nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2020‒01‒20
thirteen papers chosen by
Georg Man

  2. Fintech contribution to Indonesia's economic growth By Nasihin Aziz, Athoillah
  3. Macroeconomic Macroeconomic Effects of Credit Deepening in Latin America. By Carvalho, Carlos; Pasca, Nilda; Souza, Laura; Zilberman, Eduardo
  4. Population Aging, Credit Market Frictions, and Chinese Economic Growth By Michael Dotsey; Wenli Li; Fang Yang
  5. "An Empirical Stock-Flow Consistent Macroeconomic Model for Denmark" By Mikael Randrup Byrialsen; Hamid Raza
  6. Globalization and Economic Growth in CEMAC: The Role of Complementarities By Mbiankeu Nguea, Stéphane
  7. Cross-Border flows and the effect of Global Financial shocks in Latin America. By Gondo, Rocío; Pérez, Fernando
  8. Requerimientos de encaje como instrumento de estabilidad financiera. By Cantú, Carlos; Gondo, Rocio; Martínez, Berenice
  9. SFX Interventions, Financial Intermediation, and External Shocks in Emerging Economies. By Carrasco, Alex; Florián, David; Nivín, Rafael
  10. Is the negative interest rate policy effective? By Robert L. Czudaj
  11. Inventory credit to enhance food security in Africa By Tristan Le Cotty; Elodie Maitre d'Hotel; Subervie Julie
  12. Rural Transformation, Inequality, and the Origins of Microfinance By Marvin Suesse; Nikolaus Wolf
  13. The economic forces driving FinTech adoption across countries By Jon Frost

    Abstract: A dire concern for many nations has always been their patterns of economic growth and financial development throughout the years. Tentatively, a relationship between the concepts co-exists. However, the direction of causality is of great interest, particularly in relation to the country?s level of development and growth. This paper studies the existence of a relationship between financial development and economic growth using a sample of G-7 countries for the period of 1996 to 2013. Making use of panel data models such as panel unit root test, Johansen-Fisher cointegration and vector error correction model/granger causality and using secondary time series data obtained from the World Bank and the International Monetary Fund (IMF) for G-7 countries (Canada, France, Germany, Great Britain, Italy, Japan and United States). Variables used include, economic growth, stock market capitalisation, total investment growth, interest rates and population growth. Findings of the study indicated that real interest rates and total investment is positively related to economic growth in G-7; while other variables such as stock market size, do play a significant role in explaining economic growth in G-7 countries. This study may assist G-7 countries to improve their economic growth structure and financial development systems over time.
    Keywords: Financial development, economic growth, panel data, developed countries, G-7
    JEL: A10 C01 E00
    Date: 2019–10
  2. By: Nasihin Aziz, Athoillah
    Abstract: Fintech investment increased substantially in 2018 with total global investment dollars in all M&A, PE, and VC more than doubling from $ 50.8 billion in 2017 to $ 111.8 billion in 2018. In Indonesia, the financial technology industry ( fintech) is growing The rapid growth of both fintech payments and loans, this is reflected in the distribution of fintech loans which penetrated Rp33.2 trillion in May 2019, while fintech payment transactions reached Rp47.1 trillion in 2018. Indonesian fintech players are still dominant in the payment business ( 43%), loans (17%), and the remainder in the form of aggregators, crowdfunding and others. The development of fintech has increased Indonesia's GDP by Rp25.97 trillion.
    Keywords: Digital economy, financial technology (fintech), economic growth
    JEL: O10 O11
    Date: 2019–12–30
  3. By: Carvalho, Carlos (PUC Río); Pasca, Nilda (Banco Central de Reserva del Perú); Souza, Laura (Itaú-Unibanco); Zilberman, Eduardo (BCCH)
    Abstract: We augment a standard dynamic general equilibrium model with financial frictions, in order to quantify the macroeconomic effects of the credit deepening process observed in Latin America in the last decade - most notably in Brazil. In the model, a stylized banking sector intermediates credit from patient households to impatient households and entrepreneurs. Motivated by the Brazilian experience, we allow the credit constraint faced by households to depend on labor income. Our model is designed to isolate the effects of credit deepening through demand-side channels, and abstracts from potential effects of credit supply on total factor productivity. In the calibrated model, credit deepening generates only modest above-trend growth in consumption, investment, and GDP. Since Brazil has experienced one of the most intense credit deepening processes in Latin America, we argue that the quantitative effects that hinge on the channels captured by the model are unlikely to be sizable elsewhere in Latin America.
    Keywords: credit deepening; financial frictions; consignado credit; payroll lending
    JEL: E20 E44 E51
    Date: 2019–12
  4. By: Michael Dotsey; Wenli Li; Fang Yang
    Abstract: We build a unified framework to quantitatively examine population aging and credit market frictions in contributing to Chinese economic growth between 1977 and 2014. We find that demographic changes together with endogenous human capital accumulation account for a large part of the rise in per capita output growth, especially after 2007, as well as some of the rise in savings. Credit pol-icy changes initially alleviate the capital misallocation between private and public firms and lead to significant increases in both savings and output growth. Later, they distort capital allocation. While contributing to further increase in savings, the distortion slows down economic growth. Among factors that we consider, increased life expectancy and financial development in the form of reduced inter-mediation cost are the most important in driving the dynamics of savings and growth.
    Keywords: Aging; Credit policy; Household saving; Output growth; China
    JEL: E21 J11 J13 L52
    Date: 2019–12–20
  5. By: Mikael Randrup Byrialsen; Hamid Raza
    Abstract: This paper emphasizes the need for understanding the interdependencies between the real and financial sides of the economy in macroeconomic models. While the real side of the economy is generally well explained in macroeconomic models, the financial side and its interaction with the real economy remains poorly understood. This paper makes an attempt to model the interdependencies between the real and financial sides of the economy in Denmark while adopting a stock-flow consistent approach. The model is estimated using Danish data for the period 1995-2016. The model is simulated to create a baseline scenario for the period 2017-30, against which the effects of two standard shocks (fiscal shocks and interest rate shocks) are analyzed. Overall, our model is able to replicate the stylized facts, as will be discussed. While the model structure is fairly simple due to different constraints, the use of the stock-flow approach makes it possible to explain several transmission mechanisms through which real economic behavior can affect the balance sheets, and at the same time capture the feedback effects from the balance sheets to the real economy. Finally, we discuss certain limitations of our model.
    Keywords: Empirical Stock-Flow Consistent Models; Denmark; Open Economy
    JEL: E17 E12 F41
  6. By: Mbiankeu Nguea, Stéphane
    Abstract: This study provides an empirical assessment of the relationship between economic globalization and economic growth. Furthermore, the study examined the effect of complementary policies on the growth effect of globalization. Based on CEMAC countries for the period from 1970 to 2015, analyses were performed using panel data regressions. In line with previous economic research, the findings indicate that the impact of economic globalization on economic growth in CEMAC is positive and significant. The results also show that the impact of economic globalization in CEMAC countries does not depend on the level of democracy and financial development.
    Keywords: Economic Growth, Economic Globalization, CEMAC
    JEL: F62
    Date: 2019–11–20
  7. By: Gondo, Rocío (Banco Central de Reserva del Perú); Pérez, Fernando (Banco Central de Reserva del Perú)
    Abstract: This work quantifies the effect of changes in global financial conditions on cross-border flows and domestic financial and macroeconomic variables for a group of countries in Latin America. Using the BIS database of international banking statistics, we consider heterogeneous effects of different types of international financing (credit from global banks to domestic banks and non-financial firms and bond issuance by non-financial firms), on the behavior of the domestic banking system and the transmission to the real economy through the link between bank credit, investment and output. Consistent with the implications from a DSGE model such as Aoki et al. (2018), our results show that an increase in foreign interest rates translate into lower external funding for banks and thus into lower credit growth and higher domestic interest rates. This effect is amplified through an exchange rate depreciation due to capital outflows. We find evidence of a larger drop in flows from global banks to domestic banks relative to those from global banks to non-financial firms. In terms of the real economy, we observe a reduction in GDP growth, although not significant, and an increase in inflation due to the pass through effect from the exchange rate to prices.
    Keywords: Panel Vector Autoregressions, Exogenous Block, Bayesian Estimation, Cross-Border flows.
    JEL: C23 E44 F21 F32
    Date: 2019–12
  8. By: Cantú, Carlos (Bank for International Settlements); Gondo, Rocio (Banco Central de Reserva del Perú); Martínez, Berenice (Bank for International Settlements)
    Abstract: Este trabajo analiza el costo-beneficio de usar requerimientos de encajes desde un objetivo de estabilidad financiera. Se estima los costos de un incremento de los requerimientos de encaje a través de su impacto en el crecimiento del crédito bancario y de la producción industrial usando un panel VAR. Luego, se estima los beneficios calculando la caída en la frecuencia e incidencia de episodios de estrés financiero en un modelo de alerta temprana. Se encuentra que los requerimientos de encaje son una herramienta efectiva para la estabilidad financiera. Las ganancias económicas de una menor probabilidad de crisis financiera más que compensan la reducción inicial en la actividad económica. Asimismo, se encuentra que los requerimientos de encajes son mayores en economías emergentes que en países avanzados. Finalmente, se muestra que una tasa de encaje uniforme o diferenciada por plazos tiene un efecto mayor, mientras que una tasa de encaje diferenciado por monedas podría estar respondiendo a otros objetivos tales como una reducción de la dolarización financiera.
    Keywords: reserve requirements, macroprudential policy, financial distress episodes, cost-benefit analysis
    JEL: E44 E58 F41 G01 G28
    Date: 2019–12
  9. By: Carrasco, Alex (Banco Central de Reserva del Perú); Florián, David (Banco Central de Reserva del Perú); Nivín, Rafael (Banco Central de Reserva del Perú)
    Abstract: In this document, we study the role of sterilized foreign exchange (SFX) interventions as an additional monetary policy instrument for emerging market economies in response to external shocks. We develop a model in order to analyze SFX interventions as a balance sheet policy induced by a financial friction in the form of an agency problem between banks and depositors. The severity of the bank's agency problem depends directly on a measure of currency mismatch at the bank level. Moreover, credit and deposit dollarization co-exists in equilibrium as endogenous variables. In this context, SFX interventions can lean against the response of the bank's lending capacity and ultimately the response of real variables by moderating the response of the exchange rate. Furthermore, we take the model to data by calibrating it to replicate some financial steady-state targets for the Peruvian banking system as well as matching the impulse responses of the macroeconomic model to the impulse responses implied by an SVAR model. Our results indicate that SFX interventions successfully reduce GDP and investment volatility by about 6% and 14%, respectively, when compared to a flexible exchange rate regime. Moreover, SFX interventions reduce the response of GDP to foreign interest rate and commodity price shocks by around 11 and 22 percent, respectively. Hence, this policy produces significant welfare gains when responding to external shocks: if the Central Bank does not intervene in the Forex market in the face of external shocks, there would be a welfare loss of 1.1%.
    Keywords: Sterilized Forex Interventions, External Shocks, Financial Cycle, Dollarization, Monetary Policy.
    Date: 2019–12
  10. By: Robert L. Czudaj
    Abstract: This paper examines the effectiveness of the negative interest rate policy conducted by several central banks to stabilize economic growth and inflation exectations through the signaling channel. In doing so, we assess survey-based expectations data for up to 44 economies from 2002 to 2017 and analyze the impact of the adoption of a negative interest rate policy on expectations made by professionals based on a difference-in-differences approach. Our main ï¬ ndings are as follows: First, we show that the introduction of negative policy rates signiï¬ cantly reduces expectations regarding 3-month money market interest rates and also 10-year government bond yields. Second, we also provide evidence for a signiï¬ cantly positive effect of this unconventional monetary policy tool on GDP growth and inflation expectations. This implies that the negative interest rate policy appears to be effective in boosting economic growth and overcoming a deflationary spiral. Consequently, the effect of negative nominal interest rates on real interest rate expectations is also negative.
    Keywords: Expectations, Inflation, Monetary policy, Negative interest rates, Survey data
    JEL: E31 E43 E52
    Date: 2019–12
  11. By: Tristan Le Cotty (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Elodie Maitre d'Hotel (UMR MOISA - Marchés, Organisations, Institutions et Stratégies d'Acteurs - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - INRA - Institut National de la Recherche Agronomique - Montpellier SupAgro - Centre international d'études supérieures en sciences agronomiques - CIHEAM-IAMM - Centre International de Hautes Etudes Agronomiques Méditerranéennes - Institut Agronomique Méditerranéen de Montpellier - CIHEAM - Centre International de Hautes Études Agronomiques Méditerranéennes - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier); Subervie Julie (CEE-M - Centre d'Economie de l'Environnement - Montpellier - FRE2010 - INRA - Institut National de la Recherche Agronomique - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier)
    Abstract: In many African countries, rural households typically sell their output immediately after harvest and then have to face the lean season in often dramatic conditions. This paper explores whether alleviating both credit and storage constraints through an inventory credit (or warrantage) program in Burkina Faso is associated with improvements in household food insecurity and dietary diversity. We partnered with a rural bank and a nation-wide organization of farmers to evaluate a warrantage system with seventeen villages in the western region of Burkina Faso. In randomly chosen treatment villages, the households were offered a loan in exchange for storing a portion of their harvest as a physical guarantee in one of the newly-built warehouses of the project. We show that, after three seasons, the warrantage program has extended users' self-subsistence period by an average of seventeen days, increased the average size of the farmby one and a half hectares (one additional hectare of cotton and one additional half hectare of maize) and increased dietary diversity significantly, with more fish, fruit and oil consumed weekly.
    Keywords: inventory credit,warrantage,savings,storage,intertemporal price fluctuations
    Date: 2019
  12. By: Marvin Suesse; Nikolaus Wolf
    Abstract: What determines the development of rural financial markets? Starting from a simple theoretical framework, we derive the factors shaping the market entry of rural microfinance institutions across time and space. We provide empirical evidence for these determinants using the expansion of credit cooperatives in the 236 eastern counties of Prussia between 1852 and 1913. This setting is attractive as it provides a free market benchmark scenario without public ownership, subsidization, or direct regulatory intervention. Furthermore, we exploit features of our historical set-up to identify causal effects. The results show that declining agricultural staple prices, as a feature of structural transformation, leads to the emergence of credit cooperatives. Similarly, declining bank lending rates contribute to their rise. Low asset sizes and land inequality inhibit the regional spread of cooperatives, while ethnic heterogeneity has ambiguous effects. We also offer empirical evidence suggesting that credit cooperatives accelerated rural transformation by diversifying farm outputs.
    Keywords: microfinance, credit cooperatives, rural transformation, land inequality, Prussia
    JEL: G21 N23 O16 Q15
    Date: 2019
  13. By: Jon Frost
    Abstract: FinTech is being adopted across markets worldwide - but not evenly. Why not? This paper reviews the evidence. In some economies, especially in the developing world, adoption is being driven by an unmet demand for financial services. FinTech promises to deliver greater financial inclusion. In other economies, adoption can be related to the high cost of finance, a supportive regulatory environment, and other macroeconomic factors. Finally, demographics play an important role, as younger cohorts are more likely to trust and adopt FinTech services. Where FinTech helps to make the financial system more inclusive and efficient, this could benefit economic growth. Yet the market failures traditionally present in finance remain relevant, and may arise in new guises.
    Keywords: FinTech; digital innovation; financial inclusion; financial regulation
    JEL: E51 G23 O33
    Date: 2020–01

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