nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2019‒01‒07
nine papers chosen by
Georg Man

  1. The Inverted-U Relationship between Credit Access and Productivity Growth By Philippe Aghion; Antonin Bergeaud; Gilbert Cette; Rémy Lecat; Hélène Maghin
  2. Monetary Policy, Product Market Competition and Growth By Phillipe Aghion; Emmanuel Farhi; Enisse Kharroubi
  3. Parental Altruism, Missing Credit Markets and Growth By Hatcher, Michael; Pourpourides, Panayiotis M.
  4. The Impact of Illicit Financial Flow on Economic Growth of Ethiopia By Alula Nerea
  5. Impactos do Direcionamento de Crédito Sobre a Economia Brasileira: uma abordagem de equilíbrio geral By Gabriel A. Madeira; Mailliw Serafim; Sergio Mikio Koyama; Fernando Kuwer
  6. Financial Inclusion and Macroeconomic Stability in Emerging and Frontier Markets By Vo, A.T.; Van, L. T.-H.; Vo, D.H.; McAleer, M.J.
  7. A Policy of Credit Disruption: The Punjab Land Alienation Act of 1900 By Latika Chaudhary; Anand V. Swamy
  8. Changes in the Effects of Bank Lending Shocks and the Development of Public Debt Markets By Sangyup Choi
  9. Financial development and industrial pollution By De Haas, Ralph; Popov, Alexander

  1. By: Philippe Aghion; Antonin Bergeaud; Gilbert Cette; Rémy Lecat; Hélène Maghin
    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: inverted-u relationship, credit, eurosystem
    Date: 2018–12
  2. By: Phillipe Aghion; Emmanuel Farhi; Enisse Kharroubi
    Abstract: In this paper we argue that monetary easing fosters growth more in more credit-constrained environments, and the more so the higher the degree of product market competition. Indeed when competition is low, large rents allow firms to stay on the market and reinvest optimally, no matter how funding conditions change with aggregate conditions. To test this prediction, we use industry-level and firm-level data from the Euro Area to look at the effects on sectoral growth and firm-level growth of the unexpected drop in long-term government bond yields following the announcement of the Outright Monetary Transactions program (OMT) by the ECB. We find that the monetary policy easing induced by OMT, contributed to raising sectoral (firm-level) growth more in more highly leveraged sectors (firms), and the more so the higher the degree of product market competition in the country (sector).
    Keywords: growth, financial conditions, firm leverage, competition
    JEL: E32 E43 E52
    Date: 2018–12
  3. By: Hatcher, Michael (University of Southampton); Pourpourides, Panayiotis M. (Cardiff Business School)
    Abstract: Parental transfers towards the education of children are non-trivial, especially in countries, characterized by both imperfect credit markets and high economic growth rates. In this paper, we analyze the role of parental altruism on economic growth and dynamic efficiency, especially when credit markets for education loans are missing. We demonstrate conditions under which missing or imperfect credit markets increase economic growth and do not hinder dynamic efficiency. We also show that a newly constructed index of parental altruism, orthogonal to income effects, exhibits high cross-country correlations with model-implied measures of parental altruism at different levels of credit market development.
    Date: 2018–12
  4. By: Alula Nerea
    Abstract: The objective of this study was to investigate the impact of Illicit Financial Flow (IIF) on economic growth of Ethiopia. The study used secondary data, particularly from 2000 to 2015 years. It has also employed varies internationally recognized estimation models (Hot Money Narrow and Trade miss-invoicing) to get the magnitude of Illicit Financial Flow in Ethiopia. Moreover, it employed error correction model to get a short and long run velocity and magnitudinal effect of IFF on Gross Domestic Product (GDP). The study found that IFF has significant and negative impact on GDP. Based on research findings, establishing controlling and auditing mechanisms for trans-boundary trade activities in Ethiopia, creating effective institution and building collaborative approach are recommended to curb the magnitude of IFF and its impact on economic growth.
    Keywords: IFF; HMN; ECM;Trade Miss-invoicing
    JEL: C22 C53 F32 O47
    Date: 2018–12–20
  5. By: Gabriel A. Madeira; Mailliw Serafim; Sergio Mikio Koyama; Fernando Kuwer
    Abstract: In Brazil, about 40% of the credit to firms originates from earmarking credit policies. These loans are heavily subsidized, with interest rates substantially lower than the others. Only about 18% of formal firms are benefited by these loans. However, these firms receive about 80% of total corporate credit from banks. It is reasonable to assume that the effects of these policies on the economy are substantial. To evaluate them, we elaborate a general equilibrium model with heterogeneous agents and credit restrictions that incorporates the credit earmarking policies practiced in Brazil. Using theoretical and numerical resources recently incorporated into the economic literature, we adjusted the model to the Brazilian data in order to simulate the effects of the removal of credit earmarking policies. Our simulations indicate that the extinction of earmarked credit programs would generate several positive effects, such as increased output and productivity, reduced inequality and financial inclusion. Next, we simulate variations in earmarking policies, evaluating the impacts of giving greater focus to poorer or more productive entrepreneurs. While these changes can lead to improvements, our simulations indicate smaller gains than the mere removal of earmarking programs.
    Date: 2018–12
  6. By: Vo, A.T.; Van, L. T.-H.; Vo, D.H.; McAleer, M.J.
    Abstract: Financial inclusion, being considered as a key enabler to reducing poverty and boosting prosperity in emerging and frontier markets such as Vietnam, is the process in which individuals and small businesses are provided with an access to useful and affordable financial products and services. The extant literature on the empirical evidence regarding the contribution of financial inclusion to macroeconomic stability is mixed. This paper investigates the linkages between financial inclusion and macroeconomic stability, which has not yet been thoroughly examined in the literature, for 22 emerging and frontier economies from 2008 to 2015, with particular focus on a potential optimal level. Using the panel threshold estimation technique, the empirical findings show that financial inclusion, as approximated by the growth rate in the number of bank branches over 100,000 account holders, is found to enhance financial stability under a certain threshold. Financial inclusion is also found to be of benefit to maintaining stable inflation and output growth. Policy implications are also discussed on the basis of the important empirical findings.
    Keywords: Financial inclusion, Macroeconomic stability, Panel threshold, Emerging and frontier markets
    JEL: C62 O16 P45
    Date: 2018–12–01
  7. By: Latika Chaudhary (Naval Postgraduate School); Anand V. Swamy (Williams College)
    Abstract: If land is titled and transferable, it can be used as collateral against which money can be borrowed. The resulting increase in access to credit is usually expected to foster economic growth. We study a policy in colonial India that made land less available as collateral for debt. Using a panel dataset for Punjab districts from 1890 to 1910, we find that this reduced the availability of mortgage-backed credit, but did not hurt proxies for economic development such as acreage and cattle, at least in the short run.
    Date: 2018–10
  8. By: Sangyup Choi (Yonsei University)
    Abstract: This paper investigates whether the real effect of bank lending shocks has changed over time by applying a sign-restriction approach. I identify a negative bank lending shock by considering markets for bank loans and public debt (corporate bonds and commercial papers) jointly. Since the real effect of bank lending shocks hinges critically on firms¡¯ ability to access alternative sources of financing, the rapid development in public debt markets from the 1980s could change this effect as well. Indeed, I find that firms' enhanced ability to access public debt markets is associated with a decline in the effect of bank lending shocks on output during the Great Moderation. Consistent with the underlying identifying strategy based on the firm's ability to access public debt markets, the substantial decline in the effects of bank lending shocks is only observed on investment, not consumption.
    Keywords: Bank lending shocks; Sign-restriction VARs; Great Moderation; Public debt market; Substitutability between bank loans and bonds
    JEL: E32 E44 G21
  9. By: De Haas, Ralph; Popov, Alexander
    Abstract: We study the impact of financial market development on industrial pollution in a large panel of countries and industries over the period 1974-2013. We find a strong positive impact of credit markets, but a strong negative impact of stock markets, on aggregate CO2 emissions per capita. Industry-level analysis shows that stock market development (but not credit market development) is associated with cleaner production processes in technologically "dirty" industries. These industries also produce more green patents as stock markets develop. Moreover, our results suggest that stock markets (credit markets) reallocate investment towards more (less) carbon-efficient sectors. Together, these findings indicate that the evolution of a country's financial structure helps explain the non-linear relationship between economic development and environmental quality documented in the literature.
    Keywords: financial development; industrial pollution; innovation; reallocation
    JEL: G10 O4 Q5
    Date: 2018–08–04

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