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on Financial Development and Growth |
| By: | Luo, Yulei; Nie, Jun (Federal Reserve Bank of Kansas City); Young, Eric R. |
| Abstract: | We build a robustness (RB) version of the Obstfeld (1994) model to study the effects of financial integration on growth and welfare. Our model can account for the empirically observed heterogeneity in the relationship between growth and volatility for different countries. The calibrated model shows that financial integration leads to significantly larger gains in growth and welfare for advanced countries than developing countries, with some developing countries experiencing growth and welfare loss in financial integration. Our analytical solutions help uncover the key mechanisms by which this happens. |
| Keywords: | Robustness; Model Uncertainty; Financial Integration; Risk Sharing; Economic Growth; Welfare |
| JEL: | C61 D81 E21 |
| Date: | 2018–12–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp18-12&r=fdg |
| By: | Ramírez-Rondán, N. R.; Terrones, Marco E.; Vilchez, Andrea |
| Abstract: | A sizeable literature suggests that financial sector development could be an important enabler of the growth benefits of trade openness. We provide a comprehensive analysis of how financial development can affect the relationship between trade openness and growth using a dynamic panel threshold model and an extensive dataset for a large sample of countries for the 1970-2015 period. We find that there is a financial development threshold in which trade openness has a positive and significant effect on economic growth. We also find that when splitting the sample into industrialized and non-industrialized countries, the financial development threshold that enables the growth benefits of trade is higher in the former group of countries than in the latter. This finding is consistent with the fact that the export composition of industrialized countries is tilted towards more capital-intensive finance-constrained goods. |
| Keywords: | Trade openness, economic growth, threshold model, panel data. |
| JEL: | C33 E51 F43 O41 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:90385&r=fdg |
| By: | Vladimir Asriyan; Luc Laeven; Alberto Martin |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1622&r=fdg |
| 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 in providing new credit to finance investment in expanding, innovative sectors. Structural parameters of a country's banking system thus influence comparative advantage and trade, and can magnify the gains from trade liberalization. The analysis shows how insolvency laws, minimum capital standards, and cost of bank equity determine credit reallocation, sectoral expansion and trade patterns. |
| Keywords: | Banking; capital reallocation; comparative advantage; Trade |
| JEL: | F10 G21 G28 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13375&r=fdg |
| By: | Ari, Anil |
| Abstract: | I propose a dynamic general equilibrium model in which strategic interactions between banks and depositors may lead to endogenous bank fragility and slow recovery from crises. When banks’ investment decisions are not contractible, depositors form expectations about bank risk-taking and demand a return on deposits according to their risk. This creates strategic complementarities and possibly multiple equilibria: in response to an increase in funding costs, banks may optimally choose to pursue risky portfolios that undermine their solvency prospects. In a bad equilibrium, high funding costs hinder the accumulation of bank net worth and lead to a “gambling trap” with a persistent drop in investment and output. I bring the model to bear on the European sovereign debt crisis, in the course of which under-capitalized banks in default-risky countries experienced an increase in funding costs and raised their holdings of domestic government debt. The model is quantied using Portuguese data and accounts for macroeconomic dynamics in Portugal in 2010-2016. Policy interventions face a trade-off between alleviating banks’ funding conditions and strengthening risk-taking incentives. Liquidity provision to banks may perpetuate gambling traps when not targeted. Targeted interventions have the capacity to eliminate adverse equilibria. JEL Classification: E44, F30, F34, G01, G21, G28, H63 |
| Keywords: | banking crises, financial constraints, risk-taking, sovereign debt crises |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20182217&r=fdg |
| By: | Farhi, Emmanuel (Harvard University); Gourio, Francois (Federal Reserve Bank of Chicago) |
| Abstract: | Real risk-free interest rates have trended down over the past 30 years. Puzzlingly in light of this decline, (1) the return on private capital has remained stable or even increased, creating an increasing wedge with safe interest rates; (2) stock market valuation ratios have increased only moderately; (3) investment has been lackluster. We use a simple extension of the neoclassical growth model to diagnose the nexus of forces that jointly accounts for these developments. We find that rising market power, rising unmeasured intangibles, and rising risk premia, play a crucial role, over and above the traditional culprits of increasing savings supply and technological growth slowdown. |
| Keywords: | investment; equity premium; risk-free rate; profitability; valuation ratios; labor share; competition; markups; safe assets |
| JEL: | E32 G12 |
| Date: | 2018–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2018-19&r=fdg |