nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2020‒01‒27
eleven papers chosen by
Georg Man

  1. Secular Stagnation, Financial Frictions, and Land Prices By Zhifeng Cai
  2. Human Capital and Financial Development: Firm-Level Interactions and Macroeconomic Implications By Allub, Lian; Gomes, Pedro; Kuehn, Zoë
  3. Liquidity Choice and Misallocation of Credit By Ehsan Ebrahimy
  4. Persistent Misallocation and the Productivity Slowdown in EU By Shalini Mitra
  5. The Long-Run Effects of Monetary Policy By Òscar Jordà; Sanjay R. Singh; Alan M. Taylor
  6. Macroprudential Policy in Asian Economies By Kim, Soyoung
  7. The Financial Channels of Labor Rigidities: Evidence from Portugal By Ettore Panetti; Edoardo M. Acabbi; Alessandro Sforza
  8. How Effective is Microfinance on Poverty Reduction? Empirical Evidence on ACSI - Ethiopia By Bogale Berhanu Benti
  9. Legal History, Institutions and Banking System Development in Africa By Samuel Mutarindwa; Dorothea Schäfer; Andreas Stepan
  10. On the Simultaneous Openness Hypothesis: FDI, Trade and TFP Dynamics in Sub-Saharan Africa By Simplice A. Asongu; Joseph Nnanna; Paul N. Acha-Anyi
  11. Financial Development and Income Inequality in Indonesia: A Sub-national Level Analysis By Aginta, Harry; Soraya, Debby A; Santoso, Wahyu B

  1. By: Zhifeng Cai (Rutgers University)
    Abstract: This paper explores a model in which large transitory financial shocks can generate persistent slumps in output, land prices, and interest rate. The propagation originates from high sensitivity of land prices with respect to fundamental, which is achieved by a land consumption channel that exploits the high complementarity of land services and consumption in households’ preference. When this complementarity is disciplined by micro-level evidence, the unique recursive equilibrium features an S-shaped law of motion for capital with two locally stable steady states. Small shocks move the economy around the unconstrained steady state whereas large transitory financial shocks push the economy into the constrained steady state at which low interest rate makes firm unwilling to save out of the financial friction, leading to a secular stagnation.
    Keywords: Secular Stagnation, Steady-State Multiplicity, Financial Frictions, House Prices
    JEL: E0
    Date: 2020–01–23
  2. By: Allub, Lian; Gomes, Pedro; Kuehn, Zoë
    Abstract: Capital-skill complementarity in production implies non-trivial interactions between availability of human capital and financial constraints. Firms that are constrained in their access to finance hire a lower proportion of skilled workers than unconstrained firms. On the other hand, higher wages of skilled workers reduce firms’ desired capital intensity and thus loosen their effective financial constraints. We build a dynamic occupational choice model to quantify how a lack of human capital and financial frictions, as well as the joint effect of both restrictions interact to explain cross-country differences in aggregate output per capita, productivity, average firm size and college premia. We calibrate our model to US data, and we vary financial frictions and educational attainment as observed across countries. We find that the joint effect of both restrictions is up to 50 percent larger compared to the sum of the individual effects. In countries with a negligible share of tertiary educated workers, financial development has small effects on aggregate output.
    Keywords: Banca de desarrollo, Educación, Evaluación de impacto, Finanzas,
    Date: 2019
  3. By: Ehsan Ebrahimy
    Abstract: This paper studies a novel type of misallocation of credit between investments of varying liquidity. One type of investment is more liquid, i.e., its return is more pledgeable, and the other is more productive. Low liquidities of both investment types imply that the allocation of credit is constrained inefficient and that there is overinvestment in the liquid type. Constrained inefficient equilibria feature non-positive, i.e., one less than or equal the economy’s growth rate, and yet too high interest rate, too much investment and too little consumption. Financial development can reduce long-term welfare and output in a constrained inefficient equilibrium if it raises the liquidity of the liquid type. I show a maximum liquid asset ratio or a simple debt tax can achieve constrained efficiency. Introducing government bonds can make Pareto improvement whenever it does not raise the interest rate.
    Date: 2019–12–20
  4. By: Shalini Mitra
    Abstract: Why did the productivity slowdown in EU happen at a time of increasing financial market deregulation and generally easing credit conditions? The fact that productivity growth was declining at a time of rising credit is in contrast to the standard prediction of macroeconomic models which find a positive relation between credit and productivity growth. I argue in this paper that if the conventional channel though which such a productivity increase occurs - the reallocation of capital from less to more productive businesses - is impaired, then a decline in credit constraints has the opposite effect in the standard model and aggregate productivity declines. There is in fact ample evidence in the literature to support the impairment of capital reallocation in the EU during this period.
    Keywords: capital misallocation, financial constraints, heterogenous firms, productivity slowdown, aggregate productivity, EU
    JEL: D24 D5 D61
    Date: 2018–04
  5. By: Òscar Jordà; Sanjay R. Singh; Alan M. Taylor (University of California Davis; National Bureau of Economic Research; University of Virginia; Harvard University; University of California Berkeley; Morgan Stanley; Centre for Economic Policy Research (CEPR); ebrary Inc; Northwestern University)
    Abstract: Is the effect of monetary policy on the productive capacity of the economy long lived? Yes, in fact we find such impacts are significant and last for over a decade based on: (1) merged data from two new international historical databases; (2) identification of exogenous monetary policy using the macroeconomic trilemma; and (3) improved econometric methods. Notably, the capital stock and total factor productivity (TFP) exhibit hysteresis, but labor does not. Money is non-neutral for a much longer period of time than is customarily assumed. A New Keynesian model with endogenous TFP growth can reconcile all these empirical observations.
    Keywords: monetary policy; money neutrality; hysteresis; trilemma; instrumental variables; local projections
    JEL: E01 E30 E32 E44 E47 E51 F33 F42 F44
    Date: 2020–01–16
  6. By: Kim, Soyoung (Seoul National University)
    Abstract: This paper analyzes the conduct and effects of macroprudential policy in 11 Asian economies. Of these, India, the People’s Republic of China, and the Republic of Korea frequently used loan-to-value ratios and required reserve ratios even before the global financial crisis. India and the People’s Republic of China are the most frequent users of macroprudential policy tools. Since 2000, tightening actions have been more frequent than loosening in the 11 economies. Most took tightening actions more frequently after the global financial crisis than before it. In most of these economies, macroprudential policy tends to be tightened when credit expands. The main empirical results from the analysis, which uses panel vector autoregression models, are that contractionary macroprudential policy has significant negative effects on credit and output; and that these effects are qualitatively similar to those of monetary policy. This suggests that policy authorities may experience potential policy conflicts when credit conditions are excessive and the economy is in recession.
    Keywords: credit; macroprudential policy; monetary policy; output; vector autoregression
    JEL: E58 E60 G28
    Date: 2019–04–16
  7. By: Ettore Panetti; Edoardo M. Acabbi; Alessandro Sforza
    Abstract: How do credit shocks affect labor market reallocation, firms’ exit and other real outcomes? How do labor-market rigidities impact their propagation? To answer these questions, we match administrative data on worker, firms, banks and credit relationships in Portugal, and conduct an event study of the interbank market freeze at the end of 2008. Our results highlight that the credit shock had significant effects on employment dynamics and firms’ survival. These findings are entirely driven by the interaction of the credit shock with labor market frictions, determined by rigidities in labor costs and exposure to working-capital financing, which we label “labor-as-leverage” and “labor-as-investment” financial channels. The credit shock explains about 29 percent of the employment loss among large Portuguese firms between 2008 and 2013, and contributes to productivity losses due to increased labor misallocation.
    JEL: D24 E24 G21
    Date: 2019
  8. By: Bogale Berhanu Benti (University of Antwerp, Belgium)
    Abstract: As per the World Bank report (2015), in 2000 Ethiopia had one of the highest poverty rates in the world, with 56 percent of the population living on less than (U.S.) $1.25 purchasing power parity (PPP) a day. According to International Fund Agricultural Development (2008), “Under the IFAD, initiated Rural Financial Intermediation Programme (RUFIP), impressive results have been achieved over the past five years in expanding outreach in the delivery of financial services by operationally sustainable microfinance institutions (MFIs) and RUSACCOs, with the clientele growing from about 700,000 to nearly 2 million poor rural households. The programme has demonstrated the potential of rural finance in enabling a large number of poor people to overcome poverty. Women account for about 30 per cent and 50 per cent of beneficiaries of MFIs and RUSACCOs respectively. However, much remains to be done, particularly in improving management information systems and expanding outreach to access-deficit and pastoral areas†Republic (2008). Based on the strategy of poverty eradication, microfinance institutions are playing significant role on the reduction of poverty and increase source of income by providing financial services, such as saving and credit to rural poor household society particularly poor women household. Therefore Amhara credit and saving institution (ACSI) has a significant effect on poverty alleviation and the institution stands for poor rural household and enable them to invest small sum of money in productive activity.
    Keywords: microfinance, poverty reduction strategy, sustainability
    Date: 2019–11
  9. By: Samuel Mutarindwa; Dorothea Schäfer; Andreas Stepan
    Abstract: This paper links banking systems development to the colonial and legal history of African countries. Specifically, we investigate the impact of differing legal traditions on the development of existing investor and creditor protection, and on African banking systems. Based on a sample of 40 African countries from 2000 to 2016, our empirical findings show a significant dependence of current financial institutions on the legal origin and the colonization type. Findings also reveal that current legal financial institutions are not the major determinants of banking system development, whereas institutional and regulatory quality significantly matter for banking system development in both common and civil law countries. Strong creditor rights reduce the cost of banking in African countries
    Keywords: Legal origin, colonial history, financial institutions, banking system, Hausman-Taylor estimation
    JEL: G21 G38 G39 K40
    Date: 2020
  10. By: Simplice A. Asongu (Yaoundé/Cameroon); Joseph Nnanna (The Development Bank of Nigeria, Abuja, Nigeria); Paul N. Acha-Anyi (Walter Sisulu University, South Africa)
    Abstract: This study assesses the simultaneous openness hypothesis that trade modulates foreign direct investment (FDI) to induce positive net effects on total factor productivity (TFP) dynamics. Twenty-five countries in Sub-Saharan Africa and data for the period 1980 to 2014 are used. The empirical evidence is based on the Generalised Method of Moments. First, trade imports modulate FDI to overwhelmingly induce positive net effects on TFP, real TFP growth, welfare TFP and real welfare TFP. Second, with exceptions on TFP and welfare TFP where net effects are both positive and negative, trade exports modulate FDI to overwhelmingly induce positive net effects on real TFP growth and welfare real TFP. In summary, the tested hypothesis is valid for the most part. Policy implications are discussed.
    Keywords: Productivity; Foreign Investment; Sub-Saharan Africa
    JEL: E23 F21 F30 L96 O55
    Date: 2020–01
  11. By: Aginta, Harry; Soraya, Debby A; Santoso, Wahyu B
    Abstract: It is widely believed that financial inclusion aids inclusive growth and reducing inequality. This study constructs financial inclusion indicator and analyzes the link of financial inclusion and income inequality for 33 provinces in Indonesia. In extension to analyses at national level, estimation has been done by dividing provinces into three categories which are agriculture, manufacture, and mining economies. By using Fixed Effect Panel Model, we find financial inclusion appears to have insignificant effect to inequality at national level. While at sub-national level, adding other variables such as GRDP, years of schooling, and trade openness, we find financial inclusion appears to have negative and significant impact on income inequality in manufacture and mining-based provinces, not in agriculture-based. The results suggest that financial inclusion helps to lower income inequality when economic condition encourage people to utilize financial access for productive purposes. More effective financial inclusion programs in rural area are highly demanded.
    Keywords: Financial development, income inequality, Fixed Effect Panel Model
    JEL: E5 G21 G28 R11 R12
    Date: 2018–12

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