nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2019‒12‒23
seventeen papers chosen by
Georg Man

  1. Does stock market capitalization cause GDP? A causality study for Central and Eastern European countries By Prats Albentosa, María Asuncíon; Sandoval, Beatriz
  3. Financial Conditions and Growth at Risk in the ECCU By Takuji Komatsuzaki; Steve Brito
  4. The Impact of Mobile Money on Long-Term Poverty: Evidence from Bangladesh By A.T.M. Hasibul, Islam; Syed Abul, Basher; A.K. Enamul, Haque
  5. Financial Constraints of Entrepreneurs and the Self-Employed By Mikhed, Vyacheslav; Raina, Sahil; Scholnick, Barry
  6. Examining macroprudential policy and its macroeconomic effects - some new evidence By Soyoung Kim; Aaron Mehrotra
  7. Informality, Frictions, and Macroprudential Policy By Moez Ben Hassine; Nooman Rebei
  8. In the face of spillovers: prudential policies in emerging economies By Coman, Andra; Lloyd, Simon P.
  9. Financial Development and Energy Consumption Nexus in Malaysia: A Multivariate Time Series Analysis By Islam, Faridul; Shahbaz, Muhammad; Ahmed, Ashraf U.; Alam, Md. Mahmudul
  10. Does access to international capital markets affect investment dynamics in Sub-Saharan Africa? By Senga, Christian; Cassimon, Danny; Kigabo, Thomas
  11. Empirical evidence on the dynamics of investment under uncertainty in the US By Qazi Haque; Leandro M. Magnusson; Kazuki Tomioka
  12. Taxation and the life cycle of firms By Andrés Erosa; Beatriz González
  13. Bank Recapitalisation and Credit Growth: The Indian Case By Verma, Radheshyam; Herwadkar, Snehal
  14. Factor shares and the rise in corporate net lending By Jan Behringer
  15. The Global Financial Cycle and Capital Flow Episodes: A Wobbly Link? By Beatrice D. Scheubel; Livio Stracca; Tille Cedric
  16. Breaking the Bank? A Probabilistic Assessment of Euro Area Bank Profitability By Selim Elekdag; Sheheryar Malik; Srobona Mitra
  17. The Ef ciency and Inef ciency of the Banking Sectors: Evidence From Selected ASEAN Banking By , abdul.mongid

  1. By: Prats Albentosa, María Asuncíon; Sandoval, Beatriz
    Abstract: This paper analyses the relationship between stock market capitalization and real GDP in ten Central and Eastern European countries (CEECs) that joined the European Union in 2004 and 2007, with the objective of determining if the financial markets have played a role as a driver of the economic development in these countries or vice versa. The methodology is based on the application of three different measures of causality between the relevant variables, in order to determine the existence and the direction of causality. Using a cointegrated Vector Autoregressive model (VAR), the authors study the relationship between the relevant variables through the following tests: Granger causality test, Toda-Yamamoto approach and Frequency Domain approach. The results obtained suggest evidence of the existence of this relationship, in both directions, in a significant number of this group of countries, and especially in those there is a long-term relationship.
    Keywords: stock market development,economic growth,Granger causality,Toda-Yamamoto,Frequency Domain
    JEL: C32 F43 G15
    Date: 2019
  2. By: , Shafenti; osman, Irwan ramli
    Abstract: This research discusses about the analysis of the role of sectoral credit and the impact of BI Rate in promoting economic growth in Indonesia with panel data method analysis. Researcher estimates this model by using the structure of stacked panel data and also uses observation period from 2011 to 2015. This panel data also consist of 16 sectors of the economy as the cross section dataset. The objectives of this study are to describe the role of sectoral credit and the impact of BI rate to the GDP In promoting economic growth. Based on fixed effect method by using eviews 9, all independent variables have positive and significant impacts to GDP growth partially and simultaneously. Through this study, researcher expects ministry of finance as the fiscal authority, central bank of Indonesia (monetary authority), and also financial services authority of Indonesia can form a synergy and continuous interaction in designing policies that have impacts on sustainable economic growth in Indonesia
    Date: 2018–05–30
  3. By: Takuji Komatsuzaki; Steve Brito
    Abstract: We study the growth determinants in the Eastern Caribbean Currency Union (ECCU), using the Growth at Risk (GaR) framework with a focus on financial variables. We find that excessive bank credit growth is associated with lower future real GDP growth in the medium term especially on the low quantiles of growth distribution. Moreover, worsening of both global financial conditions and external conditions are associated with lower future growth in the short term, especially at the high quantiles of growth distribution. Country-specific results are broadly in line with ECCU-wide results, with some variation potentially due to the strong Citizenship-By-Investment program inflows and lack of credit union data. The establishment of a macroprudential framework in the ECCU would need to pay close attention to credit growth not only of banks but also credit unions and continue to monitor global and external conditions.
    Date: 2019–11–15
  4. By: A.T.M. Hasibul, Islam; Syed Abul, Basher; A.K. Enamul, Haque
    Abstract: Mobile money has become a lifeline for millions of poor people who have limited access to a formal banking system. It encompasses a wide range of benefits such as women’s empowerment, risk sharing, improved labor market outcomes and reductions in poverty. In this paper, we ask whether mobile money can help lift people out of poverty. Previous studies have addressed this question by using microanalyses of field experiments or longitudinal data on rural households, whereas we use district-level data to reevaluate the mobile money–poverty nexus. In particular, we study the impact of mobile money on district-level poverty in Bangladesh over the period 2010–2016. Our study finds that every 1 billion Taka (approximately US$ 11.76 million) increase in mobile money transactions via the bKash system leads to a 0.48% reduction in the poverty rate in Bangladesh. The marginal impact ranges from 0.27 to 0.48 percentage points across five poverty quintiles, implying a reduction of poverty rates between 0.9 and 1.5 percentage points compared with the base poverty rate of 31.5% in 2010. The findings suggest that mobile money has been successful in fostering various poverty reduction initiatives and that targeted policy prescriptions can be devised to lift up poorer societies that are still outside the purview of mobile financial services. To further increase mobile money use, the government could use its own infrastructure to enhance mobile agent density in the poorest sectors of society.
    Keywords: Mobile money, poverty, bKash.
    JEL: G20 I32 L96 O16
    Date: 2019–12–09
  5. By: Mikhed, Vyacheslav (Federal Reserve Bank of Philadelphia); Raina, Sahil (University of Alberta); Scholnick, Barry (University of Alberta)
    Abstract: Growth-oriented entrepreneurial start-ups generate more economic growth than other self-employed businesses, yet they only constitute a small fraction of start-ups. We examine whether financial constraints impede these types of start-ups by exploiting lottery wins as exogenous wealth shocks. We find that lottery-win magnitude increases winners’ subsequent incorporation, implying that entrepreneurs face financial constraints, but not business registration, implying that financial constraints do not bind as much for the self-employed. Our results, that financial constraints bind for incorporations among men, for serial entrepreneurs, during economic booms, and in neighborhoods without local lenders, are important for understanding the financial impediments to entrepreneurial start-ups.
    Keywords: entrepreneurship; self-employment; financial constraints
    JEL: G21 L26 M13
    Date: 2019–12–11
  6. By: Soyoung Kim; Aaron Mehrotra
    Abstract: In this paper, we provide empirical evidence about the broader macroeconomic effects of macroprudential policies and the underlying transmission mechanism, as well as the response of macroprudential policy to financial risks. To this end, we use structural panel vector autoregressions and a dataset covering 32 advanced and emerging economies. We show that macroprudential policy shocks have effects on real GDP, the price level and credit that are very similar to those of monetary policy shocks, but the detailed transmission of the two policies is different. Whereas macroprudential policy shocks mostly affect residential investment and household credit, monetary policy shocks have more widespread effects on the economy. Moreover, while positive credit shocks are generally met with tighter macroprudential policy, macro-financial country characteristics such as the exchange rate regime and the level of financial development affect the policy response.
    Keywords: macroprudential policy, monetary policy, credit, macroeconomic effect, macroprudential policy response
    JEL: E58 E61 G28
    Date: 2019–12
  7. By: Moez Ben Hassine; Nooman Rebei
    Abstract: We analyze the effects of macroprudential policies through the lens of an estimated dynamic stochastic general equilibrium (DSGE) model tailored to developing markets. In particular, we explicitly introduce informality in the labor and goods markets within a small open economy embedding financial frictions, nominal and real rigidities, labor search and matching, and an explicit banking sector. We use the estimated version of the model to run welfare analysis under optimized monetary and macroprudential rules. Results show that although informality reduces the efficiency of macroprudential policies following a convex fashion, combining the latter with an inflation targeting objective could be beneficial.
    Date: 2019–11–27
  8. By: Coman, Andra; Lloyd, Simon P.
    Abstract: We examine whether emerging market prudential policies help to reduce the macrofinancial spillover effects of US monetary policy. We find that emerging markets with tighter prudential policies face significantly smaller, and less negative, spillovers to total credit from US monetary policy tightening shocks. Loan-to-value ratio limits and reserve requirements appear to be particularly effective prudential measures at mitigating the spillover effects of US monetary policy. Our findings indicate that domestic prudential policies can dampen emerging markets’ exposure to US monetary policy and the associated global financial cycle, even when accounting for capital controls, suggesting they may be a useful tool in the face of international macroeconomic policy trade-offs. JEL Classification: E52, E58, E61, F44
    Keywords: international spillovers, local projections, monetary policy, policy interactions, prudential policy
    Date: 2019–12
  9. By: Islam, Faridul; Shahbaz, Muhammad; Ahmed, Ashraf U.; Alam, Md. Mahmudul (Universiti Utara Malaysia)
    Abstract: Despite a bourgeoning literature on the existence of a long-run relationship between energy consumption and economic growth, the findings have failed to establish clearly the direction of causation. A growing economy needs more energy, which is exacerbated by growing population. Evidence suggests that financial development can reduce overall energy consumption by achieving energy efficiency. Economic growth and energy consumption in Malaysia have been rising in tandem over the past several years. The three public policy objectives of Malaysia are: economic progress, population growth and financial development. It is of interest to the policymakers to understand the dynamic interrelation among the stated objectives. The paper implements Auto Regressive Distributed Lag (ARDL) approach to cointegration to examine the existence of a long-run relationship among the series: energy consumption, population, aggregate production, and financial development for Malaysia; and tests for Granger causality within the Vector Error Correction Model (VECM). The results suggest that energy consumption is influenced by economic growth and financial development, both in the short and the long-run, but the population-energy relation holds only in the long run. The findings have important policy implications for balancing economic growth vis-à-vis energy consumption for Malaysia, as well as other emerging nations.
    Date: 2019–02–24
  10. By: Senga, Christian; Cassimon, Danny; Kigabo, Thomas
    Abstract: This study investigates the influence of government borrowing through international capital markets on investment dynamics in Sub-Saharan Africa (SSA). We apply the synthetic control method to Gabon, Ghana and Senegal to assess whether this kind of government borrowing affects private, public and FDI in these countries using annual data for the period 1995-2017. Our results suggest that government and private investment have not been affected by governments’ borrowing through international capital markets, but that the move may have boosted these countries’ capacity to attract foreign direct investment. They lend support to the hypothesis that these countries’ exposure to international capital markets is an opportunity to register on the investors’ radar.
    Keywords: Sub-Saharan Africa; investment; synthetic control method
    JEL: E22 F21 F34 G15 O55
    Date: 2019–12
  11. By: Qazi Haque; Leandro M. Magnusson; Kazuki Tomioka
    Abstract: We study the effects of financial uncertainty on investment dynamics in the U.S. using a vector autoregression with drifting parameters and stochastic volatilities. We find time-varying negative effects of financial uncertainty shocks on investment. These effects have declined in the post-WWII period but became more pronounced in the presence of the zero lower bound episode. We also find that the response of inflation to uncertainty shocks varies over time, and these shocks do not always act like aggregate demand shocks. Remarkably, the relevance of financial uncertainty shocks is found to be negligible during the Great Recession.
    Keywords: Uncertainty shocks, investment dynamics, TVP-VARs with stochastic volatility, Bayesian VARs, Great Recession
    JEL: C11 C32 E22 E32 E44
    Date: 2019–12
  12. By: Andrés Erosa (Universidad Carlos III de Madrid); Beatriz González (Banco de España and Universidad Carlos III de Madrid)
    Abstract: The Hopenhayn and Rogerson (1993) framework is extended to understand how different forms of taxing capital income affect firms’ investment and financial policies over their life cycle. Corporate income taxation slows down firm growth over the life cycle by reducing after-tax profits available for reinvesting, and it distorts optimal firms’ size. Dividend income taxation reduces external equity financing, but it does not affect size at maturity. Capital gains taxes make firms start larger, so that internal growth is lower. With these mechanisms in mind, we calibrate our economy to the US and discuss different revenue-neutral tax reforms that might lead to increases in aggregate output and capital.
    Keywords: macroeconomics, capital income taxation, firm dynamics, investment
    JEL: D21 E22 E62 G32 H32
    Date: 2019–12
  13. By: Verma, Radheshyam; Herwadkar, Snehal
    Abstract: The continuing deterioration in asset quality of public sector banks in India since 2012 has had multidimensional ramifications. On the one hand, while significant loan loss provisions were required to be kept, eroding the profitability of these banks, on the other hand, it affected their risk-taking ability and resources available for on-lending to commercial sector. From a macroeconomic perspective thus, poor asset quality and lower economic growth reinforced each other into a vicious cycle. The government intermittently infused capital in the public-sector banks, but most of that was absorbed by the continuing deterioration in asset quality, delaying the revival in the credit growth cycle. This led to the question of how much capital infusion is necessary to kick-start the credit cycle. Using bank-wise data for the period 2008-18, the present study analyses this question in a dynamic panel framework. The findings of the study suggest that the relationship between bank capital and credit growth is non-linear. Any amount of recapitalisation in banks is may be helpful in accelerating credit growth. However, the study found the single threshold level 13.1 per cent of CRAR level would be optimal. Above this threshold level, incremental increase in bank capital has positive but declining marginal effects on lending.
    Keywords: Bank capital, regulatory capital, recapitalisation, bank lending.
    JEL: G21
    Date: 2019–12–04
  14. By: Jan Behringer
    Abstract: The corporate sector has turned from a net borrowing position to a net lending position in many advanced countries over the past decades. This phenomenon is rather unusual as the corporate sector had historically borrowed funds from other sectors in the economy. In this paper, we analyze how changes in the distribution of income between wages and profits have affected corporate net lending in a sample of 40 countries for the period 1990-2016. A consistent finding ist hat an increase (decrease) in the corporate profit share leads to an increase (decrease) in corporate net lending, controlling for other corporate net lending determinants. We disentangle the effects of the profit share on corporate saving and investment and explore a number of alternative explanations of our results, including changes in the cost of capital, shifts in the composition of industrial sectors, the growing importance of intangible capital, and a temporary crisis phenomenon. We conclude that factor shares are an important driver of macroeconomic trends and that the rise in corporate profits has contributed considerably to the improvement in the corporate net lending positions across countries.
    Keywords: Corporate saving, investment, income distribution, cost of capital
    JEL: E21 E22 E25 G30
    Date: 2019
  15. By: Beatrice D. Scheubel; Livio Stracca; Tille Cedric
    Abstract: We add to the literature on the influence of the global financial cycle (GFC) and gyrations in capital flows. First, we build a new measure of the GFC based on a structural factor approach, which incorporates theoretical priors in its definition. This measure can also be decomposed in a price-based and quantity-based version of the GFC, which is novel in the literature. Second, we compare our measure to other common existing indicators of the GFC. Third, we estimate the influence of the fluctuations in the GFC on capital flow episodes (sudden stops, flights, retrenchments, surges) and currency crises, also testing for its stability and linearity. We find that the nexus between the GFC and capital flow episodes is generally consistent and not very wobbly. In line with theoretical priors, we find some evidence that the GFC is more important for sudden stops when it is more negative, i.e. the relationship is (mildly) convex, in keeping with a role for occasionally binding constraints, but the evidence for this feature is not strong.
    Keywords: capital flows, global financial cycle, push factors, structural factor analysis
    JEL: F32 F33 F36 F42 F44
    Date: 2019
  16. By: Selim Elekdag; Sheheryar Malik; Srobona Mitra
    Abstract: This paper explores the determinants of profitability across large euro area banks using a novel approach based on conditional profitability distributions. Real GDP growth and the NPL ratio are shown to be the most reliable determinants of bank profitability. However, the estimated conditional distributions reveal that, while higher growth would raise profits on average, a large swath of banks would most likely continue to struggle even amid a strong economic recovery. Therefore, for some banks, a determined reduction in NPLs combined with cost efficiency improvements and customized changes to their business models appears to be the most promising strategy for durably raising profitability.
    Date: 2019–11–22
  17. By: , abdul.mongid
    Abstract: This paper examines the cost ef ciency of banks operating in selected countries of the Association of Southeast Asian Nations (ASEAN). We calculate the cost ef ciency base on accounting ef ciency and economic ef ciency using Stochastic Frontier Analysis (SFA) and then classify it as ef cient and not. Further, bank speci c and economic variables are combined to determine the cost ef ciency and the ef ciency category (ef ciency dummy) using linear regression and logistic regression. The results show that bank ef ciency determined by asset size, dummy of economic crisis, interest rate gap, economic growth, in ation, capital, earning assets and loan losses provision. Only capital, earning asset and loan loss provision are consistent for accounting and economic ef ciencies. For economic variable, economic growth and in ation rate are only signi cant in the accounting ef ciency. The result implied that ASEAN banking should continue to consolidate the asset size and the authority should create high economic growth and a low in ation environment to make their banking industry more ef cient.
    Date: 2018–01–10

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