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on Financial Development and Growth |
| By: | Alessio Ciarlone (Banca d'Italia) |
| Abstract: | In this paper, I provide evidence about the impact that changes in certain indicators of financial development have on economic growth in a sample of 19 countries of Emerging Europe. Real per capita GDP growth, bank credit to the private sector, stock market capitalization and the outstanding stock of international debt securities – along with a series of other traditional determinants of economic development – are found to be co-integrated. By means of recent econometric techniques for heterogeneous panels, inference is drawn about the long- and short-run relationship between the variables of interest. The main result of the analysis points to the existence of non-linearities. There appears to be an inverted U-shaped relationship between bank credit to the private sector and economic growth. By contrast, both domestic stock market capitalization and the stock of international debt securities display a more traditional positive and monotone relationship with economic development. |
| Keywords: | finance, economic growth, pooled mean group estimator, threshold effect, dynamic panel threshold, non-monotonicity, emerging Europe |
| JEL: | C23 F43 G21 G23 O11 O16 O41 O47 P34 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_521_19&r=all |
| By: | Laura Heras Recuero (Banco de España); Roberto Pascual González (Banco de España) |
| Abstract: | This paper aims to investigate the relationship between economic growth, institutional quality and financial development whitin a sample of middle-income countries. We generate three hypothesis on the potential relationships between those three dimensions by reviewing the existing literature and test them in the framework of a Panel Vector Autoregressive (PVAR) model. The main results, derived from the Impulse Response Function (IRF) analysis, are two-fold. First, we find a unidirectional positive relationship from economic growth to financial development. Second, institutional quality and economic growth are positively related but the causality direction depends on the nature of the institutional quality proxies. Legal institutional quality has an impact on economic growth while the latter causes an improvement in public sector institutional quality. |
| Keywords: | economic growth, economic convergence, institutional quality, financial development |
| JEL: | O11 O16 O43 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1937&r=all |
| By: | Andrew J Tiffin |
| Abstract: | Machine learning tools are well known for their success in prediction. But prediction is not causation, and causal discovery is at the core of most questions concerning economic policy. Recently, however, the literature has focused more on issues of causality. This paper gently introduces some leading work in this area, using a concrete example—assessing the impact of a hypothetical banking crisis on a country’s growth. By enabling consideration of a rich set of potential nonlinearities, and by allowing individually-tailored policy assessments, machine learning can provide an invaluable complement to the skill set of economists within the Fund and beyond. |
| Date: | 2019–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/228&r=all |
| By: | Olga Bespalova; Marina V Rousset |
| Abstract: | This paper uses the Growth-at-Risk (GaR) methodology to examine how macrofinancial conditions affect the growth outlook and its probability distribution. Using this approach, we evaluate risks to GDP growth in the Dominican Republic using quarterly data for 1996-2018. We group macrofinancial conditions in five principal determinants, based on 32 indicators. The Dominican Republic’s growth distribution appears most vulnerable to negative shocks to domestic financial conditions, domestic leverage, domestic demand, and external demand, with additional repercussions from the external cost of borrowing in the longer run. Our findings show that domestic monetary policy plays a particularly important role in reducing growth vulnerabilities when the economy is weak. |
| Date: | 2019–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/246&r=all |
| By: | Harald Hau; Difei Ouyang |
| Abstract: | In geographically segmented credit markets, local real estate booms can deteriorate the funding conditions for small manufacturing firms and undermine their competitiveness. Using exogenous variation in the administrative land supply across 172 Chinese cities, we show that higher predicted real estate prices cause higher borrowing costs for small manufacturing firms, reduce their bank lending, lower their investment rate and labor productivity, and reduce their output and TFP growth by economically significant magnitudes. These effects are absent in large and listed companies with access to the national capital market. The evidence highlights the benefits of financial market integration. |
| Keywords: | factor price externalities, real estate booms, firm growth, financial constraints |
| JEL: | D22 D24 R31 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7928&r=all |
| By: | Minetti, Raoul (Michigan State University, Department of Economics); Murro, Pierluigi (LUISS University); Peruzzi, Valentina (LUISS University) |
| Abstract: | The re-regulation wave following the global financial crisis is putting pressure on local community and cooperative banks. In this paper, we show that cooperative banking can play a pivotal role in reducing income inequalities in local communities. By analyzing Italian local (provincial) credit markets over the 2001-2011 period, we find that cooperative banks mitigate income inequality more than their commercial counterparts. This effect remains significant when we account for the pervasiveness of relationship lending in the provinces, suggesting that it is the specific nature and orientation of cooperative banks, rather than their lending technologies, that improve income distribution. The impact of cooperative banking on inequality appears to be mainly channeled by reduced migratory flows and lower business turnover. |
| Keywords: | Cooperative banks; income inequality; financial development |
| JEL: | G21 G38 O15 |
| Date: | 2019–09–24 |
| URL: | http://d.repec.org/n?u=RePEc:ris:msuecw:2019_010&r=all |
| By: | Trust R. Mpofu (School of Economics, University of Cape Town); Eftychia Nikolaidou (School of Economics, University of Cape Town) |
| Abstract: | This paper investigates the macroeconomic and bank-specific determinants of non-performing loans (NPLs) in eight sub-Saharan African economies. The study is motivated by the fact that some of these economies have experienced banking crises in the past, their NPLs have relatively been rising post the 2008/2009 global financial crisis and have recently experienced rapid growth of bank credit to the private sector. Such issues pose credit risks in the banking sector. Employing dynamic panel data methods over the period 2000-2017 and using a variety of specifications, the results show that NPLs decrease when real GDP growth rate, return on equity, return on assets, and bank size increase and rises when public debt, inflation rate, broad money, and domestic credit to private sector by banks increase. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ctn:dpaper:2019-02&r=all |
| By: | Osborn, Tom L (Shamiri Institute) |
| Abstract: | Small businesses play an important role in African economies. But because of a funding gap, many of these businesses struggle to access adequate growth capital. Venture capital (VC) can fill this funding gap and has emerged as an important global source of growth capital. While VC can help grow African businesses, our understanding of VC activities in Africa remains limited. Sparse research has limited the ability of small business owners to expand their financing options. We use a sample of 120 VC funds that primarily invest in Africa to investigate trends in the growth of VC activities in Africa, as well as to examine the associations between VC fundraising and micro-level firm variables between 2000-2018. We find that at least $4.57b of VC funding has been raised during this period by African VC funds. We observe that most funds keep diversified portfolios and invest in businesses at various stages of growth, and that funds prefer to keep their investment activities within domiciled countries. Using a multiple linear regression model, we find significant associations between VC fundraising and VC fund type, location focus, and vintage year. We do not find any associations between VC fundraising and industry focus, fund manager domicile or fundraising target size. These findings are important because small businesses can better assess their funding options, VC firms can update their strategies, and policy makers can update their policy priorities. |
| Date: | 2019–04–17 |
| URL: | http://d.repec.org/n?u=RePEc:osf:africa:78smp&r=all |
| By: | Tweneboah Senzu, Emmanuel |
| Abstract: | It a paper presented at the project finance conference 2019 in Accra-Ghana with the article focus to propose structures and innovations required to attract foreign direct investment for the current emerging market with a special interest to the small and medium scale enterprises and the informal economy as the backbone of it sustainable economic growth using the economic market of Ghana as a case study. |
| Keywords: | Banking & Finance, Financial Sector, Macroeconomics, Monetary Policy, Central Bank, Foreign Direct investment |
| JEL: | E22 E26 E5 G21 G28 |
| Date: | 2019–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:96910&r=all |
| By: | Gnangnon, Sèna Kimm |
| Abstract: | This study examines the effect of financial development on non-resource tax revenue performance in developing countries, including through the international trade and economic growth channels. Using a sample of 104 developing countries over the period 1980-2014, the empirical analysis shows that financial development exerts a positive effect on non-resource tax revenue performance. Interestingly, this positive effect takes place through higher trade openness, greater export product diversification, higher share of manufactured exports in total export products, and higher economic growth rate. |
| Keywords: | Non-resource tax revenue,financial development,trade openness,export product diversification,manufacturing exports,economic growth |
| JEL: | F14 G20 H20 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:206628&r=all |
| By: | Mohammed Mardan |
| Abstract: | This paper analyzes corporate tax-related policies and the difference between them in developed and developing countries. I show that the relationship between financial development and corporate income tax rates as well as the tax administrations’ effectiveness follows a U-shaped pattern, a discrepancy to the observation that developing countries usually have the weakest administrative structures. However, this observation can be explained under the premise that the tax administration’s effectiveness is determined at a later stage, and not simultaneously with the corporate tax rate. Moreover, I show that, under this premise, fighting tax havens increases tax revenues in developed countries, but decreases them in developing countries. Instead, if policies are simultaneously considered, the fight against tax havens will also benefit developing countries. |
| Keywords: | developing countries, profit shifting, tax administration, tax competition, tax haven |
| JEL: | H25 O23 F23 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7940&r=all |
| By: | Ghosh, Saurabh; Gopalakrishnan, Pawan; Satija, Sakshi |
| Abstract: | We simulate a DSGE model with state owned banks to analyze the impact of bank recapitalization as a policy action in response to loan defaults by firms. As a special case, we calibrate the model to India, an emerging economy with state-owned banks facing a minimum investment requirement in safe assets and a sectoral lending requirement. We analyze two different scenarios of government infused recapitalization - an unconditional transfer to banks and an "equity in exchange for transfer". Our analysis shows that a government infused recapitalization in response to a negative TFP shock may increase output in the short run. However, there is a welfare loss in both cases, although higher for the unconditional transfers as compared with the "equity in exchange for transfer". Our analysis suggests that while bank recapitalization is a welcome move to kick-start credit creation, capital formation and growth, especially during a cyclical downturn, there is need for appropriate policy vigil to protect the quality of public expenditure in the social sector that matters for welfare in the long run. |
| Keywords: | Bank recapitalization, SLR requirements, Emerging Market Economies, Financial Frictions, state owned banks |
| JEL: | E32 E62 |
| Date: | 2019–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:96981&r=all |
| By: | Fève, Patrick; Garcia Sanchez, Pablo; Moura, Alban; Pierrard, Olivier |
| Abstract: | We augment a simple Real Business Cycle model with financial intermediaries that may default on their liabilities and a financial friction generating social costs of default. We provide a closed-form solution for the general equilibrium of the economy under specific assumptions, allowing for analytic results and straightforward simulations. Endogenous default generates asymmetric business cycles and our model replicates both the negative skew of GDP and the positive skew of credit spreads found in US data. Stronger financial frictions cause a rise in asymmetry and amplify the welfare costs of default. A Pigouvian tax on financial intermediation mitigates most of these negative effects at the cost of a steady-state distortion. |
| Keywords: | Real Business Cycle model, default, financial frictions, asymmetry, skewness. |
| JEL: | E32 E44 G21 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:123694&r=all |
| By: | Antonio David; Carlos Eduardo Gonçalves |
| Abstract: | This paper investigates what factors affect the duration of sudden stops in capital flows using quarterly data for a large panel of countries. We find that countries with floating exchange rate regimes tend to experience shorter sudden stop episodes and that fixed exchange rate regimes are associated with longer periods of low output growth following sudden stops. These effects are quantitatively large: having a flexible exchange rate regime increases the probability of exiting the sudden stop state by between 50 to 80 percent. Flexible exchange rate regimes significantly shorten the duration of output decelerations following sudden stops by over 30 percent. Positive variations in terms of trade also abbreviate the duration of sudden stops. In terms of policies, identification is trickier, but the evidence suggests that monetary policy tightening shortens the duration of sudden stops. Changes in capital account restrictions do not seem to matter. |
| Date: | 2019–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/230&r=all |
| By: | Adrian, Tobias (International Monetary Fund); Boyarchenko, Nina (Federal Reserve Bank of New York); Giannone, Domenico (Amazon.com, Inc.) |
| Abstract: | We estimate the evolution of the conditional joint distribution of economic and financial conditions in the United States, documenting a novel empirical fact: while the joint distribution is approximately Gaussian during normal periods, sharp tightenings of financial conditions lead to the emergence of additional modes—that is, multiple economic equilibria. Although the U.S. economy has historically reverted quickly to a “good” equilibrium after a tightening of financial conditions, we conjecture that poor policy choices under these circumstances could also open a pathway to a “bad” equilibrium for a prolonged period. We argue that such multimodality arises naturally in a macro-financial intermediary model with occasionally binding intermediary constraints. |
| Keywords: | density impulse response; multimodality; nonparametric density estimator |
| JEL: | C14 E17 E37 G01 |
| Date: | 2019–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:903&r=all |
| By: | Valentina Aprigliano (Bank of Italy); Danilo Liberati (Bank of Italy) |
| Abstract: | Following the debate on the relationship between business and financial cycle rekindled in the last decade since the global financial crisis, we assess the ability of some financial indicators to track the Italian business cycle. We mostly use credit variables to detect the turning points and to estimate the probability of recession in real time. A dynamic factor model with Markov-switching regimes is used to handle a large dataset and to cope with the nonlinear evolution of the business cycle. The in-sample results strongly support the capacity of credit variables to estimate the probability of recessions and the implied coincident indicator proves their ability to fit the business cycle. Also in real time the contribution of credit is not negligible compared to that of the industrial production, currently used for the conjunctural analysis. |
| Keywords: | business cycle, financial cycle, real time estimation, Markow-switching model, state-space model |
| JEL: | C53 E17 E32 E44 G21 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1229_19&r=all |