nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2020‒02‒03
thirteen papers chosen by
Georg Man

  1. Nexus of Financial Development, Innovation for Green Growth in ASEAN Countries By Jayasooriya, Sujith
  2. 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
  3. Testimony before the U.S. Senate Banking Committee: ‘Fostering Economic Growth: Midsized, Regional and Large Institution Perspective’ By Omarova, Saule T.; Library, Cornell
  4. On the Simultaneous Openness Hypothesis: FDI, Trade and TFP Dynamics in Sub-Saharan Africa By Simplice A. Asongu; Joseph Nnanna; Paul N. Acha-Anyi
  5. Resource–Economic Growth Nexus, Role of Governance, Financial Development, Globalisation and War: Dynamic Approach By Niknamian, Sorush
  6. Monetary Policy and Reserve Requirements in a Small Open Economy By Carlos Alberto Takashi Haraguchi; Jose Angelo Divino
  7. Microfinance and Human Development in Kerala By Kuriakose, Francis; Joseph, Janssen
  8. Inequality and gender economic inclusion: the moderating role of financial access in Sub-Saharan Africa By Simplice A. Asongu; Joseph Nnanna; Paul N. Acha-Anyi
  9. Credit growth, the yield curve and financial crisis prediction: evidence from a machine learning approach By Bluwstein, Kristina; Buckmann, Marcus; Joseph, Andreas; Kang, Miao; Kapadia, Sujit; Simsek, Özgür
  10. Firm or bank weakness? Access to finance since the European sovereign debt crisis By Corbisiero, Giuseppe; Faccia, Donata
  11. The big-city bias in access to finance: evidence from firm perceptions in almost 100 countries By Lee, Neil; Luca, Davide
  13. 'Money markets and trade’ defining provincial financial agents in England and Japan By Ishizu, Mina

  1. By: Jayasooriya, Sujith
    Abstract: Albeit economic growth of global economies is increasing, nexus of green economic growth, innovation, and financial development needs to be thoroughly understood to make prudent economic policies for sustainability. The research question intends to identify the green growth promoting policies and impact of innovation and financial systems on sustainable economic growth. Rationale for the research is to provide pragmatic evidences to build up economic systems that lead green growth under the emission control and abatement. Empirical approach is used to (i) estimate augmented-Green-Solow model for ASEAN countries (ii) EKC is also estimated with Generalized Method of Moments (GMM) estimation to reveal the impact of financial development, innovation, and trade openness using World Bank data from 1980 to 2014. The empirical results indicate, across estimation methods and specifications, a strong correlation of the innovation, financial development and CO2 emissions per capita for green growth. Further, increase of innovation and financial structure leads the economies to be sustainable with increase of abatement cost with technological adaptation, and human capital. The implications of the study are to deliberate on the determinants of green growth to promote sustainable development in the economies. Finally, the paper guides policymakers to reform financial and innovation systems to achieve advancement in green technologies adapting sustainable economic policies for green growth.
    Keywords: Finance, Innovation, Green Solow Growth, Generalized Methods of Moments estimation.
    JEL: E61 F43 F62 F63
    Date: 2020–01–18
  2. By: Mariarosaria Comunale; Francesco Paolo Mongelli
    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, and synchronization
    JEL: C23 E40 F33 F43
    Date: 2020–01
  3. By: Omarova, Saule T.; Library, Cornell
    Abstract: This written statement accompanied Professor Omarova’s oral testimony given on June 15, 2017, in a hearing held by the U.S. Senate Banking Committee on the necessity of relaxing certain aspects of post-crisis financial regulation applicable to midsized, regional and large banks, as a means of fostering America’s economic growth. In her written statement, Professor Omarova systematically lays out the reasons why massive deregulation urged by the banking industry will hinder, rather than foster, sustainable long-term growth in the real (i.e., non-financial) sector of the American economy.
    Date: 2017–12–21
  4. 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
  5. By: Niknamian, Sorush
    Abstract: This study reassesses the resource–economic growth nexus by incorporating several channels. Advanced panel time series techniques are used to analyse panel time series data from 1980 to 2015 in 31 oil-rich countries. Results show that oil rent augments economic growth; thus, oil rent is conducive rather than impediment for economic growth. The role of governance in economic growth is significant in the selected countries. Oil rent exerts a positive significant impact on economic growth in countries with good governance compare to countries with poor governance. Financial development is an unimportant channel in the resource–growth nexus because FD is often unable to mobilise oil rent from the government to the private sector in oil-rich countries. Globalisation is advantageous for countries and promote economic growth. Moreover, war exerts a significant negative effect on growth in the long term.
    Date: 2019–12–31
  6. By: Carlos Alberto Takashi Haraguchi; Jose Angelo Divino
    Abstract: This paper investigates how a combination of monetary and macroprudential policies might affect the dynamics of a small open economy with financial frictions under alternative exogenous shocks. The proposed DSGE model incorporates macroprudential policy rules to the financial sector of an open economy. Exogenous shocks in productivity, domestic and foreign monetary policies are used to identify the roles of the macroprudential and monetary policies in stabilizing the economy. A welfare analysis compares the performance of alternative rules for reserve requirements. The model is calibrated for the Brazilian economy and results indicate the exchange rate plays a central role in the transmission of foreign shocks, but not of domestic shocks. Considering the volatility of the variables and convergence to steady state, the interest rate rule should target domestic inflation and not respond directly to the exchange rate. The reserve requirement rule, in its turn, should react countercyclically to the credit-gap and not have a fixed component. There is complementarity between monetary and macroprudential policies to stabilize the small open economy.
  7. By: Kuriakose, Francis; Joseph, Janssen
    Abstract: This paper examines how microfinance institutions impact human development indicators using the case of Kerala in southern India. The study uses an institutional approach to understand microfinance institutions with the help of three variables - core activities, total loan portfolio and approach to microfinance. The impact of microfinance institutions on four human development variables namely education, health, income and participation are analyzed. The main conclusion of the study is that microfinance institutions that follow an integrated approach impact human development more than those that follow a minimalist approach. Furthermore, this impact of microfinance institution is due to production functions that generate income and protective function that defends against vulnerability. Therefore, an integrated approach to microfinance has income generating and risk mitigating effects that translate into better human development indicators.
    Keywords: Microfinance, Human development, Financial inclusion, Social welfare, Kerala
    JEL: G2 G21 I3 I31 I38
    Date: 2020–03–14
  8. 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 how financial access can be used to modulate the effect of income inequality on gender economic inclusion. The focus is on 42 countries in sub-Saharan Africa (SSA) for the period 2004-2014 and the empirical evidence is based on Generalised Method of Moments (GMM) and Fixed Effects (FE) regressions. Significant results are not apparent in the FE regressions. The following main findings are established from the GMM estimations. There is a negative net effect from the role of financial access in modulating the effect of the Palma ratio on female labour force participation while there is a positive net effect from the relevance of financial access in moderating the effect of the Gini coefficient on female unemployment. There are also net negative effects from the role of financial access in modulating the Gini coefficient and the Palma ratio for female employment. The unexpected findings are elucidated and implications are discussed in the light of challenges to Sustainable Development Goals in the sub-region. Inter alia: financial access is a necessary but not a sufficient moderator of income inequality for the enhancement of women’s participation in the formal economic sector.
    Keywords: Africa; Finance; Gender; Inclusive development
    JEL: G20 I10 I32 O40 O55
    Date: 2019–01
  9. By: Bluwstein, Kristina (Bank of England); Buckmann, Marcus (Bank of England); Joseph, Andreas (Bank of England and King’s College London); Kang, Miao (Bank of England); Kapadia, Sujit (European Central Bank); Simsek, Özgür (University of Bath)
    Abstract: We develop early warning models for financial crisis prediction using machine learning techniques on macrofinancial data for 17 countries over 1870–2016. Machine learning models mostly outperform logistic regression in out-of-sample predictions and forecasting. We identify economic drivers of our machine learning models using a novel framework based on Shapley values, uncovering non-linear relationships between the predictors and crisis risk. Throughout, the most important predictors are credit growth and the slope of the yield curve, both domestically and globally. A flat or inverted yield curve is of most concern when nominal interest rates are low and credit growth is high.
    Keywords: Machine learning; financial crisis; financial stability; credit growth; yield curve; Shapley values; out-of-sample prediction
    JEL: C40 C53 E44 F30 G01
    Date: 2020–01–03
  10. By: Corbisiero, Giuseppe; Faccia, Donata
    Abstract: This paper uses a unique dataset where credit rejections experienced by euro area firms are matched with firm and bank characteristics. This allows us to study simultaneously the role that bank and firm weakness had in the credit reduction observed in the euro area during the sovereign debt crisis, and in credit developments characterising the post-crisis recovery. Compared with the existing literature matching borrowers’ and lenders’ characteristics, our dataset provides a better representation of euro area firms of small and medium size. Our findings suggest that, while firm balance sheet factors have been strong determinants of credit rejections, in the crisis period bank weakness made it harder to obtain external finance for firms located in stressed countries of the euro area. JEL Classification: E44, F36, G01, G21
    Keywords: bank lending, credit crunch, credit supply, European sovereign debt crisis
    Date: 2020–01
  11. By: Lee, Neil; Luca, Davide
    Abstract: There is mounting evidence in the developed world to suggest that there is geographical variation in access to finance. At the same time, there is a growing interest in the advantages of major cities in emerging economies in providing better access to services. Yet there is little evidence on spatial variation in access to finance in the developing world. In this article, we address this gap. We propose that one important function of big cities is to provide better credit markets, but that-as countries develop-this 'big city bias' is likely to decline. We test these hypotheses using data on over 80,000 firms in 97 countries and provide new evidence that firms in large cities-with more than 1 million inhabitants-are less likely to perceive access to capital as a constraint. However, this big-city bias in access to finance declines as countries develop.
    Keywords: access to finance; urbanisation; credit markets; cities; firm financing
    JEL: G10 O16 R51
    Date: 2019–01–01
  12. By: Muhammad Meki (Post-doctoral research fellow in development economics at Pembroke College, University of Oxford)
    Abstract: Access to finance is often listed as one of the most important constraints on the expansion of small firms in low-income countries. However, several recent studies reveal that most microcredit-funded businesses rarely grow beyond subsistence-level entrepreneurship. Other evidence shows that cash and capital grants have delivered high returns to some microenterprises, and that small changes to contract structure can have a long-term effect on investment and profits. In this paper, I investigate the potential of ‘microequity’ contracts, which can be viewed as lying at some point on a spectrum between credit and grants, and provide a more flexible form of capital with performance-contingent repayments and a greater sharing of risk and reward. I present results from work with two of the largest microfinance institutions in Pakistan to investigate the effects of microequity contracts on microenterprises. In the first part of the paper, I describe an artefactual field experiment, designed using a simple model of investment choice under different financial contracts. This is tested with microenterprise owners who are part of a related field experiment that provides them with shared-ownership financing to expand their business. Results reveal that equity-financed microenterprise owners chose investment options with a greater expected profit than those under debt financing, with heterogeneity analysis suggesting a larger effect for the most riskaverse individuals, who also exhibit a stronger preference for equity contracts when offered a choice. In the final part of the paper, I describe qualitative insights for why most microfinance institutions do not implement microequity products, using a field survey and manager interviews, which reveal the practical implementation challenges due to costly state verification, adverse selection into profit-sharing contracts and moral hazard caused by inappropriately-tailored sharing ratios
    Date: 2019–09–20
  13. By: Ishizu, Mina
    Abstract: The paper aims to offer an introduction to provincial financial agents as the key components in provincial-metropolitan integration of money markets. It establishes that PFAs engaged in de facto banking and played an important role in local money markets. Both in England and in Tokugawa Japan, they were responsible for making decisions whether or not to establish a connection with financial agents in the commercial centres. The paper also considers some of the financial services facilitated by the existence of financial connections between metropolitan and provincial financial agents. In both countries, remittances and (particularly in England) investment were important financial activities facilitated by such connections, while bill-rediscounting appears to have been relevant only in the English case. On the other hand, in Japan domain-related business activity forged financial links with the commercial centres, links in which provincial financial agents played a major role. Also the expansion of inter-domainal private trade may have further stimulated the inter-regional financial linkages in the late Tokugawa period.
    Keywords: financial agents; provincial towns; inter-regional financial linkages;; early industrialisation
    JEL: N20 N23 N25
    Date: 2020–01

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