nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2019‒04‒15
eight papers chosen by
Georg Man

  1. FDI, banking crisis and growth: direct and spill over effects By Brahim Gaies; Khaled Guesmi; St\'ephane Goutte
  2. Financial Deepening, Terms of Trade Shocks, and Growth Volatility in Low-Income Countries By Kangni R Kpodar; Maelan Le Goff; Raju J Singh
  3. When complexity meets finance: A contribution to the study of the macroeconomic effects of complex financial systems By Alberto Botta; Eugenio Caverzasi; Alberto Russo
  4. Macroeconomic Effects of Taxes on Banking By J. E. Boscá; R. Doménech; J. Ferri; J. Rubio-Ramirez
  5. Economic and political drivers of the duration of credit booms By Vítor Castro; Rodrigo Martins
  6. Monetary Policy, Growth and Employment in Developing Areas: A Review of the Literature By Junankar, Pramod N. (Raja)
  7. The Prewar Financial System and the Dynamics of Corporate Financing By Konishi, Masaru; Yoshida, Takashi
  8. Revisiting The Finance-Inequality Nexus in a Panel of African Countries By Christelle Meniago; Simplice A. Asongu

  1. By: Brahim Gaies (LED); Khaled Guesmi (LED); St\'ephane Goutte (LED)
    Abstract: This study suggests a new decomposition of the effect of Foreign Direct Investment (FDI) on long-term growth in developing countries. It reveals that FDI not only have a positive direct effect on growth, but also increase the latter by reducing the recessionary effect resulting from a banking crisis. Even more, they reduce its occurrence. JEL: F65, F36, G01, G15
    Date: 2019–04
  2. By: Kangni R Kpodar; Maelan Le Goff; Raju J Singh
    Abstract: This paper contributes to the literature by looking at the possible relevance of the structure of the financial system—whether financial intermediation is performed through banks or markets—for macroeconomic volatility, against the backdrop of increased policy attention on strengthening growth resilience. With low-income countries (LICs) being the most vulnerable to large and frequent terms of trade shocks, the paper focuses on a sample of 38 LICs over the period 1978-2012 and finds that banking sector development acts as a shock-absorber in poor countries, dampening the transmission of terms of trade shocks to growth volatility. Expanding the sample to 121 developing countries confirms this result, although this role of shock-absorber fades away as economies grow richer. Stock market development, by contrast, appears neither to be a shock-absorber nor a shock-amplifier for most economies. These findings are consistent across a range of econometric estimators, including fixed effect, system GMM and local projection estimates.
    Date: 2019–03–25
  3. By: Alberto Botta; Eugenio Caverzasi; Alberto Russo
    Abstract: In the last decade, complexity economics has emerged as a powerful approach to the understanding of the most relevant factors influencing economic development. The concept of economic complexity has been applied to the study of different economic issues such as economic growth, technological change and inequality. With this work we aim at extending the application of this concept to the study of the financial side of the economy, and, in particular, of the macroeconomic effects of rising financial complexity. In this paper, we present an agent-based model integrating an increasingly complex financial sector with a real side of the economy populated, among other sectors, by heterogeneous households. We test the systemic impact that the increasing complexity of both the financial system and the financial products it manufactures bear on economic growth, macroeconomic stability and inequality. We find mixed results with respect to the positive economic implications the existing literature ascribes to products complexity and deepening production capabilities. Despite higher financial complexity may lead to faster growth, our model suggests that this comes at the cost of heightened financial fragility, a more crisis-prone economic system, and increasing levels of income and wealth inequality. According to these findings, and consistently with pioneering insights from Minsky, we claim that rising complexity does not always entail positive consequences for the well-being of the economy. This is particularly true when it comes to financial innovations and financial complexity.
    Keywords: AB-SFC model, financial complexity, securitization
    JEL: E44 G01 G23
    Date: 2019–04
  4. By: J. E. Boscá; R. Doménech; J. Ferri; J. Rubio-Ramirez
    Abstract: This paper evaluates the macroeconomic effects of taxes on banking in a small open economy in a currency union for three tax alternatives: an additional tax on profits, on deposits, and on loans. We propose a DSGE model with a rich detail of taxes and a banking sector and show that these three taxes are equivalent in their effects on macroeconomic variables. Banks react to higher taxes by increasing their markups and by transferring part of the fiscal cost to households and firms through higher interest rates on loans. The increase in government revenues comes at a cost of a long-run decrease of GDP, an increase in loans interest rates, and a reduction in the volume of credit, deposits and bank capital. Our simulation exercises show that the trade-off between government revenues and economic activity is well captured by a multiplier of GDP to ex post government revenue close to -0.9, which is virtually independent of the tax rate.
    Date: 2019–04
  5. By: Vítor Castro (School of Business and Economics, Loughborough University, NIPE); Rodrigo Martins (Faculty of Economics, University of Coimbra)
    Abstract: This paper presents a new perspective on the study of credit booms by examining what determines their duration and by testing for relevant political features. The results from the estimation of a discrete-time duration model show that not only economic factors but also political dynamics play an important role in explaining the duration of credit booms. These are found to last longer when the economy is both growing faster and exhibits lower levels of liquidity in the banking system; but credit booms tend to be shorter when countries improve their current account position. Furthermore, their duration is affected by the electoral cycle as well as when centre parties are in office. Credit expansions that end in a banking crisis are also found to be statistically longer and their duration more sensitive to economic and political factors. Finally, we find strong evidence that Central Bank independence and the length of credit booms are inversely related.
    Keywords: Credit Booms; Duration Analysis; Political Cycles; Ideology; Central Bank independence.
    JEL: C41 D72 E32 E51
    Date: 2018
  6. By: Junankar, Pramod N. (Raja) (University of New South Wales)
    Abstract: In this paper we review the literature on the impact that monetary policy has on growth and employment in developing countries. Much of the literature focusses on the impact of monetary policy on inflation levels and inflation volatility, and sometimes on output (GDP) levels and volatility of output. This survey of the literature on Monetary policy and growth shows that money plays a small role in developing countries and that monetary policy is not a very important influence on growth but may have some impact on inflation. Although there is much discussion about the merits of keeping inflation levels and volatility low, there is very little literature on studying the impact of low rates of steady inflation on the levels of private investment and technological change and hence on economic growth and on employment. There is very little research about the direct links between monetary policy and employment. The impact of growth on employment depends on what are the main drivers of economic growth and the initial state of the economy. Although growth may lead to increasing employment (formal and informal) there is little evidence showing that growth leads to an increase in "decent employment".
    Keywords: monetary policy, role of money, growth, employment, development
    JEL: E52 J4 O11 O17 O47
    Date: 2019–03
  7. By: Konishi, Masaru; Yoshida, Takashi
    Abstract: The literature that documents the positive association between financial development and growth raises the question, in a historical context, of whether financial systems were well developed enough to promote growth even in the early stages of economic growth. This study examines whether firms used the financial system (capital markets and financial intermediaries) for financing in the prewar period as actively as they do today. Applying the survival analysis to the financial data of Japanese listed nonfinancial firms in the 1914–1929 and 1999–2013 periods, we show that prewar firms used the financial system to meet their needs for funds equally or more actively compared with present-day firms; however, they did not use it to realize their optimal capital structures as actively as present-day firms do. Prior studies show that the Japanese financial system was well developed in the early 20th century in terms of the size of capital markets compared with the recent period. Our results related to meeting financing needs are consistent with this. However, the results related to the realization of optimal capital structure imply that the Japanese financial system was not as sophisticated in the prewar period as it is today in terms of allowing firms optimal choices between debt and equity for adjustments of capital structure.
    Keywords: Financial development, financial markets, capital structure, leverage
    JEL: G10 G20 G32
    Date: 2019–03–15
  8. By: Christelle Meniago (School of Economics, Sol Plaatje University); Simplice A. Asongu (Africa Governance and Development Institute)
    Abstract: The study assesses the role of financial development on income inequality in a panel of 48 African countries for the period 1996 to 2014. Financial development is defined in terms of depth (money supply and liquid liabilities), efficiency (from banking and financial system perspectives), activity (at banking and financial system levels) and stability while, three indicators of inequality are used, namely, the: Gini coefficient, Atkinson index and Palma ratio. The empirical evidence is based on Generalised Method of Moments. When financial sector development indicators are used exclusively as strictly exogenous variables in the identification process, it is broadly established that with the exception of financial stability, access to credit (or financial activity) and intermediation efficiency have favourable income redistributive effects. The findings are robust to the: control for unobserved heterogeneity in terms of time effects and inclusion of time invariant variables as strictly exogenous variables in the identification process.
    Keywords: Economic Growth, Debt, innovation assimilation, companies, Economic Growth, MobileMoney,SME
    JEL: R10
    Date: 2018–06

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