nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2020‒01‒13
seventeen papers chosen by
Georg Man

  1. Growth Effects of Financial Market Instruments: The Ghanaian Experience By Ekundayo P. Mesagan; Isaac A. Ogbuji; Yasiru O. Alimi; Anthonia T. Odeleye
  2. Role of Micro finance Institutions In Promoting Financial Inclusion and Economic Growth By Naseer, Imran; Azam, Amir
  3. Financial Risk Capacity By Saki Bigio; Adrien d'Avernas
  4. Feedbacks: Financial Markets and Economic Activity By Markus K. Brunnermeier; Darius Palia; Karthik A. Sastry; Christopher A. Sims
  5. Has the credit supply shock asymmetric effects on macroeconomic variables? By V. Colombo; A. Paccagnini
  6. Macroeconomic effects of political risk shocks By Hacioglu Hoke, Sinem
  7. This paper explores the long-run relationships among inflation, capital accumulation and unemployment. We find that in the U.S. data, inflation and the capital to output ratio are positively correlated, while in a cross-section of 49 countries, a non-monotonic relationship exists between inflation and the investment to output ratio. To reconcile these empirical findings, we propose a general equilibrium framework with frictions in both labor and goods markets. This framework allows us to highlight the following two channels through which monetary policy affects capital accumulation: extensive and intensive margins. Due to the opposing effects on these two margins, our model predicts that an inverted U-shaped relationship exists between inflation and capital in the long run. The nonlinearity identified by our model strongly contrasts previous findings suggesting either a positive or a negative correlation between money and capital. Our work provides novel insight into a classical issue. By Gomis-Porqueras, Pedro; Huangfu, Stella; Sun, Hongfei
  8. Agricultural credits and agricultural productivity: Cross-country evidence By Seven, Unal; Tumen, Semih
  9. FINANCE FOR SDGs: Addressing Governance Challenge of Aid Utilisation in Bangladesh By Fahmida Khatun; Syed Yusuf Saadat; Md. Kamruzzaman
  10. Strengthening The Role of Macroprudential Policies to Support A Sustainable Development. The Case of Indonesia By Mohamad Fadhil Hasan; Achmad Nur Hidayat; Tutut Dewanto
  11. SME access to finance in Europe: structural change and the legacy of the crisis By McQuinn, John
  12. Banking Supervision, Monetary Policy and Risk-Taking: Big Data Evidence from 15 Credit Registers By Carlo Altavilla; Miguel Boucinha; José-Luis Peydró; Frank Smets
  13. A new approach to Early Warning Systems for small European banks By Bräuning, Michael; Malikkidou, Despo; Scricco, Giorgio; Scalone, Stefano
  14. The Dynamics of Non-Performing Loans during Banking Crises: A New Database By Anil Ari; Sophia Chen; Lev Ratnovski
  15. Empirical evidence on the dynamics of investment under uncertainty in the U.S. By Qazi Haque; Leandro M. Magnusson; Kazuki Tomioka
  16. The Elusive Quest for Additionality By Nicolas Van de Sijpe; Patrick Carter; Raphael Calel
  17. Schumpeter vs. Minsky on the Evolution of Capitalism and Entrepreneurship By Sau, Lino

  1. By: Ekundayo P. Mesagan (Pan-Atlantic University, Lagos, Nigeria); Isaac A. Ogbuji (University of Lagos, Nigeria); Yasiru O. Alimi (University of Lagos, Nigeria); Anthonia T. Odeleye (University of Lagos, Nigeria)
    Abstract: This study analyses the growth effects of financial market instruments in Ghana between 1991 and 2017. We use the ARDL bounds testing approach to analyse data on real GDP per capita, monetary policy rate, treasury bill rate, stocks traded, bank credits, stock turnover, market capitalisation, foreign direct investment, and gross investment. Findings show the existence of a long-run relationship between both short- and long-term financial market indicators and economic growth. Also, results confirm that long-term financial instruments perform better than the short-term instruments in boosting the country’s economy in the short-run, while in the long-run, both short-term and long-term financial indicators positively impact economic growth in Ghana. We recommend that the bank of Ghana should consider lowering the bank rate further from the current annual rate of 16.0% to enhance bank credits, boosts domestic investment, and improve growth in the long-run.
    Keywords: Financial Market Instruments, Market Capitalisation, Economic Growth, ARDL Bounds Test.
    JEL: E13 E43 E51 G20 O47
    Date: 2019–01
  2. By: Naseer, Imran; Azam, Amir
    Abstract: Many of the developing and advanced economies are focusing on the improvement of Microfinance Institute Performance because most of the studies and empirical results support the existence of significant positive relationship between Microfinance Institute Performance and Index of Financial Inclusion and both have significant positive impact on Economic Growth and its one of the basic goal and objective of the economies to attain sustainable economic growth. Through the current study it is being tried to find the relationship between microfinance institute performance, financial inclusion and economic growth in South Asian economies using Panel data from 2009-2017 using Common Random Effect, Random and Fixed effect Model. The findings show that there is strong positive relationship between Micro finance Institute Performance, Financial Inclusion and Economic Growth. Therefore the developing economies specially Pakistan whose most of economic indicators are showing declining position can sustain their economic growth through proper utilization of Micro finance Institution Performance.
    Keywords: Micro finance Institute, Index of Financial Inclusion, Economic Growth, South Asian Region
    JEL: G23 G28
    Date: 2019–08–28
  3. By: Saki Bigio; Adrien d'Avernas
    Abstract: Financial crises are particularly severe and lengthy when banks fail to recapitalize 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 information asymmetries. Large equity losses force banks to tighten intermediation, which exacerbates adverse selection. Adverse selection lowers bank profit margins which slows both the internal growth of equity and equity injections. This mechanism generates financial crises characterized by persistent low growth. The lack of equity injections during crises is a coordination failure that is solved when the decision to recapitalize banks is centralized.
    JEL: E32 E44 G01 G21
    Date: 2019–12
  4. By: Markus K. Brunnermeier (Princeton University); Darius Palia (Rutgers University); Karthik A. Sastry (Massachusetts Institute of Technology); Christopher A. Sims (Princeton University)
    Abstract: Our structural VAR with 10 monthly variables and identified by heteroscedasticity shows that credit and output growth are mostly positively associated. Negative reduced form responses to credit growth are attributed in our model to the monetary policy response to credit expansion shocks. Financial stress, measured by rises in interest rate spreads, is followed by declines in output and shrinkage of credit. We find two distinct sources of financial stress shocks. Neither credit aggregates nor rate spreads provide much advance warning of the 2008-9 crisis, but the spreads improve the model forecasts during the crisis.
    JEL: G01
    Date: 2019–08
  5. By: V. Colombo; A. Paccagnini
    Abstract: We investigate the role played by the credit supply shock across the business cycle in the U.S. over the period 1973 - 2018. We estimate a nonlinear VAR including nominal, real, monetary, and financial variables. According to our results, a credit supply shock triggers asymmetric and negative effects on macroeconomic variables. We find that the state-dependent forecast error variance decomposition of industrial production, employment, and inflation due to the shock is from six to eight times larger in recessions than in normal times.
    JEL: C32 E32 E52
    Date: 2020–01
  6. By: Hacioglu Hoke, Sinem (Bank of England and Data Analytics for Finance and Macro (KCL))
    Abstract: We investigate the macroeconomic effects of political risk in an information-rich SVAR. Using an external instrument based on an index of US partisan conflict for identification, we find that reduced political risk has expansionary impact: it is immediately priced into stock prices; increases firms’ credit availability, employment and investments while households invest and consume more — ultimately output rises. As an important driver of economic dynamics in medium to long term, the shock create an aggregate supply effect where output growth and inflation move in opposite directions, and generates a trade-off between inflation stabilization and output growth during turbulent periods. Key words: political risk shocks, partisan conflict, identification with external instruments.
    Keywords: Political; Risk; Shocks
    JEL: C36 E03
    Date: 2019–12–20
  7. By: Gomis-Porqueras, Pedro; Huangfu, Stella; Sun, Hongfei
    Keywords: Monetary Policy, Inflation, Unemployment, Capital, Search Frictions
    Date: 2019–08
  8. By: Seven, Unal; Tumen, Semih
    Abstract: We present cross-country evidence suggesting that agricultural credits have a positive impact on agricultural productivity. In particular, we find that doubling agricultural credits generates around 4-5 percent increase in agricultural productivity. We use two different agricultural production measures: (i) the agricultural component of GDP and (ii) agricultural labor productivity. Employing a combination of panel-data and instrumental- variable methods, we show that agricultural credits operate mostly on the agricultural component of GDP in developing countries and agricultural labor productivity in developed countries. This suggests that the nature of the relationship between agricultural finance and agricultural output changes along the development path. We conjecture that development of the agricultural finance system generates entry into the agricultural labor market, which pushes up the agricultural component of GDP and keeps down agricultural labor productivity in developing countries; while, in developed countries, it leads to labor-augmenting increase in agricultural production. We argue that replacement of the informal credit channel with formal and advanced agricultural credit markets along the development path is the main force driving the labor market response.
    Keywords: Agricultural credits,productivity,labor markets,financial development
    JEL: J43 Q14 Q18 O47
    Date: 2020
  9. By: Fahmida Khatun; Syed Yusuf Saadat; Md. Kamruzzaman
    Abstract: Bangladesh’s upcoming graduation from least developed country (LDC) status, which may potentially take place in 2024, has generated renewed interest in the country’s ability to mobilise finance for development from external and domestic sources. Over the years, foreign aid received by Bangladesh has become more project specific, multilateral and loan-dominated. While the commitment and disbursement gap has been widening, Bangladesh’s overall dependence on aid has declined. Thus, it remains to be seen whether Bangladesh can fully transform from an aid-dependent to a trade-led economy. This study investigates the impact of foreign aid in Bangladesh, and attempts to uncover whether the development progress of the country can be sustained in the absence of foreign aid. A broad-based empirical analysis shows that, foreign aid is not a statistically significant determinant of economic growth in Bangladesh. However, a more disaggregated analysis reveals that, foreign aid to the health sector can significantly improve health outcomes. These findings show that, while foreign aid may not be a driving force of economic growth per se, it is still an important source of support for the social sectors of the country, which receive limited resource from the government. Hence, Bangladesh will have to improve the efficiency in aid utilisation. However, the country cannot expect to continue receiving foreign aid perpetually, and must prudently prepare for a gradual and systematic phase-out. Since graduation to a developing country status will make obtaining external finances more difficult and expensive, improving generation of domestic resources and their efficient use will be of critical importance for Bangladesh in the coming years.
    Keywords: SDGs, LDC, economic growth, Aid Utilisation, Governance
    Date: 2019–05
  10. By: Mohamad Fadhil Hasan (Supervisory Board of Bank Indonesia); Achmad Nur Hidayat (Supervisory Board of Bank Indonesia); Tutut Dewanto (Supervisory Bank of Indonesia)
    Abstract: The external pressures on the domestic economic stability has prompted Bank Indonesia to focus on its monetary policy on the exchange rate measures. However, as part of the policy mix, the stance of monetary policy has been balanced with accommodative macroprudential policies to continue providing its support for the economic growth. Even though they have different targets and in their implementation there are potential conflicts that may occur when we try to achieve the objectives of both policies, the central bank deems a monetary policy and macroprudential policies to be complementary policies. This situation will provide a space for the macroprudential policies to encourage some kind of bank intermediation and to spur a credit growth. A policy support is needed to accelerate the credit growth to achieve its economic financing targets in the next 5 years, namely at 16% yoy.This study was aimed at identifying proper recommendations on the macroprudential policies such as encouraging a credit growth that included easing Loan to Value (LTV) ratios, targeting sectoral credit, easing the Macroprudential Intermediation Ratio (MIR), decreasing the Macroprudential Liquidity Buffer (MLB) ratios, easing the counter cyclical capital buffer (CCB) requirements, and strengthening coordination with other government agencies.
    Keywords: Macroprudential policy, monetary policy, credit growth, loan to value ratio, coordination, sustainable economic growth, targeted sectoral lending
    JEL: E02 E00 E58
    Date: 2019–10
  11. By: McQuinn, John (Central Bank of Ireland)
    Abstract: Small and Medium Enterprise (SME) access to credit deteriorated during the financial crisis and credit constraints remain high for some euro area countries. This paper investigates the factors linked to the variation in SME credit access across euro area countries. After controlling for the fundamental performance and characteristics of firms and bank funding costs, I investigate the financial and macroeconomic channels that explain variation in credit constraints across countries and time. The paper combines approaches taken in the literature, extends the analysis to the post-crisis period, distinguishes between alternative measures of credit constraints and incorporates the role of soft information. The most economically important channels associated with SME access to finance are found to be the soft information channel and firm indebtedness. Bank competition and the condition of bank balance sheets are also found to have economically important relationships with SME access to finance.
    Keywords: access to finance, SMEs, financial crises, soft information, firm indebtedness, bank competition, bank balance sheets, capital markets union.
    JEL: G01 G21 D22 D82 E66
    Date: 2019–08
  12. By: Carlo Altavilla; Miguel Boucinha; José-Luis Peydró; Frank Smets
    Abstract: We analyse the effects of supranational versus national banking supervision on credit supply, and its interactions with monetary policy. For identification, we exploit: (i) a new, proprietary dataset based on 15 European credit registers; (ii) the institutional change leading to the centralisation of European banking supervision; (iii) high-frequency monetary policy surprises; (iv) differences across euro area countries, also vis-à-vis non-euro area countries. We show that supranational supervision reduces credit supply to firms with very high ex-ante and ex-post credit risk, while stimulating credit supply to firms without loan delinquencies. Moreover, the increased risk-sensitivity of credit supply driven by centralised supervision is stronger for banks operating in stressed countries. Exploiting heterogeneity across banks, we find that the mechanism driving the results is higher quantity and quality of human resources available to the supranational supervisor rather than changes in incentives due to the reallocation of supervisory responsibility to the new institution. Finally, there are crucial complementarities between supervision and monetary policy: centralised supervision offsets excessive bank risk-taking induced by a more accommodative monetary policy stance, but does not offset more productive risk-taking. Overall, we show that using multiple credit registers – first time in the literature – is crucial for external validity.
    Keywords: supervision, banking, AnaCredit, monetary policy, euro area crisis
    JEL: E51 E52 E58 G01 G21 G28
    Date: 2019–12
  13. By: Bräuning, Michael; Malikkidou, Despo; Scricco, Giorgio; Scalone, Stefano
    Abstract: This paper describes a machine learning technique to timely identify cases of individual bank financial distress. Our work represents the first attempt in the literature to develop an early warning system specifically for small European banks. We employ a machine learning technique, and build a decision tree model using a dataset of official supervisory reporting, complemented with qualitative banking sector and macroeconomic variables. We propose a new and wider definition of financial distress, in order to capture bank distress cases at an earlier stage with respect to the existing literature on bank failures; by doing so, given the rarity of bank defaults in Europe we significantly increase the number of events on which to estimate the model, thus increasing the model precision; in this way we identify bank crises at an earlier stage with respect to the usual default definition, therefore leaving a time window for supervisory intervention. The Quinlan C5.0 algorithm we use to estimate the model also allows us to adopt a conservative approach to misclassification: as we deal with bank distress cases, we consider missing a distress event twice as costly as raising a false flag. Our final model comprises 12 variables in 19 nodes, and outperforms a logit model estimation, which we use to benchmark our analysis; validation and back testing also suggest that the good performance of our model is relatively stable and robust. JEL Classification: E58, C01, C50
    Keywords: bank distress, decision tree, machine learning, Quinlan
    Date: 2019–12
  14. By: Anil Ari; Sophia Chen; Lev Ratnovski
    Abstract: This paper presents a new dataset on the dynamics of non-performing loans (NPLs) during 88 banking crises since 1990. The data show similarities across crises during NPL build-ups but less so during NPL resolutions. We find a close relationship between NPL problems—elevated and unresolved NPLs—and the severity of post-crisis recessions. A machine learning approach identifies a set of pre-crisis predictors of NPL problems related to weak macroeconomic, institutional, corporate, and banking sector conditions. Our findings suggest that reducing pre-crisis vulnerabilities and promptly addressing NPL problems during a crisis are important for post-crisis output recovery.
    Date: 2019–12–06
  15. By: Qazi Haque (The University of Western Australia, Centre for Applied Macroeconomic Analysis); Leandro M. Magnusson (Business School, The University of Western Australia); Kazuki Tomioka (University of Rochester)
    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
  16. By: Nicolas Van de Sijpe (Department of Economics, University of Sheffield); Patrick Carter (CDC); Raphael Calel (Georgetown University, McCourt School of Public Policy.)
    Abstract: Development finance institutions (DFIs) annually invest $90 billion to support under-financed projects across the world. Although these government-backed institutions are often asked to show that their investments are “additional” to what private investors would have financed, it is rarely clear what evidence is needed to answer this request. This paper demonstrates, through a series of simulations, that the nature of DFIs’ operations creates systematic biases in how a range of estimators assess additionality. Recognising that rigorous quantitative evidence of additionality may continue to elude us, we discuss the value of qualitative evidence, and propose a probabilistic approach to evaluating additionality.
    Keywords: Development Finance Institutions; Investment; Additionality; Simulation.
    JEL: F21 F35 G15 O16 O19
    Date: 2019–12
  17. By: Sau, Lino (University of Turin)
    Abstract: Joseph Schumpeter and Hyman Minsky have devoloped, during their lives, both a theory of the business cycles and a theory of capitalist development. Minsky was influenced by Schumpeter during the period he spent at Harvard University in 1942 and he thought that Schumpeter vision of the capitalist process required an integration of financial markets and investment behaviour: roughtly speaking, Minsky’s financial keynesianism was what Schumpeter needed to complete his own theory of the devoloping of a capitalist economy. Minsky explored an even broader historical framework during the last decade of his life: the theory of capitalist development along the idea that there are many types of capitalism. As pointed out by Whalen (2001) to analyse each stage of capitalist development following Minsky’s perspective, one should ask what is the distinctive activity being financed, what is the pivotal source of financing, and what is the balance of economic power between those in business and in banking/finance activity. Capitalist development is shaped by the institutional structure, but this structure is always evolving in response to profit-seeking activity. The financial system takes on special importance in this theory not only because finance exerts a strong influence on business activity but also because this system is particularly prone to innovation. In this paper, I shall focus particularly on this analysis trying to up-date his taxonomy, taking into account the process of global financialisation, and comparing it with Schumpeter’s previous scrutinity on the evolution of capitalism.
    Date: 2019–11

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