nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2019‒09‒30
twelve papers chosen by
Georg Man

  1. Synergizing Ventures By Ufuk Akcigit; Emin Dinlersoz; Jeremy Greenwood; Veronika Penciakova
  2. Remittances, Finance and Industrialisation in Africa By Uchenna Efobi; Simplice A. Asongu; Chinelo Okafor; Vanessa Tchamyou; Belmondo Tanankem
  3. Essays on banking and international trade By Schmitz, Emerson
  4. The Role of ICT and Financial Development on CO2 Emissions and Economic Growth By Ibrahim D. Raheem; Aviral K. Tiwari; Daniel Balsalobre-lorente
  5. Nowcasting GDP Growth Using a Coincident Economic Indicator for India By Bhadury, Soumya; Ghosh, Saurabh; Kumar, Pankaj
  6. Credit intermediation and the transmission of macro-financial uncertainty: International evidence By Gächter, Martin; Geiger, Martin; Stöckl, Sebastian
  7. Implications of Default Recovery Rates for Aggregate Fluctuations By Giacomo Candian; Mikhail Dmitriev
  8. Risk weighting, private lending and macroeconomic dynamics By Donadelli, Michael; Jüppner, Marcus; Prosperi, Lorenzo
  9. Monitoring and Forecasting Cyclical Dynamics in Bank Credits: Evidence from Turkish Banking Sector By Mehmet Selman Colak; Ibrahim Ethem Guney; Ahmet Senol; Muhammed Hasan Yilmaz
  10. Boom de crédito en Uruguay: Identificación y Anticipación By María Victoria Landaberry
  11. The Long-Run Effects of Monetary Policy By Oscar Jorda; Alan Taylor; Sanjay Singh
  12. Trade Shocks and Credit Reallocation By Stefano Federico; Fadi Hassan; Veronica Rappoport

  1. By: Ufuk Akcigit (University of Chicago); Emin Dinlersoz (U.S. Census Bureau); Jeremy Greenwood (University of Pennsylvania); Veronika Penciakova (University of Maryland)
    Abstract: Venture capital and growth are examined both empirically and theoretically. Empirically, VC-backed startups have higher early growth rates and patenting levels than non-VC-backed ones. Venture capitalists increase a startup's likelihood of reaching the right tails of firm size and innovation distributions. Furthermore, there is positive assortative matching: better venture capitalists match with better startups, creating a synergistic effect. An endogenous growth model, where venture capitalists provide both expertise and financing to business startups, is constructed to match these facts. The degree of assortative matching and the taxation of VC-backed startups are important for growth.
    Date: 2019
  2. By: Uchenna Efobi (Covenant University, Ota, Ogun State, Nigeria); Simplice A. Asongu (Yaoundé, Cameroon); Chinelo Okafor (Covenant University, Ota, Ogun State, Nigeria); Vanessa Tchamyou (Antwerp, Belgium); Belmondo Tanankem (MINEPAT, Cameroon)
    Abstract: The paper assesses how remittances directly and indirectly affect industrialisation using a panel of 49 African countries for the period 1980-2014. The indirect impact is assessed through financial development channels. The empirical evidence is based on three interactive and non-interactive simultaneity-robust estimation techniques, namely: (i) Instrumental Fixed Effects (FE) to control for the unobserved heterogeneity; (ii) Generalised Method of Moments (GMM) to control for persistence in industrialisation and (iii) Instrumental Quantile Regressions (QR) to account for initial levels of industrialisation. The non-interactive specification elucidates direct effects of remittances on industrialisation whereas interactive specifications explain indirect impacts. The findings broadly show that for certain initial levels of industrialisation, remittances can drive industrialisation through the financial development mechanism. Policy implications are discussed.
    Keywords: Africa; Diaspora; Financial development; Industrialisation; Remittances
    JEL: F24 F43 G20 O55
    Date: 2019–01
  3. By: Schmitz, Emerson (Tilburg University, School of Economics and Management)
    Abstract: This thesis consists of three essays: the first two on banking and the third one on international trade. The first chapter examines the impact of two programs carried out by Brazilian federal banks in 2012 aimed at ameliorating credit conditions and expanding access to credit to individuals and small and medium enterprises (SME) in Brazil. The second chapter investigates a potential non-homogeneous relation between financial intermediation and economic growth by levels of human capital development, focusing on a period of exceptional growth of the credit market in Brazil, from 2004 to 2016. The third chapter analyzes the short-run effects of the uncertainties brought along with the Brexit referendum on the bilateral trade between Belgium and its main trading partners.
    Date: 2019
  4. By: Ibrahim D. Raheem (EXCAS, Liège, Belgium); Aviral K. Tiwari (Rajagiri Business School, Kochi, India); Daniel Balsalobre-lorente (Ciudad Real, Spain)
    Abstract: This study explores the role of the information and communication Technology (ICT) and financial development (FD) on both carbon emissions and economic growth for the G7 countries for the period 1990-2014. Using PMG, we found that ICT has a long run positive effect on emissions, while FD is a weak determinant. The interactive term between the ICT and FD produces negative coefficients. Also, both variables are found to impact negatively on economic growth. However, their interactions show they have mixed effects on economic growth (i.e., positive in the short-run and negative in the long-run). Policy implications were designed based on these results.
    Keywords: ICT; Financial development; Carbon emissions; Economic growth and G7 countries
    JEL: E23 F21 F30 O16
    Date: 2019–01
  5. By: Bhadury, Soumya; Ghosh, Saurabh; Kumar, Pankaj
    Abstract: In India, the first official estimate of quarterly GDP is released approximately 7-8 weeks after the end of the reference quarter. To provide an early estimate of the current quarter GDP growth, we construct a Coincident Economic Indicator for India (CEII) using 6, 9 and 12 high-frequency indicators. These indicators represent various sectors, display high contemporaneous correlation with GDP, and track GDP turning points well. While CEII-6 includes domestic economic activity indicators, CEII-9 combines indicators on trade and services along with the indicators used in CEII-6. Finally, CEII-12 adds financial indicators to the indicators used in CEII-9. In addition to the conventional economic activity indicators, we include a financial block in CEII-12 to reflect the growing influence of the financial sector on economic activity. CEII is estimated using a dynamic factor model to extract a common trend underlying the highfrequency indicators. We use the underlying trend to gauge the state of the economy and to identify sectors contributing to economic fluctuations. Further, CEIIs are used to nowcast GDP growth, which closely tracks the actual GDP growth, both in-sample and out-of-sample.
    Keywords: Nowcast, Gross Domestic Product, Economic Cycle, Dynamic Factor Model, Turning Point Analysis, Jagged Edge Data
    JEL: C32 C51 C53
    Date: 2019–09–12
  6. By: Gächter, Martin; Geiger, Martin; Stöckl, Sebastian
    Abstract: We examine the transmission of global macro-financial uncertainty to economic activity depending on the current state of the banking sector. Previous literature suggests that credit supply and uncertainty shocks are important drivers of economic activity, but the distinction between the two is empirically challenging. In this paper, we introduce a new, but surprisingly simple measure of macro-financial uncertainty at the global level while the state of credit intermediation is being captured on the country level. Macro-financial uncertainty generally exerts adverse effects on economic growth in a sample of advanced economies. We find, however, that a shock to uncertainty is strongly reinforced when credit intermediation is distressed. In addition, we show that both macroeconomic and financial market uncertainty are associated with lower economic activity, although the latter exerts stronger effects. State-dependency of the effects is prevalent in both cases. Our findings have important policy implications, highlighting both the state of the banking sector as well as the origin of uncertainty as crucial factors in the transmission of uncertainty.
    Keywords: uncertainty,credit intermediation,local projection method,state-dependency
    JEL: D80 E32 E44 G21
    Date: 2019
  7. By: Giacomo Candian (HEC Montréal); Mikhail Dmitriev (Florida State University)
    Abstract: We document that default recovery rates in the United States are highly volatile and strongly pro-cyclical. These facts are hard to reconcile with the existing financial friction literature. Indeed, models with limited enforceability a la Kiyotaki and Moore (1997) do not have defaults and recovery rates, while agency costs models following Bernanke, Gertler, and Gilchrist (1999) underestimate the volatility of recovery rates by one order of magnitude. We extend the standard agency costs model allowing liquidation costs for creditors to depend on the tightness of the market for physical capital. Creditors do not have expertise in selling entrepreneurial assets, but when buyers are plentiful, this disadvantage is minimal. Instead when sellers are abundant, the disadvantage of being an outsider is higher. Following a negative shock, entrepreneurs sell capital and liquidation costs for creditors increase. Creditors cut lending and cause entrepreneurs to sell more capital. This liquidity channel works independently from standard balance sheet effects and amplifies the impact of financial shocks on output by up to 50 percent.
    Date: 2019
  8. By: Donadelli, Michael; Jüppner, Marcus; Prosperi, Lorenzo
    Abstract: According to current regulation, European banks can apply zero risk weights to sovereign exposures in their balance sheet, irrespective of the assigned rating. We show that a zero risk weighting of sovereign bonds has implications by distorting banks' asset allocation decisions. Due to the lower regulatory cost of sovereign bonds, banks invest more in those bonds at the expense of lending to the real sector. To quantify the effect of this distortion, we build a standard RBC model featuring financial intermediation and a government sector calibrated to the euro area economy. Financial regulation is introduced via a penalty function that punishes banks if they deviate from the target capital ratio. We study the zero risk weight policy during normal times when there is no sovereign default risk and find that a policy introducing positive risk weights on government bonds has both long-run effects and stabilising properties with respect to the business cycle. This policy makes the steady state lending spread on loans to firms decline, stimulating investment and output. Also, it stabilises the lending spread, leading to a lower volatility of investment and output.
    Keywords: sovereign bonds,risk weighting,RBC,lending
    JEL: E44 E32 G21 G32
    Date: 2019
  9. By: Mehmet Selman Colak; Ibrahim Ethem Guney; Ahmet Senol; Muhammed Hasan Yilmaz
    Abstract: Credit growth rate deviating from its long-run trend or equilibrium value holds importance for policymakers given the implications on economic activity and macro-financial interactions. In the first part of this study, the main aim is to construct indicators for determining the episodes of moderate-to-excessive credit slowdown and expansion by utilizing time-series filtering methods such as Hodrick-Prescott filter, Butterworth filter, Christiano-Fitzgerald filter and Hamilton filter over the time period 2007-2019. In addition to filtering choices, four different credit ratios (which are credit-to-GDP ratio, real credit growth, logarithm of real credit, credit impulse ratio) are included in the methodology to ensure the robustness. This framework enables one to generate monitoring tools for not only total loans, but also for financial intermediation activities with different loan breakdowns regarding type, sector and currency denomination. Moreover, industry-based dynamics of commercial loans are examined by using micro-level Credit Registry data set. In the following part, the credit cycle implied by macroeconomic dynamics are investigated by using factor-augmented predictive regression models. In this context, factors representing the global economic developments, banking sector outlook, local financial conditions and economic growth tendencies are created from large data set of 107 time series by utilizing principal component analysis. Analysis conducted for January 2009-April 2019 interval seems to be in line with exogenous shocks affecting the credit market in the corresponding period. To gain more knowledge about the predictive power of factor-augmented regression models, out-of-sample forecasting exercises are performed. It is found that global forces and economic activity provide substantial improvement in terms of predictive power over simple autoregressive benchmark models given low level of relative forecast errors.
    Keywords: Credit cycle, Macroeconomic dynamics, Filtering, Factor models, Forecasting
    JEL: G21 E51 C38 C53
    Date: 2019
  10. By: María Victoria Landaberry (Banco Central del Uruguay)
    Abstract: In this paper we review the most used methodologies for the identification of credit boom episodes as ex post identification threshold techniques that can be used to identify episodes in Uruguay between 1985 and 2018. We estimate a Bayesian Model Average (BMA) that allows the identification and early prediction of credit booms based on the interrelation between these episodes and the macroeconomic aggregates. Considering the evolution of GDP, private consumption, investment, public spending, imports, exports, the exchange rate, the terms of trade, the current account and the capital account and financial information as a percentage of GDP, it is possible to determine the probability of being in an episode of credit boom up to two quarters in advance. Following this methodology, 3 episodes are identified, from the second quarter of 2000 to the first quarter of 2003, from the fourth quarter of 2008 to the second quarter of 2010 and from the second quarter of 2012 to the third quarter of 2015.
    Abstract: En el presente documento se revisan las metodologías más utilizadas para la identificación de episodios de boom de crédito, conocidas como técnicas de umbral o de identificación ex post, y se aplican para identificar dichos episodios en Uruguay entre 1985 y 2018. También se estima un modelo bayesiano promedio (BMA por sus siglas en inglés) que permite la identificación y predicción temprana de episodios de boom de crédito a partir de la interrelación entre estos y los agregados macroeconómicos. Considerando la evolución del PIB, el consumo privado, la inversión, el gasto público, las importaciones, las exportaciones, el tipo de cambio, los términos de intercambio, el saldo de la cuenta corriente, la cuenta de capital y financiera neta como porcentaje del PIB, es posible determinar la probabilidad de estar en un episodio de boom de crédito hasta con dos trimestres de anticipación. Siguiendo esta metodología se identifican 3 episodios, desde el segundo trimestre del año 2000 al primer trimestre del año 2003, desde el cuarto trimestre de 2008 hasta el segundo trimestre de 2010 y desde el segundo trimestre de 2012 hasta el tercer trimestre de 2015.
    Keywords: Early warning indicator, Credit Booms, financial stability, Uruguay; indicadores de alerta temprana, Boom de Crédito, estabilidad financiera
    JEL: E32 E37 R21 R31
    Date: 2019
  11. By: Oscar Jorda (Federal Reserve Bank of San Francisco an); Alan Taylor (University of California, Davis); Sanjay Singh (University of California, Davis)
    Abstract: A well-worn tenet holds that monetary policy does not affect the long-run productive capacity of the economy. Merging data from two new international historical databases, we find this not to be quite right. Using the trilemma of international finance, we find that exogenous variation in monetary policy affects capital accumulation, and to a lesser extent, total factor productivity, thereby impacting output for a much longer period of time than is customarily assumed. We build a quantitative medium- scale DSGE model with endogenous TFP growth to understand the mechanisms at work. Following a monetary shock, lower output temporarily slows down TFP growth. Internal propagation of the monetary shock extends the slow down in productivity, and eventually lowers trend output. Yet the model replicates conventional textbook results in other dimensions. Monetary policy can have long-run effects.
    Date: 2019
  12. By: Stefano Federico; Fadi Hassan; Veronica Rappoport
    Abstract: The effect of trade liberalization on welfare and economic activity remains one of the most important questions in economics. The literature identifies a number of key determinants that reduce the potential gains from trade, by focusing on frictions to labor mobility across regions or sectors. This paper contributes to this debate by exploring a novel channel, namely the reallocation of credit in the aftermath of a trade shock. We find that there are endogenous financial frictions that arise from trade liberalization and spillovers between losers and winners from trade that go through banks, as banks can be negatively affected by a trade shock through the portfolio of firms they lend to. Using data from the Italian credit registry, matched with bank and firm level data, we follow the evolution of bank and firm activities prior to and after the entry of China into the WTO. We identify the sectors most affected by import competition from China and estimate the transmission of this trade shock from firms to their lending banks, and the consequence of the shock on banks' lending to other firms. We find that, controlling for credit demand, banks exposed to the China shock decrease their lending relative to non-exposed banks. Importantly, this lending is reduced both for firms exposed to competition from China and to those that are not and that we should expect to expand. The main mechanism is related to the reduction of the core capital of banks, and their resulting funding capacity, through the rise of non-performing loans. We quantify the impact of this effect on real outcomes such as employment, investment, and output and we find relevant aggregate implications. These findings provide evidence that following a trade shock, bank lending has a key impact on the reallocation channel and on the potential gains from trade.
    Keywords: trade liberalisation, China shock, bank credit, resource reallocation, gains from trade
    JEL: F10 F14 G21
    Date: 2019–09

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