nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2019‒03‒11
ten papers chosen by
Georg Man

  1. Reinvigorating Growth in Belize By Dmitry Vasilyev
  2. Nepal; Selected Issues By International Monetary Fund
  3. Credit and fiscal multipliers in China By Chen, Sophia; Ratnovski, Lev; Tsai, Pi-Han
  4. Growth at Risk: Concept and Application in IMF Country Surveillance By Ananthakrishnan Prasad; Selim Elekdag; Phakawa Jeasakul; Romain Lafarguette; Adrian Alter; Alan Xiaochen Feng; Changchun Wang
  5. Money and modernization in early modern England By Nuno Palma
  6. The real effects of zombie lending in Europe By Tracey, Belinda
  7. Bank Capital Regulation and Endogenous Shadow Banking Crises By Poeschl, Johannes; Zhang, Xue
  8. Inequality, Portfolio Choice and the Great Recession By Heejeong Kim
  9. Host-Country Financial Development and Multinational Activity By Bilir, Kamran; Chor, Davin; Manova, Kalina
  10. Why Does Economic Performance Differ between Domestic and Foreign-Owned Establishments? Evidence from Nigeria By Hideaki Goto; Nonso Richard Okechukwu

  1. By: Dmitry Vasilyev
    Abstract: In the 1990s and early 2000s, Belize grew faster than its regional peers. By the mid-2000s, however, economic growth had slowed down to the regional average. A vicious circle of low growth and increasing public debt has been clouding Belize’s outlook. This paper applies a growth diagnostic approach based on the Hausmann-Rodrik-Velasco framework to investigate the main growth constraints and opportunities for higher growth in Belize. Improvements in access to finance and in the business climate could unlock Belize’s strengths.
    Date: 2019–02–04
  2. By: International Monetary Fund
    Abstract: Selected Issues
    Keywords: Financial sector development;Development;Intergovernmental fiscal relations;Fiscal policy;Financial sector;fiscal federalism;NRB;federalism;core inflation;subnational
    Date: 2019–02–17
  3. By: Chen, Sophia; Ratnovski, Lev; Tsai, Pi-Han
    Abstract: We estimate credit and fiscal multipliers in China, using subnational political cycles as a source of exogenous variation. The tenure of the provincial party secretary, interacted with the credit and fiscal expenditure used in other provinces, instruments for provincial credit and government expenditure growth. We find a fiscal multiplier of 0.75 in 2001-2008, which increased to 1.2 in 2010-2015, consistent with higher multipliers in a slower economy. At the same time, a credit multiplier of 0.2 in 2001-2008 declined to close to zero in 2010-2015, consistent with credit saturation and credit misallocation. Our results suggest that credit expansion cannot further support economic growth in China. The flip side is that lower credit growth is also unlikely to disrupt output growth. Fiscal policy is powerful, and can cushion the macroeconomic adjustment to lower credit intensity.
    JEL: E63 G21 H20 R12
    Date: 2019–02–28
  4. By: Ananthakrishnan Prasad; Selim Elekdag; Phakawa Jeasakul; Romain Lafarguette; Adrian Alter; Alan Xiaochen Feng; Changchun Wang
    Abstract: The growth-at-risk (GaR) framework links current macrofinancial conditions to the distribution of future growth. Its main strength is its ability to assess the entire distribution of future GDP growth (in contrast to point forecasts), quantify macrofinancial risks in terms of growth, and monitor the evolution of risks to economic activity over time. By using GaR analysis, policymakers can quantify the likelihood of risk scenarios, which would serve as a basis for preemptive action. This paper offers practical guidance on how to conduct GaR analysis and draws lessons from country case studies. It also discusses an Excel-based GaR tool developed to support the IMF’s bilateral surveillance efforts.
    Date: 2019–02–21
  5. By: Nuno Palma (University of Manchester and CEPR)
    Abstract: Classic accounts of the English industrial revolution present a long period of stagnation followed by a fast take-off. However, recent findings of slow but steady per capita economic growth suggest that this is a historically inaccurate portrait of early modern England. This growth pattern was in part driven by specialization and structural change accompanied by an increase in market participation at both the intensive and extensive levels. These, I argue, were supported by the gradual increase in money supply made possible by the importation of precious metals from America. They allowed for a substantial increase in the monetization and liquidity levels of the economy, hence decreasing transaction costs, increasing market thickness, changing the relative incentive for participating in the market, and allowing agglomeration economies to arise. By making trade with Asia possible, precious metals also induced demand for new desirable goods, which in turn encouraged market participation. Finally, the increased monetization and market participation made tax collection easier. This helped the government to build up fiscal capacity and as a consequence to provide for public goods. The structural change and increased market participation that ensued paved the way to modernization.
    Keywords: Origins and persistence of modern economic growth; the industrious, industrial and financial revolutions; early modern monetary injections; the great divergence; the little divergence; state-formation; provision of public goods
    JEL: E10 E40 E50 N13 N33 O40
    Date: 2019–02
  6. By: Tracey, Belinda (Bank of England)
    Abstract: Around 10% of European firms were in receipt of subsidized bank loans following the peak of the European sovereign debt crisis in 2011. To what extent did such forbearance lending contribute to the subsequent low output growth experienced by the euro area? In this paper, we address this question by developing a quantitative model of firm dynamics in which forbearance lending and firm defaults arise endogenously. The model provides a close approximation to key euro-area firm statistics over the period 2011 to 2014. We evaluate the impact of forbearance lending by considering a counterfactual scenario in which firms no longer have access to loan forbearance. Our key finding is that aggregate output, investment and total factor productivity are higher in the absence of forbearance lending than in the benchmark scenario that includes forbearance lending. This suggests that forbearance lending practices contributed to the low output growth across the euro area following the onset of the sovereign debt crisis.
    Keywords: Forbearance lending; zombie firms; firm defaults; firm dynamics
    JEL: G21 G32 L25
    Date: 2019–03–01
  7. By: Poeschl, Johannes; Zhang, Xue
    Abstract: We study the macroeconomic effects of bank capital requirements in an economy with two banking sectors. Banks are connected through a wholesale funding market. Anticipated banking crises occur endogenously in the form of self-fulfilling wholesale funding rollover crises. Retail bank capital requirements can reduce the frequency and severity of banking crises. Tightening retail bank capital requirements increases the size and leverage of the shadow banking sector through a novel channel that works through the anticipation of banking crises. A policy which corrects this spillover is more than twice as effective in reducing the frequency and severity of banking crises.
    Keywords: Bank capital regulation, shadow banking, anticipated bank runs.
    JEL: E44 G24 G28
    Date: 2018–12–20
  8. By: Heejeong Kim (Concordia University)
    Abstract: What drives sharp declines in aggregate quantities over the Great Recession? I study this question by building a dynamic stochastic overlapping generations economy where households hold both low-return liquid and high-return illiquid assets. In this environment, I consider shocks to aggregate TFP that occur alongside a rise in risk of a further economic downturn. Importantly, a higher probability of an economic disaster is consistent with the recent evidence finding a decline in households’ expected income growth over the Great Recession. I also show that a rise in disaster risk explains the rise in savings rates, seen in the micro data over the Great Recession. When calibrated to reproduce the distribution of wealth as well as the frequency and severity of disasters reported in Barro (2006), a rise in disaster risk, and an empirically consistent fall in TFP, explains around 70 percent of the decline in aggregate consumption and more than 50 percent of the decline in investment over the Great Recession. Comparing my model to an economy without illiquid assets, I find that household variation in the liquidity of wealth plays a key role in amplifying the effect of a rise in disaster risk.
    Keywords: Business cycles, incomplete markets, disaster risk, portfolio choice
    JEL: E21 E32
    Date: 2019–02
  9. By: Bilir, Kamran; Chor, Davin; Manova, Kalina
    Abstract: This paper evaluates the influence of host-country financial conditions on the global operations of multinational firms. Using detailed U.S. data, we establish that financial development in a country is associated with relatively more entry by multinational affiliates, as well as with higher aggregate affiliate sales to the local market, back to the U.S. and to third destinations, with these effects being more pronounced in financially more vulnerable sectors. At the level of individual affiliates, by contrast, these forces are associated with relatively lower local sales and higher return and third-country sales. Yet at both aggregate and affiliate levels, the share of local sales in total sales is smaller, while the shares of U.S. and third-country sales are both bigger. These empirical regularities hold when using fixed effects to account for unobserved differences across country-years, sectors, and parent firms. We show theoretically that these patterns are consistent with host-country financial development affecting multinationals' incentives for horizontal, vertical and platform FDI through two channels: a financing effect that induces affiliate entry and expansion by improving their access to external finance, and a competition effect that reorients affiliate sales away from the local market due to increased entry by credit-constrained domestic firms.
    Keywords: credit constraints; FDI; Financial Development; Heterogeneous Firms; multinational activity
    JEL: F12 F23 F36 G20
    Date: 2019–02
  10. By: Hideaki Goto (International University of Japan); Nonso Richard Okechukwu (Bureau of Public Enterprises)
    Abstract: Diversifying its economy away from the oil industry and developing competitive nonagricultural industries are two of Nigeria's most important policy targets. However, the Nigerian economy faces significant challenges, such as educational attainment among workers, soundness of infrastructure, and access to finance. This study investigates how and to what extent these factors affect the output and productivity of domestic establishments (DEs) and foreignowned establishments (FOEs) in Nigeria. Further, it compares the economic performance of these two groups of establishments and analyzes the determinants of ownership differentials. First, the results show that FOEs significantly outperform DEs. Second, access to finance plays a key role, both in improving the economic performance of establishments (regardless of their ownership) and in explaining ownership differentials in economic performance. Third, it is implied that increasing educational attainment amongst workers could improve the performance of DEs by making it easier for them to employ skilled employees. In Nigeria, many reforms are under way under the Economic Recovery and Growth Plan, and they aim to develop infrastructure, strengthen the financial system, and improve human capital, to name but a few objectives; however, their rapid and complete implementation are urgently needed.
    Keywords: ownership, manufacture, productivity, decomposition, Nigeria
    Date: 2019–01

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