nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2019‒12‒02
sixteen papers chosen by
Georg Man

  1. Financing economic activity in Greece: Past challenges and future prospects By Helen Louri; Petros Migiakis
  2. Financial Conditions and 'Growth at Risk' in Italy By Piergiorgio Alessandri; Leonardo Del Vecchio; Arianna Miglietta
  3. Bank credit, liquidity and firm-level investment: are recessions different? By Ines Buono; Sara Formai
  4. Unintended side effects: stress tests, entrepreneurship, and innovation By Sebastian Doerr
  5. Monetary Easing, Leveraged Payouts and Lack of Investment By Viral V. Acharya; Guillaume Plantin
  6. Does foreign direct investment in financial services induce financial development? Lessons from emerging economies By Podikkalathil, Jithin; Manalaya, Suresh Babu
  7. Harnessing international remittances for financial development: The role of monetary policy By Haruna, Issahaku
  8. Financial development and FDI inflows in China By Khan, Hameed; Khan, Umair
  9. Innovations in emerging markets: the case of mobile money By Pelletier, Adeline; Khavul, Susanna; Estrin, Saul
  10. Leverage over the Firm Life Cycle, Firm Growth, and Aggregate Fluctuations By Dinlersoz, Emin M.; Kalemli-Ozcan, Sebnem; Hyatt, Henry; Penciakova, Veronika
  11. Credit, Bankruptcy, and Aggregate Fluctuations By Nakajima, Makoto; Rios-Rull, Jose-Victor
  12. The Impact of Bank Capital and Institutional Quality on Lending: Empirical Evidence from the MENA Region By Maya El Hourani; Gérard Mondello
  13. Drivers of bank loan growth in China: government or market? By Xiaohong Chen; Paul Wohlfarth
  14. Challenges in Implementing the Credit Guarantee Scheme for Small and Medium-Sized Enterprises: The Case of Viet Nam By Dang, Le Ngoc; Chuc, Anh Tu
  15. Urban agglomerations and firm access to credit By Amanda Carmignani; Guido de Blasio; Cristina Demma; Alessio D'Ignazio
  16. Credit constraints and trade performance: Does trust-based social capital matter? By Ndubuisi, Gideon; Konte, Maty

  1. By: Helen Louri; Petros Migiakis
    Abstract: We examine the existence of a feedback loop between the resilience of the financial sector and Greek economic activity. A sequence of structural VARs is employed using data for bank credit, liquidity, capital, asset quality and private demand in 2001-2018in two data sets. One in monthly frequency with which we examine the determinants of credit provision by Greek banks, and another in quarterly frequency with which we examine the finance-growth nexus for the Greek economy. We find that (a) the deterioration in the quality of Greek banks’ balance sheets affected negatively the provision of credit to the economy, (b) central bank liquidity and recapitalisations of Greek banks provided only a partial remedy and (c) the decline in credit significantly weakened economic activity. Also, we find that there is a role for market financing of the economy but this cannot substitute for the predominantly bank-based financing. Therefore, as the Greek economy starts bouncing back Greek banks have an important role to play, irst by solving the high NPLs problem and providing the necessary credit and second by improving the efficiency of capital allocation towards a sustainable growth model.
    Keywords: Greek crisis; credit provision; finance-growth nexus; financial stability; NPLs
    Date: 2019–04
  2. By: Piergiorgio Alessandri (Bank of Italy); Leonardo Del Vecchio (Bank of Italy); Arianna Miglietta (Bank of Italy)
    Abstract: This paper studies the relationship between financial conditions and economic activity in Italy using quantile regression techniques in the spirit of Adrian, Boryachenko and Giannone (2019). We exploit the volatility of the 2008-2012 period to assess the plausibility of ‘tail’ predictions obtained from a broad range of financial indicators. We find that, although spikes in financial distress are typically followed by economic contractions, using this relationship for out-of-sample forecasting is not trivial. To some extent, the models predict the slowdowns experienced by Italy after 2008, but the forecasts are volatile, their quality varies across indicators and horizons, and the predictions tend to overestimate the likelihood of an upcoming recession. As such, these tools represent a complement to, rather than a substitute for, an articulated and diversified systemic risk assessment framework.
    Keywords: financial conditions, quantile regression, growth risk
    JEL: C21 E37
    Date: 2019–10
  3. By: Ines Buono (Bank of Italy); Sara Formai (Bank of Italy)
    Abstract: How do bank credit supply shocks affect firms' investment decisions? We use time-varying data on Italian firms and banks to disentangle shocks to the credit supply using bank mergers and acquisitions as an instrumental variable. We find that credit constraints can hamper the ability of firms to invest. Moreover, while firms normally tend to use liquidity as a substitute for bank credit, they do not do so during recessions, a fact that amplifies the cutback on productive investment following a bank credit supply shock.
    Keywords: Corporate investments, financing constraints, Mergers and Acquisitions
    JEL: G01 G31 G32
    Date: 2019–10
  4. By: Sebastian Doerr
    Abstract: Post-crisis stress tests have helped to enhance financial stability and to reduce banks' risk-taking. In order to quantify their overall impact, regulators have turned to evaluating the effects of stress tests on financing and the real economy. Using the U.S. as a laboratory, this paper shows that stress tests have had potentially unintended side effects on entrepreneurship and innovation at young firms. Banks subject to stress tests have strongly cut small business loans secured by home equity, an important source of financing for entrepreneurs. Lower credit supply has led to a relative decline in entrepreneurship during the recovery in counties with higher exposure to stress tested banks. The decline has been steeper in sectors with a higher share of young firms using home equity financing, i.e. where the reduction in credit hit hardest. Counties with higher exposure have also seen a decline in patent applications by young firms. I provide suggestive evidence that the decline in credit has negatively affected labor productivity, reflecting young firms' disproportionate contribution to growth. My results do not imply that stress tests reduce welfare, but highlight a possible trade-off between financial stability and economic dynamism. The effects of stress tests on entrepreneurship should be taken into account when evaluating their effectiveness.
    Keywords: stress tests, small business lending, entrepreneurship, innovation, productivity slowdown
    JEL: G20 G21 L26
    Date: 2019–11
  5. By: Viral V. Acharya; Guillaume Plantin
    Abstract: This paper studies a model in which a low monetary policy rate lowers the cost of capital for entrepreneurs, potentially spurring productive investment. Low interest rates, however, also induce entrepreneurs to lever up so as to increase payouts to equity. Whereas such leveraged payouts privately benefit entrepreneurs, they come at the social cost of reducing their incentives thereby lowering productivity and discouraging investment. If leverage is unregulated (for example, due to the presence of a shadow-banking system), then the optimal monetary policy seeks to contain such socially costly leveraged payouts by stimulating investment in response to adverse shocks only up to a level below the first-best. The optimal monetary policy may even consist of “leaning against the wind,” i.e., not stimulating the economy at all, in order to fully contain leveraged payouts and maintain productive efficiency.
    JEL: E52 E58 G01 G21 G23 G28
    Date: 2019–11
  6. By: Podikkalathil, Jithin; Manalaya, Suresh Babu
    Abstract: The authors employ panel Vector Error Correction Models (VECM) and cointegration framework to identify the existence and direction of the causal association between foreign direct investment (FDI) in financial services and financial development for 26 emerging economies for the period 2003-2015. Their results show that there exists a long-run cointegrating relationship between financial development and FDI in financial services after incorporating the extent of heterogeneity among emerging economies. The authors find long run unidirectional causality from financial development to financial services FDI. Using fully modified OLS (FMOLS) estimation, they estimate the long run elasticities between financial services FDI and financial development. Their results show that financial development has a positive and significant impact on FDI in financial services, which implies that a country with well-developed financial markets tend to attract larger amounts of FDI in financial services.
    Keywords: financial development,FDI,services,emerging economies
    JEL: G20 F23 C33
    Date: 2019
  7. By: Haruna, Issahaku
    Abstract: This study investigates how remittances and monetary policy independently and interactively shape the financial system of developing countries. It employs single equation instrumental variable based estimation procedures to test the hypothesis that, to boost financial development, remittances require a complementary domestic monetary policy framework which ensures price stability while limiting price distortions. The results show that remittances stimulate financial development only in countries with a favourable monetary environment. Building on these results and employing various indicators of financial development, the results suggest that remittances rise to cushion migrant households from the repercussions of poor financial intermediation, weak institutions and unfavourable business environment in the home country. By extension, the findings are germane to monetary and financial policy in developing countries.
    Keywords: Remittances, Monetary Policy, Financial Development, Developing Country, Financial Development Index
    JEL: E5 E52 F3 G2
    Date: 2019–03–19
  8. By: Khan, Hameed; Khan, Umair
    Abstract: In this paper, the authors revisit the nexus of financial development and FDI inflows in Chinese perspective, incorporating the vital role of institutional quality and other important variables in this paradigm. Using ARDL bound testing and VECM procedures, they establish causality by exploiting variations in financial development and FDI. To unmask the shortcomings in the previous literature, the authors use a composite index of financial development, recently developed by the IMF, since it provides a more fine-grained analysis. The results show that there is a long-run relationship between FDI and financial development. Bidirectional causality is confirmed by using VECM. The inclusion of control variables, e.g., institutional quality, transport infrastructure, per capita GDP, trade openness, domestic investment, natural resources rent, is robust in the analysis. The positive role of financial development in FDI inflows is of utmost importance for policymakers and the Chinese government. Several policy implications are given in this study.
    Keywords: financial development,FDI,ARDL,liberalization,capital market,money market
    JEL: C22 F23 F38 G21 G32 O17
    Date: 2019
  9. By: Pelletier, Adeline; Khavul, Susanna; Estrin, Saul
    Abstract: Mobile money is a financial innovation that provides transfers, payments, and other financial services at a low or zero cost to individuals in developing countries where banking and capital markets are deficient and financial inclusion is low. We use transaction costs and institutional theories to explain the growth and impact of mobile money. Having developed a new archival dataset that tracks mobile money deployment across 90 emerging economies during 16 years between 2000 and 2015, we address the question of relative economic impact of the banking and telecoms sectors in the provision of mobile money. We show that telecom groups and not banks are more likely to launch mobile money in countries where legal rights are weaker and credit information less prevalent. However, it is when mobile money is offered via a banking channel that the spillover effects on the economy are greater. Findings have significant implications for policy and strategy.
    JEL: G21 M13 O33
    Date: 2019–09–09
  10. By: Dinlersoz, Emin M. (U.S. Census Bureau); Kalemli-Ozcan, Sebnem (University of Maryland); Hyatt, Henry (U.S. Census Bureau); Penciakova, Veronika (Federal Reserve Bank of Atlanta)
    Abstract: We study the leverage of U.S. firms over their life cycles and the connection between firm leverage, firm growth, and aggregate shocks. We construct a new dataset that combines private and public firms’ balance sheets with firm-level data from U.S. Census Bureau’s Longitudinal Business Database for the period 2005–12. Public and private firms exhibit different leverage dynamics over their life cycles. Firm age and size are systematically related to leverage for private firms but not for public firms. We show that private firms, but not public ones, deleveraged during the Great Recession and that this deleveraging is associated with a reduction in firm revenue and employment growth. Exploiting sectoral variation, we find that the leverage dynamics of firms is also relevant for aggregate fluctuations.
    Keywords: leverage; firm dynamics; firm growth; firm life-cycle; financial constraints; borrowing limits; short-term debt; aggregate shocks
    JEL: E23 G32
    Date: 2019–11–01
  11. By: Nakajima, Makoto (Federal Reserve Bank of Philadelphia); Rios-Rull, Jose-Victor (Federal Reserve Bank of Philadelphia)
    Abstract: We document the cyclical properties of unsecured consumer credit (procyclical and volatile) and of consumer bankruptcies (countercyclical and very volatile). Using a growth model with household heterogeneity in earnings and assets with access to unsecured credit (because of bankruptcy costs) and aggregate shocks, we show that the cyclical behavior of household earnings growth accounts for these properties, albeit not for the large volatility of credit. We find that tilting household consumption towards goods that can be purchased on credit and a slight countercyclicality in the terms of access to credit match the sizes of credit and bankruptcy volatilities. We also find that when the right to file for bankruptcy does not exist unsecured credit is countercyclical.
    Keywords: consumer credit; default; bankruptcy; debt; business cycle; heterogeneous agents; incomplete markets
    JEL: D91 E21 E32 E44 K35
    Date: 2019–11–21
  12. By: Maya El Hourani (Université Côte d'Azur, France; GREDEG CNRS); Gérard Mondello (Université Côte d'Azur, France; GREDEG CNRS)
    Abstract: This paper aims to investigate the influence of bank capitalization and institutional quality on the lending activity of commercial banks in the MENA region over the period from 2000 to 2016. By applying the fixed effect panel data estimator, we find that, commercial bank lending depends on bank-specific variables, macroeconomic variables and the institutional environment. Our results show that any increase in bank capitalization and the implementation of capital regulation (Basel II and Basel III) have negative impacts on the credit supply. We find, also, that political stability and good regulatory quality encourage foreign, domestic and private banks to improve their credit supply. However, commercial banks tend to behave cautiously when there is increasing government effectiveness and financial freedom.
    Keywords: Bank capital, institutional quality, credit supply, MENA region
    Date: 2019–11
  13. By: Xiaohong Chen (Birkbeck, University of London); Paul Wohlfarth (Birkbeck, University of London)
    Abstract: This paper investigates China’s banking system in a post-crisis environment, 2008- 2018, focusing on determinants of bank lending. We use a panel of 14 Chinese listed banks, for which there is data over this period. We group these 14 banks into various bank-clusters, classified by ownership and systemic importance. Possible determinants of loan growth are divided into two sets of variables: bureaucratic variables and economic variables. We find that for individual banks and bank groups bureaucratic variables are very significant and the economic variables have comparatively little influence, which is consistent with the state retraining quite a lot of control. However, pooling of the data gives evidence for the influence of economic variables. The size of the coefficients is similar to the average of the individual banks but they are now significant, reflecting the larger sample size. Thus the pooled estimates are more supportive of the role of bankspecific market forces in determining loan growth.
    Keywords: Loan growth, Listed banks, Bureaucratic effects, Market effects, China
    JEL: E51 P34 C32
    Date: 2019–11
  14. By: Dang, Le Ngoc (Asian Development Bank Institute); Chuc, Anh Tu (Asian Development Bank Institute)
    Abstract: Access to credit is still one of the greatest obstacles to the growth of small and medium-sized enterprises (SMEs) in Viet Nam. To date, only 39% of SMEs have bank loans. To cater to SMEs’ need for financial sources, especially formal sources such as the banking system, the Vietnamese government has implemented a large number of supporting programs, including the credit guarantee scheme (CGS) for SMEs, which it established in 2001. Through collecting, synthesizing, and analyzing data, we aim to study the challenges involved in implementing CGSs for SMEs as well as the causes of their poor performance. The fundamental reasons we find include the strict and impractical conditions for issuing credit guaranteed loans; the lack of adequate professional competence of staff involved in the credit guaranteeing task; the fragmented relationship between the credit institution and the CGS; and the lack of a credit database platform that facilitates access to finance for SMEs by providing comprehensive and reliable creditworthiness.
    Keywords: credit for SMEs; Vietnamese business environment; SMEs in Viet Nam
    JEL: E51 G23 G28 H81
    Date: 2019–04–08
  15. By: Amanda Carmignani (Bank of Italy); Guido de Blasio (Bank of Italy); Cristina Demma (Bank of Italy); Alessio D'Ignazio (Bank of Italy)
    Abstract: The paper investigates whether firms have better access to bank credit in areas with a larger degree of urbanization. It uses bank-firm data drawn from the Credit Register maintained at the Bank of Italy to devise an indicator of ease of access to credit. The paper proposes an instrumental variable strategy that uses as instruments past population density and urbanization driven by considerations of political economy. The results show that urbanization affects access to credit positively for construction firms, whose collateral greatly benefits from thicker real estate markets. No impact is found for service and manufacturing firms.
    Keywords: surbanization, access to credit
    JEL: G21 R11 R51
    Date: 2019–06
  16. By: Ndubuisi, Gideon (UNU-MERIT); Konte, Maty (UNU-MERIT)
    Abstract: It has been extensively argued that trust-based social capital expands access to credit. We embed this argument in the "credit-constrained literature," which documents inter-sector differences in financial vulnerability. We argue that financially constrained sectors are relatively better off in countries with a higher social trust level. Employing bilateral trade data comprising 50 countries' exports in 27 sectors during 1996-2008, we find that countries with a higher social trust level export more in financially vulnerable sectors because they export more products to each destination (extensive margin) and sell more of each product (intensive margin), which is in line with our hypothesis. With the exception of the intensive margin, these results are robust to a battery of sensitivity checks, including controlling for formal financing.
    Keywords: F10, F14, D70
    Date: 2019–11–08

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