of financial products, through securitization. This allows on the one hand to broaden the application of Neo-Schumpeterian insights to the financial sector and, on the other, to provide an original explanation of the so-called sub-prime crisis by applying the Financial Instability Hypothesis of Minsky to the alternative context of financial production. We maintain that the 2007-8 crisis was not the result of an innovation in the real sector, but came from an innovation (or a series of innovations) intrinsic to the financial system itself, which fostered credit creation. We argue that this 'cluster of innovations' can be placed under the label 'securitization', defined as the business of packaging and reselling loans, with repo agreements as the main source of funds.
    Keywords: Minsky, Schumpeter, securitization, financial firms, Great Financial Crisis
    Date: 2018–11–22
  11. By: Paola D'Orazio; Lilit Popoyan
    Abstract: While there is a growing debate among researchers and practitioners on the possible role of central banks and financial regulators in supporting a smooth transition to a low-carbon economy, the information on which macroprudential instruments could be used for reaching the "green structural change" is still quite limited. Moreover, the achievement of climate goals is still affected by the so-called "green finance gap". The paper addresses these issues by proposing a critical review of existing and novel prudential approaches to incentivizing the decarbonization of banks' balance sheets and align finance with sustainable growth and development objectives. The analysis carried out in the paper allows understanding under which conditions macroprudential policy could tackle climate change and promote green lending, while containing climate-related financial risks.
    Keywords: Climate Change, Climate Finance Gap, Banking Regulation, Macroprudential Policy, Central Banking, Climate-nance risk.
    Date: 2018–11–18

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