nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2019‒05‒13
eight papers chosen by
Georg Man

  1. Financial Engineering and Economic Development By Amaral, Pedro S.; Corbae, Dean; Quintin, Erwan
  2. Evidence for Gross Domestic Product growth time delay dependence over Foreign Direct Investment. A time-lag dependent correlation study By Marcel Ausloos; Ali Eskandary; Parmjit Kaur; Gurjeet Dhesi
  3. Arbitrage Crashes, Financial Accelerator, and Sudden Market Freezes By Ally Zhang
  4. Allocative Efficiency and Finance By Andrea Linarello; Andrea Petrella; Enrico Sette
  5. Rise of Bank Competition: Evidence from Banking Deregulation in China By Haoyu Gao; Hong Ru; Robert Townsend; Xiaoguang Yang
  6. Capital allocation, credit access, and firm growth in Viet Nam By Newman Carol; O’Toole Conor; Kinghan Christina
  7. Capital Market Union and Growth Prospects for Small and Medium Enterprises By Giorgio Barba Navaretti; Giacomo Calzolari; Gianmarco Ottaviano; Alberto Franco Pozzolo
  8. High-Frequency Credit Spread Information and Macroeconomic Forecast Revision By Bruno Deschamps; Christos Ioannidis; Kook Ka

  1. By: Amaral, Pedro S. (Federal Reserve Bank of Cleveland); Corbae, Dean (Wisconsin School of Business); Quintin, Erwan (Wisconsin School of Business)
    Abstract: The vast literature on financial development focuses mostly on the causal impact of the quantity of financial intermediation on economic development and productivity. This paper, instead, focuses on the role of the financial sector in creating securities that cater to the needs of heterogeneous investors. We describe a dynamic extension of Allen and Gale (1989)’s optimal security design model in which producers can tranche the stochastic cash flows they generate at a cost. Lowering security creation costs in that environment leads to more financial investment, but it has ambiguous effects on capital formation, output, and aggregate productivity. Much of the investment boom caused by increased securitization activities can, in fact, be spent on securitization costs and intermediation rents, with little or even negative effects on development and productivity.
    Keywords: Endogenous security markets; financial development; economic development;
    JEL: E30 E44
    Date: 2017–06–13
  2. By: Marcel Ausloos; Ali Eskandary; Parmjit Kaur; Gurjeet Dhesi
    Abstract: This paper considers an often forgotten relationship, the time delay between a cause and its effect in economies and finance. We treat the case of Foreign Direct Investment (FDI) and economic growth, - measured through a country Gross Domestic Product (GDP). The pertinent data refers to 43 countries, over 1970-2015, - for a total of 4278 observations. When countries are grouped according to the Inequality-Adjusted Human Development Index (IHDI), it is found that a time lag dependence effect exists in FDI-GDP correlations. This is established through a time-dependent Pearson 's product-moment correlation coefficient matrix. Moreover, such a Pearson correlation coefficient is observed to evolve from positive to negative values depending on the IHDI, from low to high. It is "politically and policy "relevant" that the correlation is statistically significant providing the time lag is less than 3 years. A "rank-size" law is demonstrated. It is recommended to reconsider such a time lag effect when discussing previous analyses whence conclusions on international business, and thereafter on forecasting.
    Date: 2019–05
  3. By: Ally Zhang (University of Zurich and Swiss Finance Institute)
    Abstract: We develop an infinite horizon model that links the intermediation in both the financial and real sectors. Intermediaries provide market liquidity and exploit the arbitrage profits in segmented financial markets. To do so, they use their productive capital as collateral. We show that the weakened intermediation and arbitrage losses are mutually reinforcing during an economic downturn. This forces intermediaries to de-lever and leads to liquidity spirals in both financial and real sectors. Also, the distress might further open up the possibility of sudden run-like market freezes, where intermediaries are denied access to renewed funding through arbitrage. We evaluate the effect of three intervention policies: direct purchase of distressed assets, interest rate cuts, and capital injection. We find that capital injection is most effective as it loosens the margin requirement. The interest cut is least effective because it exacerbates the capital misallocation.
    Keywords: limit of arbitrage, financial intermediary, haircut, segmented markets, financial crises, market liquidity, collateral constraints
    JEL: D52 D58 E44 G01 G12 G33
    Date: 2017–11
  4. By: Andrea Linarello (Bank of Italy); Andrea Petrella (Bank of Italy); Enrico Sette (Bank of Italy)
    Abstract: This paper studies the effect of bank lending shocks on aggregate labor productivity. Exploiting a unique administrative dataset covering the universe of Italian manufacturing firms between 2000 and 2015, we apply the Melitz and Polanec (2015) decomposition at the 4-digit industry level to distinguish the contribution to aggregate productivity growth of: changes in surviving firms’ average productivity, market share reallocation among surviving firms, and firm entry and exit. We estimate the impact of credit shocks on each of these components, using data from the Italian Credit Register to construct industry-specific exogenous credit supply shocks. Only for the 2008-2015 period, we find that a tightening in the supply of credit lowers average productivity but increases the covariance between market share and productivity among incumbents, thus boosting the reallocation of labor. We find no significant effects of credit supply shocks on the contribution made by firm entry and exit. We find that the effects of negative credit shocks on average productivity and reallocation are concentrated in industries with a lower share of tangible capital and collateralized debt.
    Keywords: credit supply shocks, labor productivity, allocative efficiency
    JEL: L25 O47 G01 E44
    Date: 2019–04
  5. By: Haoyu Gao; Hong Ru; Robert Townsend; Xiaoguang Yang
    Abstract: Using proprietary individual level loan data, this paper explores the economic consequences of the 2009 bank entry deregulation in China. Such deregulation leads to higher screening standards, lower interest rates, and lower delinquency rates for corporate loans from entrant banks. Consequently, in deregulated cities, private firms with bank credit access increase asset investments, employment, net income, and ROA. In contrast, the performance of state-owned enterprises (SOEs) does not improve following deregulation. Deregulation also amplifies bank credit from productive private firms to inefficient SOEs due mainly to SOEs’ soft budget constraints. This adverse effect accounts for 0.31% annual GDP losses.
    JEL: G21 G28 L50 O40
    Date: 2019–05
  6. By: Newman Carol; O’Toole Conor; Kinghan Christina
    Abstract: In this paper, we explore the relationship between firm growth, access to finance, and the efficiency of capital allocation in Viet Nam over the period 2005–2015. Using data from the UNU-WIDER Viet Nam SME survey, we test whether firms with higher marginal returns to capital are more or less likely to get access to financing. This is a key test of how efficiently the financial system is functioning.We also test whether credit supply constraints are hindering capital allocation by limiting the investment and employment activities of firms with the highest marginal return on capital. A number of findings emerge. We find that high return investors, with the greatest marginal return on capital, have a lower likelihood of having formal finance (loans outstanding with formal credit institutions).We find evidence that rejected credit applications are limiting investment activity but not employment, particularly for firms with higher investment efficiency. This suggests a link between firm growth and a suboptimal allocation of credit.
    Keywords: Access to credit,Investment and access to finance,SME
    Date: 2018
  7. By: Giorgio Barba Navaretti (University of Milan and LdA); Giacomo Calzolari (European University Institute, CEPR and LdA); Gianmarco Ottaviano (Bocconi University, London School of Economics, CEP, CEPR and LdA); Alberto Franco Pozzolo (University of Molise and LdA)
    Abstract: One of the key aims of the CMU is easing the access of SMEs to credit and capital markets. This paper examines the role of SMEs in the European economy and their financial structure. It looks at the potential effects of the CMU, by specifically focusing on the informational market failures affecting SMEs finance. A fully integrated European Capital market will be beneficial to SMEs, and the European economy, if it does entice adequate large-scale technologies and actions to solve market failures related to informational issues. Otherwise, it may generate core-periphery outcomes, with peripheral regions and weakers SMEs further excluded from crucial sources of finance.
    Date: 2019–04–29
  8. By: Bruno Deschamps (Nottingham University Business School China); Christos Ioannidis (Aston Business School, Aston University); Kook Ka (Economic Research Institute, Bank of Korea)
    Abstract: We examine whether professional forecasters incorporate high-frequency information about credit conditions when revising their economic forecasts. Using Mixed Data Sampling regression approach, we find that daily credit spreads have significant predictive ability for monthly forecast revisions of output growth, at both aggregate and individual forecast levels. The relations are shown to be notably strong during ¡®bad¡¯ economic conditions, suggesting that forecasters anticipate more pronounced effects of credit tightening during economic downturns, indicating the amplification effect of financial developments on macroeconomic aggregates. Forecasts do not incorporate the totality of financial information received in equal measures, implying the presence of information rigidities in the incorporation of credit spread information.
    Keywords: Forecast Revision, GDP Forecast, Credit Spread, High-Frequency Data, Mixed Data Sampling (MIDAS)
    JEL: C53 E32 E44
    Date: 2019–05–03

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