nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2019‒10‒07
nine papers chosen by
Georg Man

  1. The Finance-Growth Nexus: the role of banks By Thiago Christiano Silva; Benjamin Miranda Tabak; Marcela Tetzner Laiz
  2. Mengukur Perkembangan Sektor Keuangan di Indonesia dan Faktor – Faktor yang Mempengaruhi By Mansur, Alfan; Nizar, Muhammad Afdi
  3. Synergizing Ventures By Ufuk Akcigit; Emin M. Dinlersoz; Jeremy Greenwood; Veronika Penciakova
  4. Financial Frictions, Capital Misallocation, and Input-Output Linkages By Hsuan-Li Su
  5. The productivity puzzle and misallocation: an Italian perspective By Calligaris, Sara; Del Gatto, Massimo; Hassan, Fadi; Ottaviano, Gianmarco I. P.; Schivardi, Fabiano
  6. Financial Development and Trade Liberalization By David Kohn; Fernando Leibovici; Michal Szkup
  7. Collateral booms and information depletion By Vladimir Asriyan
  8. Credit Shock Propagation in Firm Networks: evidence from government bank credit expansions By Gustavo S. Cortes; Thiago Christiano Silva; Bernardus F. N. Van Doornik
  9. International Shadow Banking and Macroprudential Policy By Christopher Johnson

  1. By: Thiago Christiano Silva; Benjamin Miranda Tabak; Marcela Tetzner Laiz
    Abstract: We contribute to the finance-growth nexus literature by showing that credit origin, bank ownership, credit modality and bank type matter for economic growth. We use a unique dataset covering 5,555 municipalities in the Brazilian economy with granular information on credit characteristics. We find that non-earmarked credit to the corporate sector associates with municipal economic growth more strongly than earmarked credit, despite the increase in relevance of the latter after the global financial crisis. We also find that the credit modality---whether it is general purpose or purpose-specific loans---associates with economic growth in different ways. Overall, credit provided by domestic private banks to the corporate sector correlates with higher economic growth rates. In contrast, only after the crisis the relationship between credit from state-owned banks and economic growth becomes statistically significant. While we follow the finance-growth literature in our empirical exercises using internal instruments in GMM estimations, we also provide robustness tests using two additional external instruments: the number of complaints filed against each bank and the local credit accessibility. Our results with external instruments indicate the same findings with respect to the use of traditional internal instruments in GMM estimations.
    Date: 2019–09
  2. By: Mansur, Alfan; Nizar, Muhammad Afdi
    Abstract: In a number of occasions during the bad times where financial markets are under pressure, Indonesia often suffers the most compared to neighbors or peer countries. It indicates that there is something fundamental as the driving factors and the depth of the Indonesian financial sector may be the major factor. This research aims to investigate how deep and develop the Indonesian financial sector using multiple indicators and metrics. This research also investigates the causal relationship between financial sector development and the economic growth whether the Indonesian financial sector is supply-leading or demand-following. Moreover, this research attempts to identify the determinants of the financial sector development in Indonesia. The results show that the development of the Indonesian financial sector has been focused on the access aspect, while the development of its depth as well as efficiency is still limited. The depth level by the end of 2018 was even still lower than the level in the mid-1990s. The research's results also show that the financial sector development in Indonesia is demand-following or it develops as the economy grows. Lastly, the results show that the financial sector development in Indonesia is affected by multi-aspect factors ranging from macroeconomic factors and institutions to the openness levels either trade openness or financial openness. On those many structural aspects, Indonesia is inferior compared with many countries, so it is not a coincidence that the Indonesian financial sector is less developed compared to the many countries.
    Keywords: financial sector, development, market, depth, economy
    JEL: C12 C43 E44 G10 G18 G21 G28
    Date: 2019–09–24
  3. By: Ufuk Akcigit; Emin M. Dinlersoz; Jeremy Greenwood; Veronika Penciakova
    Abstract: Venture capital (VC) and growth are examined both empirically and theoretically. Empirically, VC-backed startups have higher early growth rates and initial patent quality than non-VC-backed ones. VC-backing increases a startup’s likelihood of reaching the right tails of the firm size and innovation distributions. Furthermore, outcomes are better for startups matched with more experienced venture capitalists. An endogenous growth model, where venture capitalists provide both expertise and financing for business startups, is constructed to match these facts. The presence of venture capital, the degree of assortative matching between startups and financiers, and the taxation of VC-backed startups matter significantly for growth.
    Keywords: venture capital, assortative matching, endogenous growth, IPO, management, mergers and acquisitions, research and development, startups, synergies, taxation, patents
    JEL: G24 N20 O30
    Date: 2019
  4. By: Hsuan-Li Su (National Taiwan University)
    Abstract: This paper studies how input-output linkages amplify the aggregate impact of sectoral financial distortions through the lens of a dynamic general equilibrium model with endogenous capital wedges. The aggregate impact of a shock can be decomposed into weighted productivity changes and changes in capital allocative efficiency. Uncertainty shocks, second-moment shocks to Solow-neutral (capital-augmenting) productivity, induce heterogenous responses in sectoral capital wedges, reducing allocative efficiency and aggregate TFP. In the calibrated model to the U.S. data, I show input-output linkages amplify the aggregate effect of financial distortions by two-fold more than an equivalent economy without linkages. Shocks that generates the spike of credit spreads similar to the magnitude during the Great Recession can decrease aggregate TFP by 0.3\% and aggregate output by 1.6\%. Among all sectors, the model indicates that the Financial sector is most sensitive to changes in its financial constraint and has the largest impact on aggregate output.
    Date: 2019
  5. By: Calligaris, Sara; Del Gatto, Massimo; Hassan, Fadi; Ottaviano, Gianmarco I. P.; Schivardi, Fabiano
    Abstract: Productivity has recently slowed down in many economies around the world. A crucial challenge in understanding what lies behind this “productivity puzzle” is the still short time span for which data can be analysed. An exception is Italy, where productivity growth started to stagnate 25 years ago. The Italian case can therefore offer useful insights to understand the global productivity slowdown. We find that resource misallocation has played a sizeable role in slowing down Italian productivity growth. If misallocation had remained at its 1995 level, in 2013 Italy’s aggregate productivity would have been 18% higher than its actual level. Misallocation has mainly risen within sectors rather than between them, increasing more in sectors where the world technological frontier has expanded faster. Relative specialization in those sectors explains the patterns of misallocation across geographical areas and firm size classes. The broader message is that an important part of the explanation of the productivity puzzle may lie in the rising difficulty of reallocating resources across firms within sectors where technology is changing faster rather than between sectors with different speeds of technological change.
    Keywords: missallocation; TFP; productivity; puzzle; Italy
    JEL: D24 O11 O47
    Date: 2018–09–21
  6. By: David Kohn (Pontificia Universidad Católica de Chile); Fernando Leibovici (Federal Reserve Bank of St. Louis); Michal Szkup (University of British Columbia)
    Abstract: We investigate the extent to which frictions in financial markets affect the gains from trade liberalization. We study a small open economy populated with entrepreneurs heterogeneous in productivity and net worth who can trade internationally and are subject to financing constraints. We calibrate the model to match key features of Colombian plant-level data and use it to quantify the role of credit frictions in shaping the economy's response to trade liberalization. We find that frictions in financial markets slow down the response of capital and output in the aftermath of trade liberalization; in contrast, the dynamics of exports adjustment are largely independent of financial development. We document evidence consistent with these findings for the Colombian trade liberalization in the early 1990s.
    Date: 2019
  7. By: Vladimir Asriyan (CREi, UPF, and Barcelona GSE)
    Abstract: We develop a new theory of information production during credit booms. In our model, entrepreneurs need credit to undertake investment projects, some of which enable them to divert resources towards private consumption. Lenders can protect themselves from such diversion in two ways: collateralization and costly screening, which generates durable information about projects. In equilibrium, the collateralization-screening mix depends on the value of aggregate collateral. High collateral values raise investment and economic activity, but they also raise collateralization at the expense of screening. This has important dynamic implications. During credit booms driven by high collateral values (e.g. real estate booms), the economy accumulates physical capital but depletes information about investment projects. As a result, collateral-driven booms end in deep crises and slow recoveries: when booms end, investment is constrained both by the lack of collateral and by the lack of information on existing investment projects, which takes time to rebuild. We provide new empirical evidence using US rm-level data in support of the model's main mechanism.
    Date: 2019
  8. By: Gustavo S. Cortes; Thiago Christiano Silva; Bernardus F. N. Van Doornik
    Abstract: We study how bank credit shocks propagate through supplier-customer firm networks. We do so using administrative data that covers firm-to-firm transactions in Brazil around the debacle of Lehman Brothers. Using the counter-cyclical reaction of government-owned banks in Brazil after Lehman's failure as a policy experiment, we show that credit shocks originated in bank-firm relationships are transmitted throughout the network of suppliers and customers, with measurable consequences for firms' real outcomes and survival probability. A firm with direct and indirect access to government credit (through its customers or suppliers) observed a 12.5% greater survival probability, vis-à-vis 4% when the firm has only direct access. Critically, we uncover drawbacks of these interventions, including a persistent increased concentration in the market share of firms that benefited from government liquidity.
    Date: 2019–09
  9. By: Christopher Johnson (UC Davis)
    Abstract: The Great Recession featured a global collapse in real and financial economic activity that was highly synchronized across countries. Two unique precursors to the crisis were the rise in the shadow banking sector and increased securitization. I develop a model that is the first to explain the extent to which these factors contributed to the international transmission of the crisis that mostly originated in the United States. Using a two-country model with commercial and shadow banking sectors, I show that a country-specific financial shock leads to a simultaneous decline in real and financial aggregates in both countries. My model is the first to include both shadow and commercial banking in an open-economy framework. While commercial banks transfer funds from borrowers to lenders, shadow banks securitize loans and sell them to intermediaries internationally as asset-backed securities. Transmission occurs through a balance sheet channel, which is stronger when intermediaries hold more securities from abroad. I also consider the implications of capital controls on the transmission of a financial crisis. In general, I find that capital controls can reduce transmission.
    Date: 2019

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