nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2019‒10‒14
sixteen papers chosen by
Georg Man

  1. Financial Repression is Knocking at the Door, Again By Etibar Jafarov; Rodolfo Maino; Marco Pani
  2. Firm Growth, Finance and Development By Francisco Buera
  3. SME Financial Inclusion for Sustained Growth in the Middle East and Central Asia By Mishel Ghassibe; Maximiliano Appendino; Samir Elsadek Mahmoudi
  4. Can Microfinance Unlock a Poverty Trap for Some Entrepreneurs? By Abhijit Banerjee; Emily Breza; Esther Duflo; Cynthia Kinnan
  5. Retirement in the Shadow (Banking) By Guillermo Ordoñez; Facundo Piguillem
  6. Shadow Banking and the Great Recession By Patrick Feve
  7. Financial Risk Capacity By Saki Bigio; Adrien d'Avernas
  8. "Branch Banking and Regional Financial Markets: Evidence from Prewar Japan" By Mathias Hoffmann; Tetsuji Okazaki; Toshihiro Okubo
  9. Statistical governance and FDI in emerging economies By von Kalckreuth, Ulf
  10. Determinants of FDI in France: Role of Transport Infrastructure, Education, Financial Development and Energy Consumption By Shahbaz, Muhammad; Mateev, Miroslav; Abosedra, Salaheddin; Nasir, Muhammad Ali; Jiao, Zhilun
  11. Credit-to-GDP gap calculation using multivariate HP filter By Levente Kocsis; Miklos Sallay
  12. The Riskiness of Credit Allocation and Financial Stability By Luis Brandao-Marques; Qianying Chen; Claudio Raddatz; Jérôme Vandenbussche; Peichu Xie
  13. The impact of interest rates on economic growth in the Republic of North Macedonia By Elmi Aziri
  14. What Happens if Central Banks Misdiagnose a Slowdown in Potential Output By Bas B. Bakker
  15. Law and finance in Britain c.1900 By Coyle, Christopher; Musacchio, Aldo; Turner, John D.
  16. Finance and Carbon Emissions By de Haas, Ralph; Popov, Alexander

  1. By: Etibar Jafarov; Rodolfo Maino; Marco Pani
    Abstract: Financial repression (legal restrictions on interest rates, credit allocation, capital movements, and other financial operations) was widely used in the past but was largely abandoned in the liberalization wave of the 1990s, as widespread support for interventionist policies gave way to a renewed conception of government as an impartial referee. Financial repression has come back on the agenda with the surge in public debt in the wake of the Global Financial Crisis, and some countries have reintroduced administrative ceilings on interest rates. By distorting market incentives and signals, financial repression induces losses from inefficiency and rent-seeking that are not easily quantified. This study attempts to assess some of these losses by estimating the impact of financial repression on growth using an updated index of interest rate controls covering 90 countries over 45 years. The results suggest that financial repression poses a significant drag on growth, which could amount to 0.4-0.7 percentage points.
    Date: 2019–09–30
  2. By: Francisco Buera (Washington University at St. Louis)
    Abstract: How important are financial markets for economic development? What are the costs of frictions in credit market on aggregate productivity? A recent literature stresses the role of the persistence of the exogenous process of firm's productivity in determining the answer to these question. If the productivity process is very persistent, then self-finance is a good substitute of external finance. Instead, we highlight the role of growth processes exhibiting a skewed distribution of firm growth, specially among young firms, a key feature of the data in developed countries.
    Date: 2019
  3. By: Mishel Ghassibe; Maximiliano Appendino; Samir Elsadek Mahmoudi
    Abstract: This paper offers empirical evidence that greater financial inclusion of small and medium enterprises (SMEs) can promote higher economic growth and employment, especially in the Middle East and Central Asia regions. First, we show that countries with higher SME financial inclusion exhibit more effective monetary policy transmission and tax collection. Second, we find substantial employment and labor productivity growth gains at the firm level from access to credit, gains that are higher for SMEs. We also obtain evidence of a substantial positive impact on SME employment and labor productivity growth from improved credit bureau coverage and insolvency regimes. Finally, cross-country aggregate evidence confirms the employment and growth gains from SME financial inclusion, which appear larger in the Middle East and Central Asia than in other regions.
    Date: 2019–09–27
  4. By: Abhijit Banerjee; Emily Breza; Esther Duflo; Cynthia Kinnan
    Abstract: Can microcredit help unlock a poverty trap for some people by putting their businesses on a different trajectory? Could the small microcredit treatment effects often found for the average household mask important heterogeneity? In Hyderabad, India, we find that “gung ho entrepreneurs” (GEs), households who were already running a business before microfinance entered, show persistent benefits that increase over time. Six years later, the treated GEs own businesses that have 35% more assets and generate double the revenues as those in control neighborhoods. We find almost no effects on non-GE households. A model of technology choice in which talented entrepreneurs can access either a diminishing-returns technology, or a more productive technology with a fixed cost, generates dynamics matching the data. These results show that heterogeneity in entrepreneurial ability is important and persistent. For talented but low-wealth entrepreneurs, short-term access to credit can indeed facilitate escape from a poverty trap.
    Keywords: Microfinance, Entrepreneurship, Poverty Trap
    JEL: D03 D14 D21 G21 O16 Z13
    Date: 2019
  5. By: Guillermo Ordoñez; Facundo Piguillem
    Abstract: The U.S. economy has recently experienced two, seemingly unrelated, phenomena: a large increase in post-retirement life expectancy and a major expansion in securitization and shadow banking activities. We argue they are intimately related. Agents rely on financial intermediaries to save for post-retirement consumption. When expecting to live longer, they rely more heavily on intermediaries that use securitization, with riskier but higher returns. A quantitative evaluation of the model shows the potential of the demographic transition to account for a boom in credit and output, but only when it triggers a more extensive use of securitization and shadow banking.
    JEL: E21 E44 G21 J11
    Date: 2019–10
  6. By: Patrick Feve
    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.
    Date: 2019
  7. By: Saki Bigio (UCLA); Adrien d'Avernas (Stockholm School of Economics)
    Abstract: Financial crises seem particularly severe and lengthy when banks fail to re- capitalize after bearing large losses. We present a model that explains the slow recovery of bank capital and economic activity. Banks provide intermediation in markets with informational asymmetries. Large equity losses force banks to reduce intermediation, which exacerbates adverse selection. Adverse selection lowers profit margins for banks, which lowers banks profits and incentives to recapitalize. The model delivers financial crises characterized by persistent low economic growth.
    Date: 2019
  8. By: Mathias Hoffmann (Department of Economics, University of Zurich); Tetsuji Okazaki (Faculty of Economics, The University of Tokyo); Toshihiro Okubo (Faculty of Economics, Keio University)
    Abstract: The banking sector in Japan experienced a substantial organizational change in the early twentieth century, including an expansion of branch networks. In this paper, we explore the implications of branch banking in regional economies, using unique bank branch office-level data for four rural regions: Fukushima, Tottori, Kumamoto, and Miyazaki Prefectures. We find that branch banking had a positive scale effect on lending. However, compared with branch offices of banks headquartered in the same municipality, branch offices of banks headquartered in other municipalities, especially in other prefectures, tended to have a lower propensity to issue loans. In particular, branch offices of banks headquartered in urban areas, such as Osaka and Tokyo, tended to collect deposits rather than to lend money through their branch networks, which restricted regional finance.
    Date: 2019–01
  9. By: von Kalckreuth, Ulf
    Abstract: The importance of institutional settings for economic development outcomes is broadly acknowledged nowadays. This paper investigates the role of official statistics in alleviating financing constraints in emerging and developing economies, with a particular focus on Sub-Saharan Africa. Official statistics has a major dual role: it directly adds to the information set of investors regarding the general state of the economy and it is a key commitment and signalling device as to future good governance. Empirically, the paper investigates, for a sample of 98 emerging and developing countries, the relationship between the adoption of the IMF General Data Dissemination Standard (GDDS) for statistical data production and the net incurrence of foreign direct investment liabilities. Direct investment is considerably higher under GDDS. Controlling also for time and country effects, using fixed effects and quantile panel regression, the relationship ceases to be uniformly positive. Heterogeneity matters: There is a large and significant difference between poorer and richer countries, as well as between countries in Sub-Saharan Africa and elsewhere. Given the information asymmetry problems in poor developing countries, this is not unexpected. Furthermore, it becomes evident that the relationship between the adoption of GDDS and net incurrence of FDI liabilities is negative for richer countries and outside Sub-Saharan Africa. For richer countries, the relevant alternative might have been the more demanding SDDS, turning the adoption of GDDS into an unfavourable signal. Quantile regression is carried out using the quantile panel estimator of Canay (2011).
    Keywords: governance,FDI,emerging economies,policy evaluation,quantile panel regression,Compact with Africa,official statistics,asymmetric information,financing constraints
    JEL: O16 G31 D82
    Date: 2019
  10. By: Shahbaz, Muhammad; Mateev, Miroslav; Abosedra, Salaheddin; Nasir, Muhammad Ali; Jiao, Zhilun
    Abstract: This paper explores the effect of education and transportation infrastructure on foreign direct investment for the French economy over the period of 1965-2017. Economic growth, financial development and electricity consumption are also considered as additional determinants of foreign direct investment. In so doing, the SOR unit root test is applied in order to examine unit root properties of variables in the presence of sharp and smooth structural breaks in the series. To examine the presence of cointegration between the variables, the bootstrapping ARDL cointegration test is applied. The empirical results show the presence of cointegration between the variables. Education and transportation add to foreign direct investment. Financial development declines foreign direct investment. The relationship between electricity consumption (economic growth) and foreign direct investment is bidirectional. The nonlinear relationship between education (transportation infrastructure) and foreign direct investment is U-shaped.
    Keywords: FDI, Transport Infrastructure, Education, Financial Development, Energy Consumption, Bootstrapping ARDL
    JEL: E0
    Date: 2019–10–01
  11. By: Levente Kocsis; Miklos Sallay
    Abstract: Periods of excessive credit growth can imply emergence of systemic financial stress which may result in financial crisis causing severe losses in the real economy. The base indicators of overheatedness in the credit markets are the expansion of the credit-to-GDP ratio and its deviation from its long-term trend, the credit-to-GDP gap. When calculating the latter, the major methodological challenge is to develop a model capable of executing the most reliable trend-cycle decomposition. This study presents a multivariate Hodrick-Prescott approach for the decomposition process, which defines the cycle with the inclusion of explanatory variables chosen by considering both statistical and economic selection criteria, successfully solving the problems raised by previous Hungarian research. The model also plays a role in the Hungarian macroprudential policy as in the future it will serve a basis for the calculation of the country specific, additional credit-to-GDP gap: one of the main quantitative factors influencing decisions regarding the countercyclical capital buffer (CCyB).
    Keywords: excessive credit growth, financial stability, credit-to-GDP gap, multivariate HP filter, countercyclical capital buffer.
    JEL: E44 G01 G17 G18 G21
    Date: 2018
  12. By: Luis Brandao-Marques; Qianying Chen; Claudio Raddatz; Jérôme Vandenbussche; Peichu Xie
    Abstract: We explore empirically how the time-varying allocation of credit across firms with heterogeneous credit quality matters for financial stability outcomes. Using firm-level data for 55 countries over 1991-2016, we show that the riskiness of credit allocation, captured by Greenwood and Hanson (2013)’s ISS indicator, helps predict downside risks to GDP growth and systemic banking crises, two to three years ahead. Our analysis indicates that the riskiness of credit allocation is both a measure of corporate vulnerability and of investor sentiment. Economic forecasters wrongly predict a positive association between the riskiness of credit allocation and future growth, suggesting a flawed expectations process.
    Date: 2019–09–27
  13. By: Elmi Aziri (Faculty of Contemporary Social Science, South East European University, Tetovo)
    Abstract: The Republic of Macedonia is considered a developing country and is still in transition and is accompanied by numerous macroeconomic problems such as high unemployment, high interest rates, low level of domestic investment. Therefore, the main purpose of this paper is to present and explain, based on concrete facts and relevant results of economic activity in the Republic of Macedonia, the occurrence of interest rates, their level, their causes and their impact on other economic processes, with particular emphasis gross domestic production and economic growth. By using regression analysis and small squares estimation (OLS) we will present variables links that will help us better investigate this phenomenon. The data we will present below date from 1993 to 2013. Earlier scholars of this phenomenon have verified the close correlation of interest rates with economic development. The data, the analysis and the conclusions to be drawn in this paper show the close and negative link between the interest rate and the economic growth of the Republic of Macedonia.
    Keywords: interest rates, economic growth, GDP, monetary measures, economic development
    Date: 2019–10
  14. By: Bas B. Bakker
    Abstract: In the last few decades, real GDP growth and investment in advanced countries have declined in tandem. This slowdown was not the result of weak demand (there has been no shift along the Okun curve), but of a decline in potential output growth (which has shifted the Okun curve to the left). We analyze what happens if central banks mistakenly diagnose the problem as insufficient demand, when it is actually a supply problem. We do this in a real model, in which inflation is not an issue. We show that aggressive central bank action may revive gross investment, but it will not revive net investment or growth. Moreover, low interest rates will lead to an increase in the capital output ratio, a low return on capital and high leverage. We show that these forecasts are in line with what has happened in major advanced countries.
    Date: 2019–09–27
  15. By: Coyle, Christopher; Musacchio, Aldo; Turner, John D.
    Abstract: In this paper, using new estimates of the size of the UK's capital market, we examine financial development and investor protection laws in Britain c.1900 to test the influential law and finance hypothesis. Our evidence suggests that there was not a close correlation between financial development and investor protection laws c.1900 and that the size of the UK's share market is a puzzle given the paucity of statutory investor protection. To illustrate that Britain was not unique in its approach to investor protection in this era, we examine investor protection laws across legal families c.1900.
    Keywords: Common Law,Finance,Investor Protection,Law,UK
    JEL: G3 G33 K22 N20
    Date: 2019
  16. By: de Haas, Ralph; Popov, Alexander
    Abstract: We study the relation between financial structure and carbon emissions in a large panel of countries and industries. For given levels of economic and financial development, emissions per capita are lower in economies that are relatively more equity-funded. Industry-level analysis reveals two channels. First, deeper stock markets reallocate investment towards cleaner industries and, second, they allow carbon-intensive industries to produce green patents and reduce their energy intensity. Only one-tenth of these industry-level reductions in domestic emissions is offset by increased carbon embedded in imports. A firm-level analysis of an exogenous shock to the cost of equity in Belgium confirms our findings.
    Keywords: Carbon Emissions; Financial Development; Financial structure; Innovation
    JEL: G10 O4 Q5
    Date: 2019–09

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