nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2018‒12‒10
nine papers chosen by
Georg Man

  1. Financial development and economic growth in SADC countries: A panel study By Clement Moyo; Pierre Le Roux
  2. Financial Dependence and Growth: the Role of Input-Output Linkages By Alessia Lo Turco; Daniela Maggioni; Alberto Zazzaro
  3. Inclusion financière, frictions financières et croissance économique By EZZAHID, Elhadj; ELOUAOURTI, Zakaria
  4. Collateral Booms and Information Depletion By Vladimir Asriyan; Luc Laeven; Alberto Martín
  5. Von Neumann-Gale Dynamics, Market Frictions, and Capital Growth By E. Babaei; I.V. Evstigneev; K.R. Schenk-Hoppé; M.V. Zhitlukhin
  6. Drivers of Growth in Fast Emerging Economies: a Dynamic Instrumental Quantile Approach to Real Output and its Rates of Growth in BRICS and MINT countries, 2001-2011 By Simplice A. Asongu; Nicholas M. Odhiambo
  7. Policy priorities to promote financial development in the context of Middle Income Trap By Alfonso Arellano; Olga Gouveia; Sebastian Nieto-Parra; Jose Rene Orozco; Rebeca Peers
  8. Debt Overhang, Rollover Risk, and Corporate Investment: Evidence from the European Crisis By Kalemli-Ozcan, Sebnem
  9. The Role of Loan Supply Shocks in Pacific Alliance Countries: A TVP-VAR-SV Approach By Gabriel Rodríguez; Carlos Guevara

  1. By: Clement Moyo (Department of Economics, Nelson Mandela University); Pierre Le Roux (Department of Economics, Nelson Mandela University)
    Abstract: The impact of financial development on economic growth has received considerable attention since the 2008/2009 global financial crisis. High levels of credit to the private sector were partly to blame for the crisis and this has re-ignited the debate on whether the growth enhancing effects of financial development outweigh the retarding effects associated with financial crises. This paper therefore, examines the financial development-growth nexus in SADC countries during the period 1990-2015. Financial development indices are created due to the strong correlations between the individual financial development indicators using principal component analysis. The empirical analysis is conducted using the Pooled Mean Group estimator and the results show that financial development has a negative impact on economic growth. Due to financial vulnerabilities emanating from an inadequate monitoring and supervisory framework, further enhancement of financial development should be undertaken with caution in SADC countries.
    Keywords: Financial development, economic growth, PMG, ARDL and PCA.
    JEL: C13 C22 G20
    Date: 2018–11
  2. By: Alessia Lo Turco (Università Politecnica delle Marche); Daniela Maggioni (Università Ca’ Foscari Venezia.); Alberto Zazzaro (University of Naples Federico II, CSEF and MoFiR.)
    Abstract: We widen the understanding of the finance-growth nexus by accounting for the indirect effect of financial development through input-output (IO) linkages in determining the growth of industries across countries. If financial development is expected to promote disproportionately more the growth of industrial sectors that are more in need of external finance, it also favours more the industries that are linked by IO relations to more financially dependent industries. We explore this new channel in a sample of countries at different development stages over the period 1995-2007. Our results highlight that financial development, besides easing the growth of industries highly dependent on external finance, also fosters the growth of industries strongly linked to highly financially dependent upstream industries. Moreover, the indirect effect - propagated through IO linkages - of finance has a higher and non-negligible role compared to the direct effect and its omission leads to a biased and underestimated perception of the role of finance for industries growth.
    Keywords: manufacturing growth; financial development; upstream and downstream linkages
    JEL: O1 G1 D57
    Date: 2018–12–03
  3. By: EZZAHID, Elhadj; ELOUAOURTI, Zakaria
    Abstract: This article develops an analytical growth model that integrates the financial sector, the part of individuals acceding to financial systems, frictions related to the enforceability of contracts and the constraints related to the costs of information on production processes. Our model considers an economy with three categories of individuals. The first includes individuals excluded from the financial system. The second includes individuals included but with constraints due to the costs of researching information on the quality of projects. The individuals of the third category accede with less constraint than the second category and more chances that the financial contracts to which they subscribe will be executed. Based on the model simulation, the quantity of resources directed to firms increase when the financial system becomes inclusive. Our model is original in nature and provides analytical and empirical evidence on the negative impact of financial exclusion on economic growth, and highlighted the vital role of financial inclusion in economic growth. As for the enforceability of contracts concluded on the credit market, it stimulates the proportion of resources invested by the agents of the three categories.
    Keywords: Financial inclusion, financial frictions and economic growth.
    JEL: C02 G2
    Date: 2018–11–21
  4. By: Vladimir Asriyan; Luc Laeven; Alberto Martín
    Abstract: We develop a new theory of information production during credit booms. In our model, entrepreneurs need credit to undertake investment projects, some of which enable them to divert resources towards private consumption. Lenders can protect themselves from such diversion in two ways: collateralization and costly screening, which generates durable information about projects. In equilibrium, the collateralization-screening mix depends on the value of aggregate collateral. High collateral values raise investment and economic activity, but they also raise collateralization at the expense of screening. This has important dynamic implications. During credit booms driven by high collateral values (e.g. real estate booms), the economy accumulates physical capital but depletes information about investment projects. As a result, collateral-driven booms end in deep crises and slow recoveries: when booms end, investment is constrained both by the lack of collateral and by the lack of information on existing investment projects, which takes time to rebuild. We provide new empirical evidence using US rm-level data in support of the model's main mechanism.
    Keywords: credit booms, collateral, information production, crises, misallocation
    JEL: E32 E44 G01 D80
    Date: 2018–11
  5. By: E. Babaei; I.V. Evstigneev; K.R. Schenk-Hoppé; M.V. Zhitlukhin
    Date: 2018
  6. By: Simplice A. Asongu (Yaoundé/Cameroon); Nicholas M. Odhiambo (University of South Africa, Pretoria, South Africa)
    Abstract: We analyze the evolution of fast emerging economies of the BRICS (Brazil, Russia, India, China & South Africa) and MINT (Mexico, Indonesia, Nigeria & Turkey) countries, by assessing growth determinants throughout the conditional distributions of the growth rate and real GDP output for the period 2001-2011. An instrumenal variable (IV) quantile regression approach is complemented with Two-Stage-Least Squares and IV Least Absolute Deviations. We find that the highest rates of growth of real GDP per head, among the nine countries of this study, corresponded to China, India, Nigeria, Indonesia and Turkey, but the highest increases in real GDP per capita corresponded, in descending order, to Turkey China, Brazil, South Africa and India. This study analyzes the impacts of several indicators on the increase of the rate of growth of real GDP and on the logarithm of the real GDP. We analyze several limitations of the methodology, related with the selection of the explained and the explanatory variables, the effect of missing variables, and the particular problems of some indicators. Our results show that Net Foreign Direct Investment, Natural Resources, and Political Stability have a positive and significant impact on the rate of growth of real GDP or on real GDP.
    Keywords: Economic Growth; Emerging countries; Quantile regression
    JEL: C52 F21 F23 O40 O50
    Date: 2018–01
  7. By: Alfonso Arellano; Olga Gouveia; Sebastian Nieto-Parra; Jose Rene Orozco; Rebeca Peers
    Abstract: This paper analyses the development of financial markets in Argentina, Colombia, Mexico and Peru in the context of the middle-income trap. This is particularly relevant for these economies, since well-developed and properly-functioning financial markets are fundamental to achieve high income status on a sustainable basis.
    Keywords: Working Paper , Global Economy , Latin America , Argentina , Colombia , Mexico , Peru
    JEL: G21 G28 O16 O54
    Date: 2018–12
  8. By: Kalemli-Ozcan, Sebnem
    Abstract: We quantify the role of financial factors behind the sluggish post-crisis performance of European firms. We use a firm-bank-sovereign matched database to identify separate roles for firm and bank balance sheet weaknesses arising from changes in sovereign risk and aggregate demand conditions. We find that firms with higher debt levels and a higher share of short-term debt reduce their investment more after the crisis. This negative effect is stronger for firms linked to weak banks with exposures to sovereign risk, signifying increased rollover risk. These financial channels explain about 60% of the decline in aggregate corporate investment.
    Keywords: Bank-Sovereign Nexus; debt maturity; Firm Investment; Rollover Risk
    JEL: E0 F0
    Date: 2018–11
  9. By: Gabriel Rodríguez (Departamento de Economía de la Pontificia Universidad Católica del Perú); Carlos Guevara (Departamento de Economía de la Pontificia Universidad Católica del Perú)
    Abstract: This paper analyzes the effect of loan supply shocks on the real economic activity of Pacific Alliance countries. The econometric approach is a Time-Varying Parameter VAR with Stochastic Volatility (TVP-VAR-SV), which is identified by sign restrictions. Results of a trace test, t-tests and the Kolmogorov-Smirnov test reveal the existence of significant changes in the distribution of parameters over time, which supports the use of time-varying parameters. The results indicate that loan supply shocks have an important impact on real economic activity in all Pacific Alliance countries: about 1% in Colombia, Mexico, and Peru, and about 0.5% in Chile. Moreover, loan supply shocks have a considerable role in driving business cycle fluctuations, not only in crisis periods, but also in stability periods. Their contribution to GDP growth is higher than that of aggregate supply shocks and as high as that of aggregate demand and monetary policy shocks. The evolution of the impact of loan supply shocks on real economic activity shows evidence of cross-country heterogeneity, reflecting different financial structures among Pacific Alliance countries. Furthermore, by assessing the effects on different measures of economic activity, it is estimated that loan supply shocks have a higher impact on domestic demand, while the impact is similar when the model is estimated for non-primary activities. Finally, the sensitivity analysis indicates that the results of the model are robust to different priors specifications, to different measures of external variables, and to multiple sets of sign restrictions. Moreover, by applying an agnostic identification, the results indicate that even letting the response of GDP unrestricted, its response to loan supply shocks remains positive and significant. With this multiple specification, the impact of loan supply shocks on GDP growth ranges between 0.8% and 1.2% in Peru and Colombia, and between 0.5% and 0.8% in Chile. These results are close to the baseline estimation and show robustness. Regarding Mexico, it is estimated that the impact of loan supply shocks varies between 0.8%-3.5%. JEL Classification-JEL: C32, E32, E51
    Keywords: Loan Supply Shocks, Variance Decomposition, Historical Decomposition, Time-Varying Parameter VAR with Stochastic Volatility, Sign Restrictions
    Date: 2018

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