nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2019‒03‒18
eleven papers chosen by
Georg Man

  2. Shadow banking and the Great Recession: Evidence from an estimated DSGE model By Patrick Fève; Alban Moura; Olivier Pierrard
  3. A macroeconomic model with heterogeneous and financially-constrained intermediaries By Thomas Lejeune; Raf Wouters
  4. On Liquidity Shocks and Asset Prices By Pablo A. Guerron-Quintana; Ryo Jinnai
  5. Capital misallocation and secular stagnation By Andrea Caggese; Ander Pérez-Orive
  6. Lending frictions and nominal rigidities: Implications for credit reallocation and TFP By David Florian Hoyle; Johanna L. Francis
  7. Measuring economic and economic policy uncertainty, and their macroeconomic effects: the case of Spain By Corinna Ghirelli; María Gil; Javier J. Pérez; Alberto Urtasun
  8. The Cost of Banking Crises: Does the Policy Framework Matter? By Grégory Levieuge; Yannick Lucotte; Florian Pradines-Jobet
  9. Can government demand stimulate private investment? Evidence from U.S. federal procurement By Shafik Hebous; Tom Zimmermann
  10. Financing and obstacles for high growth enterprises: The European case By Ferrando, Annalisa; Pal, Rozalia; Durante, Elena
  11. The Leading Premium By M. Max Croce; Tatyana Marchuk; Christian Schlag

  1. By: Nicolas De Vijlder; Koen Schoors (-)
    Abstract: In this paper we investigate the hypothesis that the economic divergence across Flemish localities between 1830 and 1910 is explained by the theory of Hernando de Soto. We hypothesize that the uniform land rights installed after the French revolution provided borrowers with an attractive form of collateral. Conditional on the presence of local financial development provided by a new government-owned bank this eased access to external finance and fostered industrial and commercial economic activity. Using primary historical data of about 1179 localities in Flanders we find that the variation in the local value of land (collateral) and the variation in local financial development jointly explain a substantial amount of the variation in non-agricultural employment accumulated between 1830 and 1910. By 1910 industrial and commercial economic activity was more developed in localities where both early (1846) rural land prices were high and early (1880) local financial development was more pronounced, which is in line with the “de Soto” hypothesis.
    Keywords: de Soto, financial institutions, industrial development, land prices, Flanders, 19th - 20th centuries
    JEL: N93 O43 R11 R12
    Date: 2019–02
  2. By: Patrick Fève; Alban Moura; Olivier Pierrard
    Abstract: We argue that shocks to credit supply by shadow and retail banks were key to understand the behavior of the US economy during the Great Recession and the Slow Recovery. We base this result on an estimated DSGE model featuring a rich representation of credit flows. Our model selects the two banking shocks as the most important drivers of the crisis because they account simultaneously for the fall in real activity, the decline in credit intermediation and the rise in lending-borrowing spreads. On the other hand, in contrast with the existing literature, our results assign only a moderate role to productivity and investment efficiency shocks.
    Keywords: Shadow banking, Great Recession, slow recovery, estimated DSGE models.
    JEL: C32 E32
    Date: 2019–03
  3. By: Thomas Lejeune (Economics and Research Department, National Bank of Belgium); Raf Wouters (Economics and Research Department, National Bank of Belgium)
    Abstract: This paper analyses the risk amplification inherent in a macroeconomic model with a heterogeneous financial sector. It extends a model with an equity-constrained intermediary by adding a shadow banking intermediary with pro-cyclical leverage. It is shown that the inclusion of this intermediary significantly amplifies financial frictions and adds to financial instability. Quantitative effects on asset prices are magnified, and the amplification propagates to the real side of the macroeconomy. Reducing the size of the shadow banking sector involves a trade-off between stabilizing the economy and the expected growth of economic activity. Ignoring the heterogeneity of the financial sector may lead to an underestimation of the excess risk-taking due to the anticipation of expansionary policies and of financial and macroeconomic responses to shocks.
    Keywords: Financial frictions, Financial constraints, Endogenous risk, Shadow banking
    JEL: G2 G12 E44
    Date: 2019–02
  4. By: Pablo A. Guerron-Quintana (Boston College and Espol); Ryo Jinnai (Hitotsubashi University)
    Abstract: In models of financial frictions, stock market booms tend to follow adverse liquidity shocks. This finding is clearly at odds with the data. We demonstrate that this counterfactual result is specific to real business cycle models with exogenous growth. Once we allow for both endogenous productivity and growth, this puzzling price dynamics easily disappear. Intuitively, the gloomy economic-growth outlook following the adverse liquidity shocks generates a predictable and negative long-run component in dividend growth, leading to the collapse of equity prices.
    Date: 2019–03–13
  5. By: Andrea Caggese; Ander Pérez-Orive
    Abstract: The widespread emergence of intangible technologies in recent decades may have significantly hurt output growth–even when these technologies replaced considerably less productive tangible technologies–because of low interest rates. After a shift toward intangible capital in production, the corporate sector becomes a net saver because intangible capital has a low collateral value. Firms’ ability to purchase intangible capital is impaired by low interest rates because low rates slow down the accumulation of savings and increase the price of capital, worsening capital misallocation. Our model simulations reproduce key trends in the U.S. in the period from 1980 to 2015.
    Keywords: Intangible capital, borrowing constraints, capital reallocation, secular stagnation
    JEL: E22 E43 E44
    Date: 2018–07
  6. By: David Florian Hoyle (Central Reserve Bank of Peru); Johanna L. Francis (Fordham University)
    Abstract: In most modern recessions there is a sharp increase in job destruction and a mild to moderate decline in job creation, resulting in unemployment. The Great Recession was marked by a significant decline in job creation particularly for young firms in addition to the typical increase in destruction. As a result job reallocation fell. In this paper, we explicitly propose a mechanism for financial shocks to disproportionately affect young (typically) smaller firms via credit contracts. We investigate the particular roles of credit frictions versus nominal rigidities in a New Keynesian model augmented by a banking sector characterized by search and matching frictions with endogenous credit destruction. In response to a financial shock, the model economy produces large and persistent increases in credit destruction, declines in credit creation, and an overall decline in reallocation of credit among banks and firms; total factor productivity declines, even though average firm productivity increases, inducing unemployment to increase and remain high for many quarters. Credit frictions not only amplify the effects of a financial shock by creating variation in the number of firms able to produce they also increase the persistence of the shock for output, employment, and credit spreads. When pricing frictions are removed, however, credit frictions lose some of their ability to amplify shocks, though they continue to induce persistence. These findings suggest that credit frictions combined with nominal rigidities are a plausible transmission mechanism for financial shocks to have strong and persistent effects on the labor market particularly for loan dependent firms. Moreover, they may play an important role in job reallocation across firms.
    Keywords: Unemployment, financial crises, gross credit flows, productivity
    JEL: J64 E32 E44 E52
    Date: 2019–03
  7. By: Corinna Ghirelli (Banco de España); María Gil (Banco de España); Javier J. Pérez (Banco de España); Alberto Urtasun (Banco de España)
    Abstract: We provide additional evidence on the relationship between uncertainty and economic activity. For this purpose, we gather and construct a wide range of proxy indicators of economic and economic policy uncertainty from Spain. We distinguish between the relative merits of different types of measures based on: (i) the volatility of financial markets; (ii) economic analysts’ disagreement; (iii) economic policy uncertainty. We show that the first and the third block of measures are the most relevant to grasp the negative effects of unexpected changes in uncertainty on aggregate economic developments, as measured by real GDP. In addition, we find that economic policy uncertainty and financial uncertainty shocks produce visible negative effects on private consumption. The negative responses on capital goods investments are initially bigger in magnitude but vanish more quickly.
    Keywords: economic uncertainty, economic policy uncertainty, impact of uncertainty shocks
    JEL: D8 C43 E2 E3
    Date: 2019–03
  8. By: Grégory Levieuge; Yannick Lucotte; Florian Pradines-Jobet
    Abstract: This paper empirically investigates how the stringency of macroeconomic policy frameworks impacts the unconditional cost of banking crises. We consider monetary, fiscal and exchange rate policies. A restrictive policy framework may promote stronger banking stability, by enhancing discipline and credibility, and by giving financial room to policymakers. At the same time though, tying the hands of policymakers may be counterproductive and procyclical, especially if it prevents them from responding properly to financial imbalances and crises. Our analysis considers a sample of 146 countries over the period 1970-2013, and reveals that extremely restrictive policy frameworks are likely to increase the expected cost of banking crises. By contrast, by combining discipline and flexibility, some policy arrangements such as budget balance rules with an easing clause, intermediate exchange rate regimes or an inflation targeting framework may significantly contain the cost of banking crises. As such, we provide evidence on the benefits of “constrained discretion” for the real impact of banking crises.
    Keywords: Banking crises, Fiscal rules, Monetary policy, Exchange rate regime, Constrained discretion.
    JEL: E44 E58 E61 E62 G01
    Date: 2019
  9. By: Shafik Hebous; Tom Zimmermann
    Abstract: We study the effects of federal purchases on firm investment using a novel panel dataset that combines federal procurement contracts in the United States with key financial firm-level information. Using panel fixed-effect models, propensity score matching, and inverse probability weighting estimation techniques, we find that 1 dollar of federal spending increases firms’ capital investment by 10 to 13 cents. In line with the financial accelerator model, our findings indicate that the effect of government purchases works through easing firms’ access to external borrowing. In particular, the effect is stronger for firms that face financing constraints and it is insignificant for unconstrained firms. Moreover, an industry-level analysis suggests that that the increase in investment at the firm level translates into an industry-wide effect without crowding-out capital investment of other firms in the same industry. Overall, our findings lend support to recent evidence on local multipliers in that increases in regional outputs should ultimately be reflected in firm balance sheets (demand for capital).
    Keywords: investment, federal procurement, financing constraints, spending, multipliers
    JEL: E62 H32 E69
    Date: 2019
  10. By: Ferrando, Annalisa; Pal, Rozalia; Durante, Elena
    Abstract: This paper investigates the links between alternative growth phases of firms and barriers to financing and investment using firm-level information for a representative sample of EU companies. We propose a novel classification of corporates: high growth (HGEs), stable and declining enterprises. We find that during the phase of high growth, firms are on average more financially constrained. To match their needs for external finance, HGEs are more likely to apply for equity financing. Furthermore, we identify firms with high growth potential. Using survey data, we investigate the barriers to investment activities faced by actual and potential HGEs. Our findings suggest that the most stringent obstacles for actual HGEs are the availability of skilled staff and business regulations, while potential HGEs are blocked by uncertainty about the future.
    Keywords: high growth enterprises,financing conditions,bank financing,equity financing,obstacles to investment
    JEL: D22 G01 G20 G32
    Date: 2019
  11. By: M. Max Croce; Tatyana Marchuk; Christian Schlag
    Abstract: In this paper, we compute conditional measures of lead-lag relationships between GDP growth and industry-level cash-flow growth in the US. Our results show that firms in leading industries pay an average annualized return 4% higher than that of firms in lagging industries. Using both time series and cross sectional tests, we estimate an annual timing premium ranging from 1.5% to 2%. This finding can be rationalized in a model in which (a) agents price growth news shocks, and (b) leading industries provide valuable resolution of uncertainty about the growth prospects of lagging industries.
    JEL: G11 G12
    Date: 2019–03

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