nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2019‒01‒28
eight papers chosen by
Georg Man

  1. FDI, banking crises and growth: direct and spill over effects By Brahim Gaies; Stéphane Goutte; Khaled Guesmi
  2. Growth Effects of Corporate Balance Sheet Adjustments in the EU: An Econometric and Model-based Assessment By Romanos Priftis; Anastasia Theofilakou
  4. Monetary policy, trade, and endogenous growth under different international financial market structures By Michael Donadelli; Patrick Grüning; Aurelija Proskute
  5. Macroeconomic Effects of Credit Deepening in Latin America By Carlos Carvalho; Nilda Pasca; Laura Souza; Eduardo Zilberman
  6. Misallocation and Credit Market Constraints: the Role of Long-Term Financing By Karabarbounis, Marios; Macnamara, Patrick
  7. The Dynamics of Finance-Growth-Inequality Nexus: Theory and Evidence for India By Pranab Kumar Das; Bhaswati Ganguli; Sugata Marjit; Sugata Sen Roy
  8. The impact of FDI on economic growth in Tunisia: An estimate by the ARDL approach By Bouchoucha, Najeh; Ali, Walid

  1. By: Brahim Gaies; Stéphane Goutte (LED - Université Paris 8); Khaled Guesmi
    Abstract: This study suggests a new decomposition of the effect of foreign direct investment (FDI) on the long-term growth of developing countries. It reveals that FDI not only has a direct positive effect on growth, but also increases it by reducing the recessionary effect resulting from a banking crisis. However, these advantages are conditioned by the FDI threshold, which in turn depends on the "absorption capacity" of the host country. JEL: F65, F36, G01, G15
    Keywords: growth,FDI,system GMM,panel logit model 2
    Date: 2019–01–09
  2. By: Romanos Priftis; Anastasia Theofilakou
    Abstract: This paper investigates the impact of active balance sheet adjustments in the non-financial corporate sector on economic growth in the EU. We first jointly model firms' ability to reduce their balance sheet imbalances and a growth equation in an instrumental variables (IV) panel context. This enables us to explicitly consider the contemporaneous interaction between corporate balance sheet adjustment and growth, which can otherwise bias inference. Our main findings inter alia suggest that: i) periods of active corporate deleveraging are associated on average with lower output growth compared to periods when no adjustment takes place, and ii) a decline in corporate debt overhang supports output growth. To explore the deleveraging mechanism qualitatively we then employ a banking variant of the Commission's QUEST model and show that following a deleveraging shock, triggered by a tightening of firms' collateral constraints, the effects on investment and GDP are negative in the short-run. In the medium run once corporate debt has been reduced the effects fade away allowing the economy to recover. In the long run the effects are largely neutral suggesting that the source of investment financing, be it financial intermediaries or the stock market, does not seem to matter.
    JEL: C3 E21 G2
    Date: 2018–01
  3. By: Brahim Gaies; Stéphane Goutte (LED - Université Paris 8); Khaled Guesmi
    Abstract: We examine the effects of financial globalization and exchange rate volatility on growth in emerging and developing countries. We generate several measures of exchange rate volatility, as well as their interaction terms with indicators of disaggregated financial globalization. Using the two-step GMM system method on dynamic panel data, we find that exchange rate volatility has a negative impact on long-term growth. On the contrary, financial globalization, and particularly investment-globalization, promotes growth not only directly, but also indirectly, by reducing the negative impact of exchange rate volatility. However, the results show that indebtedness-globalization does not produce these benefits. In this way, the results inform the government's decision on the liberalization of the domestic financial market. JEL: E44, F21, F36, O42, G15, G18
    Keywords: Foreign Investors,Government Policy,Dynamic Panel,Exchange Rate Volatility,Interactions 2
    Date: 2019–01–09
  4. By: Michael Donadelli (Ca'Foscari University of Venice); Patrick Grüning (CEFER, Bank of Lithuania and Vilnius University); Aurelija Proskute (Bank of Lithuania)
    Abstract: This study develops a symmetric two-country New-Keynesian general equilibrium model with endogenous growth, Calvo-style price and wage rigidities, and international trade of final consumption goods and intermediate goods. The equilibrium implications of two financial market structures are compared: financial autarky and complete markets. In the case of financial autarky, no international bond is traded. In the case of complete markets, the households have access to a full set of international nominal state-contingent bonds. We find that assuming complete markets instead of financial autarky leads to higher co-movement of most macroeconomic growth rates across countries, higher co-movement of inflation rates across countries, lower uncovered interest rate parity regression coefficients, and a lower correlation between exchange rate growth and consumption growth differentials. These results are mostly in line with US and UK data from 1950-2015, which are split into two samples, 1950-1970 and 1971-2015, in order to be compared to the model with financial autarky and the model with complete markets, respectively.
    Keywords: International financial markets, Monetary policy, Nominal rigidities, Endogenous growth
    JEL: E30 E44 F44 G12 O30
    Date: 2019–01–11
  5. By: Carlos Carvalho; Nilda Pasca; Laura Souza; Eduardo Zilberman
    Abstract: We augment a standard dynamic general equilibrium model with financial frictions, in order to quantify the macroeconomic effects of the credit deepening process observed in Latin America in the last decade - most notably in Brazil. In the model, a stylized banking sector intermediates credit from patient households to impatient households and entrepreneurs. Motivated by the Brazilian experience, we allow the credit constraint faced by households to depend on labor income. Our model is designed to isolate the effects of credit deepening through demand-side channels, and abstracts from potential effects of credit supply on total factor productivity. In the calibrated model, credit deepening generates only modest above-trend growth in consumption, investment, and GDP. Since Brazil has experienced one of the most intense credit deepening processes in Latin America, we argue that the quantitative effects that hinge on the channels captured by the model are unlikely to be sizable elsewhere in Latin America.
    Date: 2019–01
  6. By: Karabarbounis, Marios (Federal Reserve Bank of Richmond); Macnamara, Patrick (University of Manchester)
    Abstract: We measure aggregate productivity loss due to credit market constraints in a model with endogenous borrowing constraints, long-duration bonds, and costly equity payouts. Due to long-duration bonds, the model generates a realistic distribution of credit spreads. We structurally estimate our model using firm-level data on credit spreads from Thomson Reuters Bond Security Data and balance sheet data from Compustat. Credit market constraints increase aggregate productivity by 0.4% through their effect on the credit spread distribution. However, credit market constraints also interact with costly equity payouts, resulting in an overall productivity loss equal to 1.6%.
    Keywords: misallocation; endogenous borrowing constraints; long-duration bonds
    JEL: E23 E44 G32 O47
    Date: 2019–01–16
  7. By: Pranab Kumar Das; Bhaswati Ganguli; Sugata Marjit; Sugata Sen Roy
    Abstract: The purpose of this research study has been to expand our understanding of the finance-growth ‘nexus’ to finance-growth-inequality ‘nexus’ in the presence of both the formal and the informal sources of borrowing. Using empirical evidence of IHDS Survey data for two rounds the study attempts to assess the co-evolution of finance-growth-inequality in an intertemporal framework. The most important finding of the paper pertains to the econometric result that the household asset grows at the same rate independent of the source of loans - banks or moneylenders though the level effect (intercept) is higher if the loan is obtained from banks or lower if the household lives below poverty line. The same also holds for the rate of growth of per capita income. There is virtually no significant difference for the households living below poverty line (BPL) on the rate of growth of capital asset or income whether source of borrowing is bank or money lender. This is then formalized in a theoretical model of intertemporal choice of entrepreneur-investor to show that if there are both formal and informal sources of borrowing with a constraint on the formal sector borrowing and no constraint on the latter, then growth rates of asset and income are determined by the informal sector interest rate. The result can be generalised for any number of sources of borrowing. This questions the conventional wisdom regarding the policy aimed at financial inclusion. Inequality of income increases independent of the source of borrowing, though the BPL households are worse off in general.
    Keywords: financial development, financial inclusion growth, inequality, bank, India, IHDS, logit model
    JEL: C35 E50 G21 O11
    Date: 2018
  8. By: Bouchoucha, Najeh; Ali, Walid
    Abstract: This paper attempts to examine the impact of foreign direct investment on economic growth in Tunisia using times series data for the period 1980-2015. In this study, we used the ARDL (Autoregressive Lag Distribution) approach to study the short-term and long-term relationship between foreign direct investment and economic growth. The empirical findings show that FDI has positive impact on economic growth in both the short and the long term. For the other determinants of economic growth, we have shown that domestic investment and human capital have had a positive and significant effect on the economic growth of the Tunisian economy in the short run rather than in the long run. On the other hand, the degree of trade openness has a negative effect on short-term and long-term economic growth.
    Keywords: FDI, economic growth, Tunisia, ARDL
    JEL: F0 F43
    Date: 2019–01–14

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