nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2019‒02‒11
nine papers chosen by
Georg Man

  1. Revisiting the finance and growth nexus: A deeper look at sectors and instruments By Unger, Robert
  2. Migrant Remittances and Economic Growth: The Role of Financial Development and Institutional Quality By Imad El Hamma
  3. Low Interest Rates, Market Power, and Productivity Growth By Ernest Liu; Atif Mian; Amir Sufi
  4. The Quest for Pro-poor and Inclusive Growth: The Role of Governance By Djeneba Doumbia
  5. Credit Supply: Are there negative spillovers from banks’ proprietary trading? By Kurz, Michael; Kleimeier, Stefanie
  6. Quantifying Reduced-Form Evidence on Collateral Constraints By Sylvain Catherine; Thomas Chaney; Zongbo Huang; David Sraer; David Thesmar
  7. Online Appendix to "Credit Crunches, Asset Prices and Technological Change" By Luis Araujo; Raoul Minetti
  8. Money, Asset Markets and Efficiency of Capital Formation By van Buggenum, Hugo; Uras, Burak
  9. Optimal Monetary Policy Regime Switches By Choi, Jason; Foerster, Andrew

  1. By: Unger, Robert
    Abstract: This paper investigates empirically whether the relation between finance and growth depends on a specific type of financing. I construct a novel panel data set for 34 high income countries over the time period from 1995 to 2014 based on financial accounts data. It allows distinguishing between the sectors that receive financing - households and corporates - as well as a variety of different financial instruments. For the household sector I find an inverted u-shaped relation that indicates that high levels of finance are negatively related to economic growth. In contrast, financing of corporates is largely neutral. Furthermore, when controlling for the sectoral allocation of financing, no specific instrument - e.g. bank credit or market financing, debt or equity financing - seems to be particularly harmful or beneficial for growth.
    Keywords: banks,debt,economic growth,equity,finance,markets
    JEL: C23 G10 G21 O11 O47
    Date: 2018
  2. By: Imad El Hamma (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis - UCA - Université Côte d'Azur - CNRS - Centre National de la Recherche Scientifique, ERUDITE - Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique - UPEM - Université Paris-Est Marne-la-Vallée - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12)
    Abstract: This paper investigates the conditional effects of remittances on economic growth in 14 Middle East and North Africa (MENA) countries. Using unbalanced panel data over the period 1982‐2016, we study the hypothesis that the effect of remittances on economic growth varies depending on the level of financial development and institutional environment in recipient countries. We use Two‐Stage Least Squares (2SLS/IV) instrumental variables method in which we address the endogeneity of remittances. Our results reveal a complementary relationship between financial development and remittances to ensure economic growth. The estimations show that remittances promote growth in countries with a developed financial system and a strong institutional environment.
    Keywords: financial development,institutions quality,Remittances,economic growth
    Date: 2019–01–10
  3. By: Ernest Liu; Atif Mian; Amir Sufi
    Abstract: How does the production side of the economy respond to a low interest rate environment? This study provides a new theoretical result that low interest rates encourage market concentration by giving industry leaders a strategic advantage over followers, and this effect strengthens as the interest rate approaches zero. The model provides a unified explanation for why the fall in long-term interest rates has been associated with rising market concentration, reduced dynamism, a widening productivity-gap between industry leaders and followers, and slower productivity growth. Support for the model's key mechanism is established by showing that a decline in the ten year Treasury yield generates positive excess returns for industry leaders, and the magnitude of the excess returns rises as the Treasury yield approaches zero.
    JEL: E2 E22 G01 G12
    Date: 2019–01
  4. By: Djeneba Doumbia (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics, The World Bank - The World Bank - The World Bank)
    Abstract: This paper analyses the role of good governance in fostering pro-poor and inclusive growth. Using a sample of 112 countries over 1975–2012, it shows that growth is generally pro-poor. However, growth has not been inclusive, as illustrated by a decline in the bottom 20 percent of the income distribution. While all features of good governance support income growth and reduce poverty, only government effectiveness and the rule of law are found to enhance inclusive growth. The investigation of the determinants of pro-poor and inclusive growth highlights that education, infrastructure improvement, and financial development are the key factors in poverty reduction and inclusive growth. Relying on the panel smooth transition regression (PSTR) model following Gonzalez, Tersvirta and Dijk (2005), the paper identifies a nonlinear relationship between governance and pro-poor growth, while the impact of governance on inclusive growth appears to be linear.
    Keywords: Pro-poor growth,Inclusive growth,Governance,PSTR
    Date: 2018–11
  5. By: Kurz, Michael (Finance); Kleimeier, Stefanie (Finance)
    Abstract: Do banks that heavily engage in proprietary trading reduce credit supply relative to their non-trading peers? We answer this question by looking at credit provided by the 135 leading banks in the global corporate loan market between 2003 and 2016. We find that banks with greater trading expertise supply less credit during economically stable times than their non-trading peers and even less during crisis times. This double effect can be attributed to US banks. International banks only reduce their credit supply during crises. We show that these spillovers from trading to credit supply have adverse consequences for the real economy as firms’ ability to invest in capital and expand their workforce is reduced. During a crisis, firms that rely on banks with high trading expertise are most severely affected. Overall, our results suggest that the mandates by global regulators to separate trading from commercial banking are well advised.
    Keywords: credit supply, proprietary trading, international lending, banking, corporate loans
    JEL: G01 G21 G28
    Date: 2019–02–07
  6. By: Sylvain Catherine; Thomas Chaney (Département d'économie); Zongbo Huang (Chinese University of Hong Kong (CUHK)); David Sraer (Princeton University); David Thesmar (Sloan School of Management (MIT Sloan))
    Abstract: While a mature literature shows that credit constraints causally affect firm level investment, this literature provides little guidance to quantify the economic effects implied by these findings. Our paper attempts to fill this gap in two ways. First, we use a structural model of firm dynamics with collateral constraints, and estimate the model to match the firm-level sensitivity of investment to collateral values. We estimate that firms can only pledge about 19% of their collateral value. Second, we embed this model in a general equilibrium framework and estimate that, relative to first-best, collateral constraints are responsible for 11% output losses.
    Date: 2018–05
  7. By: Luis Araujo (Michigan State University); Raoul Minetti (Michigan State University)
    Abstract: Online appendix for the Review of Economic Dynamics article
    Date: 2019
  8. By: van Buggenum, Hugo (Tilburg University, Center For Economic Research); Uras, Burak (Tilburg University, Center For Economic Research)
    Abstract: Holdings of money and illiquid assets are likely to be determined jointly. Therefore, frictions that give rise to a need for money may affect capital formation, resulting in either too much or too little investment. Existing models of money and capital however tend to overlook that both types of investment inefficiencies can be equilibrium outcomes. Building upon insights from the New-Monetarist literature, we construct a model in which preference heterogeneity between agents implies that both over- and under-investment can arise. We use our framework to study whether monetary policy can effectively resolve both types of investment inefficiencies, and find that increasing inflation could resolve under-investment inefficiencies while reducing inflation could curb over-investment inefficiencies.
    Keywords: optiam monetary policy; asses markets; under-investment; over-investment
    JEL: E22 E41 E44 E52 O16
    Date: 2019
  9. By: Choi, Jason (University of Wisconsin-Madison); Foerster, Andrew (Federal Reserve Bank of San Francisco)
    Abstract: An economy that switches between high and low growth regimes creates incentives for the monetary authority to change its rule. As lower growth tends to produce lower real interest rates, the monetary authority has an incentive to increase the inflation target and increase the degree of inertia in setting rates in an attempt to keep the nominal rate positive. An optimizing monetary authority therefore responds to permanently lower growth by slightly increasing both the inflation target and inertia; focusing solely on the inflation target ignores a key margin of adjustment. With repeated growth rate regime switches, an optimal monetary rule that switches at the same time internalizes both the direct effects of growth regime change and the indirect expectation effects generated by switching in policy. The switching rule improves economic outcomes relative to a constant rule and one that does not consider the impact of regime changes; this result is robust to the case when the monetary authority misidentifies the growth regime with relatively high frequency.
    JEL: C63 E31 E52
    Date: 2019–02–01

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