nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2020‒01‒06
twelve papers chosen by
Georg Man

  1. Who did it? A European Detective Story. Was it Real, Financial, Monetary and/or Institutional: Tracking Growth in the Euro Area with an Atheoretical Tool By Mariarosaria Comunale; Francesco Paolo Mongelli
  2. Checks and Imbalances: Exploring the Links between Political Constraints and Banking Crises using Econometric Mediation By Jacob M. Meyer
  3. American Precious Metals and their Consequences for Early Modern Europe By Nuno Palma
  4. Crédito Cooperativo e Desenvolvimento Econômico Regional no Estado do Paraná By Marcos Santos Meneghini
  5. Financial Intermediation, Capital Accumulation and Crisis Recovery By Hans Gersbach; Jean-Charles Rochet; Martin Scheffel
  7. Fighting African Capital Flight: Trajectories, Dynamics and Tendencies By Simplice A. Asongu; Joseph I. Uduji; Elda N. Okolo-Obasi
  8. Trade, misallocation, and capital market integration By Tetenyi, Laszlo
  9. Private debt, public debt, and capital misallocation By Alimov, Behzod
  10. Hidden Reserves as an Alternative Channel of Firm Finance in a Major Developing Economy By Ibrahim Yarba
  11. Impact of Financial Liberalisation on Income Inequality: A PVAR Approach By Chokri Zehri
  12. Stranded assets and the financial system By Andreas A. Papandreou

  1. By: Mariarosaria Comunale (Bank of Lithuania); Francesco Paolo Mongelli (European Central Bank)
    Abstract: During the past thirty years, euro area countries have undergone significant changes and experienced diverse shocks. We aim to investigate which variables have consistently supported growth in this tumultuous period. The paper unfolds in three parts. First, we assemble a set of 35 real, financial, monetary and institutional variables for all euro area countries covering the period between 1990Q1 and 2016Q4. Second, using the Weighted-Average Least Squares (WALS) method, as well as other techniques, we gather clues about which variables to select. Third, we quantify the impact of various determinants of growth in the short and long runs. Our main finding is the positive and robust role of institutional reforms on long-term growth for all countries in the sample. An improvement in competitiveness matters for growth in the overall euro area in the long run as well as a decline in sovereign and systemic stress. The debt over GDP negatively influences growth for the periphery, but only in the short run. Property and equity prices have a significant impact only in the short run, whereas the loans to NFCs positively affect the core euro area. An increase in global GDP also supports growth.
    Keywords: euro area, GDP growth, monetary policy, fiscal policy, institutional integration, financial crisis, systemic stress, synchronization
    JEL: C23 E40 F33 F43
    Date: 2019–12–27
  2. By: Jacob M. Meyer
    Abstract: Political institutions can influence the likelihood of banking crises through both direct and indirect causal pathways. They may influence domestic economic conditions, thereby indirectly impacting the likelihood of a banking crisis, or they may directly affect the likelihood of banking crises through confidence and expectations-related mechanisms. I apply econometric moderated multiple-mediation to estimate this combination of effects for veto player theory - a common framework for analysing political institutional constraints - using a dynamic panel approach and a dataset of 111 developing economies and emerging markets from 1990-2012. I find more veto players indirectly reduce the likelihood of banking crises by reducing inflation and increasing GDP growth in the pre-crisis period. However, they also increase the likelihood of banking crises by increasing credit growth. When global risk is high, more veto players impede policy responses to changing conditions. This directly increases the likelihood of crises. When global risk is low, more veto players reduce policy volatility. This directly reduces the likelihood of crises. Rising global volatility has larger effect on the likelihood of crises in relatively constrained political systems.
    Keywords: Banking Crises, Political Institutions, Econometric Moderated Mediation, Veto Player Theory, Empirical International Finance.
    JEL: E02 E50 E51
    Date: 2019–10–07
  3. By: Nuno Palma (Department of Economics, University of Manchester; Instituto de Ciências Sociais, Universidade de Lisboa; CEPR)
    Abstract: Over the early modern period and beyond, massive amounts of silver and gold were found and mined in the Americas. In this paper, I review the consequences for the European economies. Some second-order receiver countries such as England benefited in both the short and long run. First-order receivers such as Spain and Portugal also benefited in the short-run, but their continued exposure to the arrival of massive quantities of precious metals eventually led to loss of competitiveness and an institutional resource curse.
    Keywords: American Precious Metals, Early Modern Period, Dutch Disease, Political Institutions, Economic growth, comparative development
    JEL: E02 E4 N14 O11
    Date: 2019–12
  4. By: Marcos Santos Meneghini
    Abstract: This study uses land endowment as an instrumental variable to estimate the impact of cooperative credit on income of Parana State municipalities. The processes of colonization and territorial occupation established between XVII and XX centuries allow to distinguish locally the formation of social capital, the reduction of market failures in financial intermediation and its influence on economic development. The credit-income elasticity suggests that an 1% increase in cooperative credit supply causes a 0.31% increase in municipal per capita agricultural income.
    Date: 2019–12
  5. By: Hans Gersbach (ETH Zurich - CER-ETH -Center of Economic Reseaarch; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)); Jean-Charles Rochet (GFRI, University of Geneva; Swiss Finance Institute; University of Zurich - Swiss Banking Institute (ISB)); Martin Scheffel (Karlsruhe Institute of Technology)
    Abstract: We integrate bank and bond financing into a two-sector neoclassical growth model to examine the stabilization effect of endogenous bank leverage adjustment. We show that although bank leverage amplifies shocks, the increase of leverage to a decline in bank equity is an automatic stabilizer in downturns, since it partially offsets the decline of bank lending to financially constrained firms. Regulatory capital limits and wage rigidities impair the re-allocation of capital between sectors and weaken the automatic stabilization channel. A quantitative analysis of the US in the Great Recession shows that the magnitude of automatic stabilization is significant and informs about potentially high costs of strict capital regulation or wage rigidities in banking crises.
    Keywords: financial intermediation, capital accumulation, banking crises, macroeconomic shocks, business cycles, bust-boom cycles, managing recoveries
    JEL: E21 E32 F44 G21 G28
    Date: 2019–12
  6. By: Desrahayu, Anita; fernos, jhon
    Abstract: Banks are institutions that play an active role in economic growth in general. As an intermediary between parties who have funds and parties who need funds, banks have a main function, among others: Banks as institutions that collect public funds in the form of deposits,banks as institutions that channel funds to the public in the form of credit, banks as institutions that launch transactions trade and circulation of money.Increasing the role of banks is very necessary to increase the real business volume that can encourage economic growth and can improve people's welfare. PT. The People's Credit Bank (BPR) Ganto Nagari 1954 Lubuk Alung is a competent institution to realize an increase in economic growth, especially for the middle and lower classes. Evidenced by the increase in business volume, distribution in the field of credit and the quality of loans disbursed.
    Date: 2019–05–01
  7. By: Simplice A. Asongu (Yaoundé/Cameroon); Joseph I. Uduji (University of Nigeria, Nsukka, Nigeria); Elda N. Okolo-Obasi (University of Nigeria, Nsukka, Nigeria)
    Abstract: An April 2015 World Bank report on attainment of the Millennium Development Goal (MDG) extreme poverty target has revealed that extreme poverty has been decreasing in all regions of the world with the exception of sub-Saharan Africa (SSA), in spite of the sub-region enjoying more than two decades of growth resurgence. This study builds on a critique of Piketty’s ‘capital in the 21st century’ and recent methodological innovations on reverse Solow-Swan to review empirics on the adoption of common policy initiatives against a cause of extreme poverty in SSA: capital flight. The richness of the dataset enables the derivation of 14 fundamental characteristics of African capital flight based on income-levels, legal origins, natural resources, political stability, regional proximity and religious domination. The main finding reveals that regardless of fundamental characteristic, from a projection date of 2010, a genuine timeframe for harmonizing policies is between 2016 and 2023. In other words, the beginning of the post-2015 agenda on sustainable development goals coincides with the timeframe for common capital flight policies.
    Keywords: Econometric modeling; Capital flight; Poverty; Africa
    JEL: C50 E62 F34 O19 O55
    Date: 2019–01
  8. By: Tetenyi, Laszlo
    Abstract: I study how cross-country capital market integration affects the gains from trade in a model with financial frictions and heterogeneous, forward-looking firms. The model predicts that misallocation among exporters increases as trade barriers fall, even as misallocation decreases in the aggregate. The reason is that financially constrained productive exporters increase their production only marginally, while unproductive exporters survive for longer and increase their size. Allowing capital inflows magnifies misallocation, because unproductive firms expand even more, leading to a decline in aggregate productivity. Nevertheless, under integrated capital markets, access to cheaper capital dominates the adverse effect on productivity, leading to higher output, consumption and welfare than under closed capital markets. Applied to the period of European integration between 1992 and 2008, I find that underdeveloped sectors experiencing higher export exposure had more misallocation of capital and a higher share of unproductive firms, thus the data is consistent with the model's predictions. A key implication of the model is that TFP is a poor proxy for consumption growth after trade liberalisation.
    Keywords: financial development,misallocation,capital market integration,trade liberalisation
    JEL: F4 O4
    Date: 2019
  9. By: Alimov, Behzod
    Abstract: Does finance facilitate efficient allocation of resources? Our aim in this paper is to find out whether increases in private and public indebtedness affect capital misallocation, which is measured as the dispersion in the return to capital across firms in different industries. For this, we use a novel dataset containing industrylevel data for 18 European countries and control for different macroeconomic indicators as potential determinants of capital misallocation. We exploit the within-country variation across industries in such indicators as external finance dependence, technological intensity, credit constraints and competitive structure, and find that private debt accumulation disproportionately increases capital misallocation in industries with higher financial dependence, higher R&D intensity, a larger share of credit-constrained firms and a lower level of competition. On the other hand, we fail to find any significant and robust effect of public debt on capital misallocation within our country-sector pairs. We believe the distortionary effects of private debt found in our analysis needs a deeper theoretical investigation.
    Keywords: private debt,public debt,capital misallocation,productivity
    JEL: D24 D61 E44 F34 H63 O47
    Date: 2019
  10. By: Ibrahim Yarba
    Abstract: This study analyses the argument that whether Turkish non-financial firms utilize any informal source of alternative funding during economic uncertainties over the last decade. This study is the first to explore the issue and provide some insights regarding how small and medium-sized enterprises do react to the financial constraint problem in such an economic environment. Both trend analysis and dynamic panel model estimations provide supporting evidence that Turkish non-financial firms have some reserves (e.g., owners’, relatives’ and/or friends’ personal wealth) that are utilized during the times of persistent stress and tightening of macroprudential policies. Most strikingly, this is the case for only small and medium-sized enterprises but not for large firms.
    Keywords: Hidden reserves, Alternative firm financing channels, SME, Macroprudential policy, Uncertainty, Persistence of uncertainty
    JEL: C23 D21 D81 G18 G32
    Date: 2019
  11. By: Chokri Zehri
    Abstract: I estimate a panel vector autoregressive model (PVAR) to study the impact of financial liberalisation on income inequality. The analysis is carried out for 162 countries over the period 1980-2015. The results show that capital account liberalisation and financial development increase inequality. However, it change according to the category of income countries (low, middle and high-income) and according to the period of study used (before and after 1990). The shocks caused by the indicators of financial liberalisation on income inequality are very low but persistent in time.
    Keywords: Financial liberalisation, income, inequality, PVAR
    JEL: F38 F41 F02
    Date: 2019–10–09
  12. By: Andreas A. Papandreou (National and Kapodistrian University of Athens)
    Abstract: There has been a burgeoning interest and literature on the risks associated with stranded assets. This paper aims to present an overview of this literature with a focus on the risks to the financial system associated with stranded assets and why these risks need to be a concern to central banks. It considers various definitions of stranded assets and its expanding scope while focusing more narrowly on climate-related risks and how these affect the financial system. Two main channels of climate-related risks are discussed in depth: risks of physical impacts from climate change and risks associated with the transition to a low-carbon economy. Reasons why the financial system may inadequately account for these risks are presented along with corrective policies on the part of investors and central banks. The paper also considers the special challenges and threats to financial stability associated with the historically unique sustainability transition needed to achieve the targets set by the Paris Agreement.
    Keywords: stranded assets; climate change;financial stability
    JEL: G2 Q54
    Date: 2019–12

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