nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2019‒02‒04
twelve 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, Hélène
  2. Monetary policy, product market competition and growth By Aghion, Philippe; Farhi, Emmanuel; Kharroubi, Enisse
  3. 1930: First Modern Crisis By Gary Gorton; Toomas Laarits; Tyler Muir
  4. Macroeconomic Effects of China's Financial Policies By Chen, Kaiji; Zha, Tao
  5. أثر الاستثمار الأجنبي المباشر على نمو القطاع الصناعي بالجزائر By Benyoub, Latifa; Aicha, Aouar; Kharafi, Khadidja
  6. Efecto de la inversión extranjera en el dinamismo macroeconómico: un análisis empírico para Bolivia By Martin Vallejos Tarqui; Shirley Navia Caceres
  7. Financialization in the EU and its consequences By Stefano Battiston; Mattia Guerini; Mauro Napoletano; Veronika Stolbova
  8. Bank credit allocation and productivity: stylised facts for Portugal By Nuno Azevedo; Márcio Mateus; Álvaro Pina
  9. Recent finance advances in information technology for inclusive development: a systematic review By Asongu, Simplice; Nwachukwu, Jacinta
  10. Money, credit, monetary policy and the business cycle in the euro area: what has changed since the crisis? By Giannone, Domenico; Lenza, Michele; Reichlin, Lucrezia
  11. Financial Frictions, Durable Goods and Monetary Policy By Leo Michelis; Ugochi T. Emenogu
  12. Financial markets and the allocation of capital: the role of productivity By Di Mauro, Filippo; Hassan, Fadi; Ottaviano, Gianmarco I. P.

  1. By: Aghion, Philippe; Bergeaud, Antonin; Cette, Gilbert; Lecat, Rémy; Maghin, Hélène
    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 quasiexperiment that generated exogenous extra supply of credits for a subset of incumbent firms.
    Keywords: inverted-u relationship; credit; eurosystem
    JEL: J1 F3 G3
    Date: 2018–12
  2. By: Aghion, Philippe; Farhi, Emmanuel; Kharroubi, Enisse
    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 industrylevel 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: Gary Gorton; Toomas Laarits; Tyler Muir
    Abstract: Modern financial crises are difficult to explain because they do not always involve bank runs, or the bank runs occur late. For this reason, the first year of the Great Depression, 1930, has remained a puzzle. Industrial production dropped by 20.8 percent despite no nationwide bank run. Using cross-sectional variation in external finance dependence, we demonstrate that banks' decision to not use the discount window and instead cut back lending and invest in safe assets can account for the majority of this decline. In effect, the banks ran on themselves before the crisis became evident.
    JEL: E02 E3 G01
    Date: 2019–01
  4. By: Chen, Kaiji (Emory University); Zha, Tao (Federal Reserve Bank of Atlanta)
    Abstract: The Chinese economy has undergone three major phases: the 1978–97 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 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.
    Keywords: marketized tools; regime change; growth; investment; capital intensity; local governments; regulations; shadow banking; debts; real estate; preferential credits; industrialization; SOEs; POEs; heavy and light sectors; monetary stimulus; trends and cycles
    JEL: E5 G1 G28 O2
    Date: 2018–11–01
  5. By: Benyoub, Latifa; Aicha, Aouar; Kharafi, Khadidja
    Abstract: The purpose of this study is to measure the impact of Foreign Direct Investment on the Industrial Sector Growth in Algeria, towards this goal we analyze the long term relationship among the following variables: the value added of industry sector is used as a dependent variable, Foreign Direct Investment inflows and Domestic Investment as independent variables, using cointegration technique over the period from 1980 to 2017. Our empirical results suggest that Foreign Direct Investment inflows and Domestic Investment had a positive and significant effect on the industrial sector growth of Algeria in the long run as well as in the short run.
    Keywords: الاستثمار الأجنبي المباشر، القطاع الصناعي، الجزائر ، التكامل المشترك. Foreign Direct Investment, Industrial Sector, Algeria, Cointegration test
    JEL: C22 F21 L6 O1
    Date: 2019
  6. By: Martin Vallejos Tarqui; Shirley Navia Caceres
    Abstract: En el presente trabajo se analiza los efectos de la Inversión Extranjera Directa (IED) en el dinamismo ma-croeconómico de la economía boliviana; para este propósito se utiliza la metodología de Vectores Auto-regresivos Estructurales (SVAR, sus siglas en ingles). Los resultados muestran signos esperados de acuer-do a la teoría económica, lo que implica efectos positivos de la inversión extranjera en el crecimiento económico e inversión nacional, este último conlleva a la complementariedad entre la inversión domés-tica y extranjera. También la IED juega un rol importante en la disminución de desempleo y aumenta las importaciones, principalmente los bienes intermedio y de capital que son destinados al sector industrial e infraestructura.
    Keywords: IED, Crecimiento Económico, Políticas Económicas, Modelo SVAR
    JEL: C2 O19 O33
    Date: 2018–12
  7. By: Stefano Battiston (Centre d'analyse et de mathématique sociale (CNRS/EHESS)); Mattia Guerini (Scuola Superiore Sant'Anna); Mauro Napoletano (Observatoire français des conjonctures économiques); Veronika Stolbova
    Abstract: Building on ISIGrowth research, in this policy brief we present empirical evidence on the patterns of increasing financialization in the EU in the last two decades, an analysis of its possible adverse effects on several objectives of the EU 2030 agenda, including inclusive growth, innovation, inequality and financial stability. We conclude by providing some policy insights and recommendations. The notion of financialization reflects, on the one hand, the engagement of non-financial firms into financial activities not directly related to production, and, on the other hand, the relative size of the financial sector with respect to the overall economy. Several empirical indicators show that financialization has been increasing in the Euro Area in the last two decades. This finding is important because while financialization has been so far mostly considered to be a driver for growth and innovation, there is today a wealth of theoretical arguments and empirical evidence pointing to the detrimental effects of excessive financialization for growth, innovation, inequality and financial stability. First, excessive financialization depresses economic growth because it implies that a larger fraction of credit is directed toward unfruitful investment projects, possibly generating economic crises (e.g. via housing price bubbles). Second, financialization has negative impact on innovation because the separation between actors taking risks from innovation and actors extracting rents from innovation implies lower share of reinvested profits (e.g. via short-termism and share buy-backs). Third, financialization contributes to inequality by strengthening top earners’ bargaining power in terms of higher wages and lower taxation, as well as by burdening public budgets with fiscal assistance to financial institutions in time of crisis. Fourth, financialization may lead to financial instability by increasing both the leverage of interconnected financial institutions and the risk of mispricing of large asset classes (e.g. the dynamics of leverage and mispricing of mortgage backed securities in the run of the 2008 financial crisis). We suggest some countermeasures that could help containing excessive financialization, including: (i) fostering the demand in the real sector; (ii) establishing mission-oriented programs by going beyond the traditional conceptual framework to fix market failures and aim to create markets where they may not exist at all; (iii) encouraging the alignment of top managers’ compensation schemes with long-term profit and corporate social responsible goals; (iv) studying the possibility of setting a minimal ratio on banks for lending to the real economy (to non-real estate sectors); (v) studying the possibility of setting a maximal level of intra-financial leverage for financial institutions.
    Date: 2018–04
  8. By: Nuno Azevedo; Márcio Mateus; Álvaro Pina
    Abstract: With a dataset covering 95% of total outstanding credit to non-financial corporations recorded in the Portuguese credit register, we investigate whether outstanding loans by resident banks to 64 economic sectors have been granted to the most productive firms. We find evidence of misallocation, which reflects the joint effects of credit supply and credit demand decisions taken over the course of time, and the adverse cyclical developments following the accumulation of imbalances in the Portuguese economy for a protracted period. In 2008-2016, the share of outstanding credit granted to firms with very low productivity (measured or inferred) was always substantial, peaking at 44% in 2013, and declining afterwards with the rebound in economic activity and the growing allocation of new loans towards lower risk firms and away from higher risk firms. Furthermore, we find that misallocation is associated with slower reallocation. The responsiveness of credit growth to firm relative productivity is much lower in sectors with relatively more misallocated credit and when banks have a high share of such credit in their portfolios.
    JEL: D24 G21 O16 O40 O47
    Date: 2018
  9. By: Asongu, Simplice; Nwachukwu, Jacinta
    Abstract: The overarching question tackled in this paper is: to what degree has financial development contributed to providing opportunities of human development for those on low-incomes and by what information technology mechanisms? We systematically review about 180 recently published papers to provide recent information technology advances in finance for inclusive development. Retained financial innovations are structured along three themes. They are: (i) the rural-urban divide, (ii) women empowerment and (iii) human capital in terms of skills and training. The financial instruments are articulated with case studies, innovations and investment strategies with particular emphasis, inter alia on: informal finance, microfinance, mobile banking, crowdfunding, microinsurance, Islamic finance, remittances, Payment for Environmental Services (PES) and the Diaspora Investment in Agriculture (DIA) initiative.
    Keywords: Finance; Inclusive Growth; Economic Development
    JEL: G20 I10 I20 I30 O10
    Date: 2018–01
  10. By: Giannone, Domenico; Lenza, Michele; Reichlin, Lucrezia
    Abstract: This paper studies the relationship between the business cycle and financial intermediation in the euro area. We establish stylized facts and study their stability during the global financial crisis and the European sovereign debt crisis. Long-term interest rates have been exceptionally high and long-term loans and deposits exceptionally low since the Lehman collapse. Instead, short-term interest rates and short-term loans and deposits did not show abnormal dynamics in the course of the financial and sovereign debt crisis. JEL Classification: E32, E51, E52, C32, C51
    Keywords: euro area, loans, monetary policy, money, non-financial corporations
    Date: 2019–01
  11. By: Leo Michelis (Department of Economics, Ryerson University, Toronto, Canada); Ugochi T. Emenogu (Bank of Canada, Ottawa, Canada)
    Abstract: This paper examines the effect of financial frictions on the consumption of durables and non-durables in a two-sector DSGE model with sticky prices and heterogeneous agents. The financial frictions are a combination of loan-to-value (LTV) and payment-to-income (PTI) constraints faced by borrowers. In this setting a monetary contraction reduces drastically the maximum amount that consumers can borrow in order to purchase durable goods. As a result, the model predicts that the consumption of durables falls, along with non-durables even when durable prices are fully flexible. Also output falls and the nominal interest rate increases following a monetary tightening. Thus, the model matches better the predictions of the model with the data, relative to the existing literature.
    Keywords: Durable goods, Sticky prices, Financial frictions, Monetary policy
    JEL: E44 E52
    Date: 2019–01
  12. By: Di Mauro, Filippo; Hassan, Fadi; Ottaviano, Gianmarco I. P.
    Abstract: The efficient allocation of credit is a key element for the success of an economy. Traditional measures of allocative efficiency focus on the Q-theory of investment and, in particular, on the elasticity of finance to investment opportunities proxied by firm real value added. This paper introduces a theorybased alternative measure that focuses instead on the elasticity of credit to firm productivity. In doing so, it develops a simple theoretical framework that delivers clear predictions for the elasticity of credit to current and future productivity depending on capital market frictions. When applied to the novel firm-level dataset of the Competitiveness Research Network (CompNet) set up by the EU System of Central Banks, the proposed measure leads to normative statements about the efficiency of credit allocation across the largest Eurozone economies, changing the conclusions that one would reach based on traditional empirical applications of Q-theory.
    Keywords: bank credit; capital allocation; productivity; credit constraints
    JEL: D92 G10 G21 G31 O16
    Date: 2018–07–01

This nep-fdg issue is ©2019 by Georg Man. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.