nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2020‒02‒10
twelve papers chosen by
Georg Man

  1. Debt, Innovation, and Growth By Thomas Geelen; Jakub Hajda; Erwan Morellec
  2. Productivity and finance: the intangible assets channel - a firm level analysis By Lilas Demmou; Guido Franco; Irina Stefanescu
  3. Bank stocks inform higher growth – A System GMM analysis of ten emerging markets in Asia By Mittal, Amit; Garg, Ajay Kumar
  4. State-owned enterprises and entrusted lending: A DSGE analysis for growth and business cycles in China By Shuonan Zhang
  5. An Anatomy of Credit Booms in Pakistan: Evidence from Macro Aggregates and Firm Level Data By Muhammad Ejaz; Muhammad Nadim Hanif
  6. Vulnerable Growth By Tobias Adrian; Nina Boyarchenko; Domenico Giannone
  7. The Long-Run Effects of Monetary Policy By Òscar Jordà; Sanjay R. Singh; Alan M. Taylor
  8. Do Bank Shocks Affect Aggregate Investment? By David E. Weinstein; Mary Amiti
  9. Banking crisis prediction with differenced relative credit By Kauko, Karlo; Tölö, Eero
  10. Structural and cyclical determinants of access to finance: Evidence from Egypt By Betz, Frank; Ravasan, Farshad R.; Weiss, Christoph T.
  12. Legal History, Institutions and Banking System Development in Africa By Mutarindwa, Samuel; Schäfer, Dorothea; Stephan, Andreas

  1. By: Thomas Geelen (Copenhagen Business School - Department of Finance; Danish Finance Institute); Jakub Hajda (University of Lausanne; Swiss Finance Institute); Erwan Morellec (Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute)
    Abstract: Recent empirical studies show that innovative firms heavily rely on debt financing. This paper investigates the relation between debt financing, innovation, and growth in a Schumpeterian growth model in which firms' dynamic R&D and financing choices are jointly and endogenously determined. The paper demonstrates that while debt hampers innovation by incumbents due to debt overhang, it also stimulates entry, thereby fostering innovation and growth at the aggregate level. The paper also shows that debt financing has large effects on firm entry, firm turnover, and industry structure and evolution. Lastly, it predicts substantial intra-industry variation in leverage and innovation, in line with the empirical evidence..
    Keywords: debt, innovation, industry dynamics, growth
    JEL: G32 O30
    Date: 2019–07
  2. By: Lilas Demmou; Guido Franco; Irina Stefanescu
    Abstract: Using a cross-country firm level panel dataset from 1995 to 2015, this paper revisits the finance–productivity nexus by looking at the role of intangible assets. It argues that due to their specific characteristics, such as valuation uncertainty and lower pledgeability, financing the purchase of intangible assets is more difficult than that of tangible assets. As a result, financial frictions are expected to be more binding for productivity growth in sectors where intangibles have become a pivotal component in firms production function. The analysis relies on a panel fixed effects econometric approach, several indices to capture financial frictions at the firm level and a new measure of intangible intensity at the industry level. We provide evidence that financial frictions act as a drag on productivity growth and especially so with respect to firms operating in intangible intensive sectors. These findings, which are robust to alternative specifications, shed light on the role of financial factors in explaining the productivity slowdown in OECD countries and provide support for using intangible intensity as a new dimension to proxy the relative exposure of industries to financing frictions.
    Keywords: financial constraints, intangible assets, productivity
    JEL: D22 D24 G31 O33
    Date: 2020–02–03
  3. By: Mittal, Amit; Garg, Ajay Kumar
    Abstract: The paper aims to recover the critical role of banks in defining the relationship between Financial Development and growth. We hypothesize that Banks can positively motivate templatized GDP growth. A System GMM estimation of GDP growth in a sample of high growth emerging markets from Asia investigates if bank stocks contain information beyond the monetary and banking aggregates.
    Keywords: Banks, Economic Growth, Asia, Emerging Markets, GMM system
    JEL: C23 F02 F63 F65 G01 G14 G21 G28 G3 G30
    Date: 2018–12–31
  4. By: Shuonan Zhang (Portsmouth Business School)
    Abstract: In this paper, we build and estimate a DSGE model to study how state-owned enterprises (SOEs) and entrusted lending affect growth and business cycles in China. Our model is featured SOEs being bank-favoured firms as well as policy tools, and more productive private firms (POEs) who can borrow from SOEs through entrusted lending. Our findings suggest SOEs dampen output volatility at the cost of TFP volatility. As policy tools, SOEs cause the expense larger than the dampening effect while a reverse case is found for SOEs being bank-favoured firms. In contrast, entrusted lending could dampen variations of both output and TFP by reallocating credits between SOEs and POEs, hence mitigating the cost of SOEs. Focusing on the recent growth slowdown in China, we further show that entrusted lending was conducive to both economic growth and TFP growth by mitigating capital misallocation.
    Keywords: State-owned Enterprises, Shadow Lending, Resource Allocation, Financial Friction, Business Cycles
    JEL: C32 E32 E44
    Date: 2020–01–17
  5. By: Muhammad Ejaz (State Bank of Pakistan); Muhammad Nadim Hanif (State Bank of Pakistan)
    Abstract: We identify private credit booms in Pakistan, using fully modified HP filter, and analyze the behavior of selected macroeconomic aggregates around these booms based on annual data over the period 1960-2018. We observe that credit booms are associated with economic expansions, increasing asset prices, appreciating REER and widening of current account deficit in Pakistan. Micro data analysis shows an association between credit booms and measures of corporate leverage, valuations and profitability. Our analysis of bank level data shows similar cyclical patterns in lending activity and profitability in banking system. Lastly, we find that credit booms in Pakistan are associated with sudden stops and currency crises but not with banking crisis. These results are in line with existing evidence on credit cycles’ dynamics in emerging markets.
    Keywords: Credit Booms, Business Cycles, Macroprudential Supervision
    JEL: E32 E51 G28
    Date: 2018–12
  6. By: Tobias Adrian; Nina Boyarchenko; Domenico Giannone (Solvay Brussels School of Economics and Management; Federal Reserve Bank of New York; La Trobe University; Université Libre de Bruxelles; Libera Universität Internazionale degli Studi Sociali; European Central Bank; University of Aston in Birmingham; European Centre for Advanced Research in Economics and Statistics; Centre for Economic Policy Research (CEPR))
    Abstract: Traditional GDP forecasts potentially present an overly optimistic (or pessimistic) view of the state of the economy: by focusing on the point estimate for the conditional mean of growth, such forecasts ignore risks around the central forecast. Yet, policymakers around the world increasingly focus on risks to the central forecast in policy debates. For example, in the United States the Federal Open Market Committee (FOMC) commonly discusses the balance of risks in the economy, with the relative prominence of this discussion fluctuating with the state of the economy. In a recent paper, we propose a method for constructing the full conditional distribution of GDP projected growth as a function of current economic and financial conditions. This blog post reviews some of the findings from that paper and the implications for macroeconomic theory and for policymakers.
    Keywords: downside risk; entropy; quantile regressions
    JEL: C1 E1 E3
  7. By: Òscar Jordà; Sanjay R. Singh; Alan M. Taylor
    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.
    JEL: E01 E30 E32 E44 E47 E51 F33 F42 F44
    Date: 2020–01
  8. By: David E. Weinstein (Federal Reserve Bank of New York; Wake Forest University; Columbia University; Department of Economics; School of Arts and Sciences; Harvard University; National Bureau of Economic Research; University of Michigan); Mary Amiti (Board of Governors of the Federal Reserve System (U.S.); Schweizerische Nationalbank; Federal Reserve Bank of New York; Universität St. Gallen; Centre for Economic Policy Research (CEPR); Internationaler Währungsfonds; Research and Statistics Group; Chinese University of Hong Kong; University of Melbourne; Universitätt Bern; National Bureau of Economic Research)
    Abstract: Traditionally, we have thought of the fates of specific banks as perhaps symptomatic of problems in the financial market but not as causal determinants of fluctuations in aggregate investment and other real economic activity. However, the high level of bank concentration in much of the OECD (Organisation for Economic Co-operation and Development) means that large amounts of lending are channeled through a small number of institutions that are no longer small even in comparison to the largest economies. Consequently, problems in a few large institutions could potentially have a large impact on aggregate lending and on real output. Our study of Japanese lending markets is the first to provide a causal link between bank shocks and firm-level investment rates. The results indicate that 40 percent of aggregate lending and investment volatility over the past two decades can be tied to the idiosyncratic successes and failures of financial institutions.
    Keywords: credit constraints; granular shocks; financual markets
    JEL: E2 G2
  9. By: Kauko, Karlo; Tölö, Eero
    Abstract: Indicators based on the ratio of credit to GDP have been found to be highly useful predictors of banking crises. We study the difference in this ratio as an early warning indicator. We test a large number of different versions of the differenced credit-to-GDP ratio with data on Euro area members. The optimal time interval of the difference is about two years. Using the moving average of GDP instead of the latest annual data has little impact on forecasting performance. The indicator is a particularly promising choice at relatively short forecasting horizons, such as two or three years.
    Keywords: banking crises,early warning indicators,differenced relative credit,credit intensity,countercyclical capital buffer
    JEL: G01 G17 G28
    Date: 2019
  10. By: Betz, Frank; Ravasan, Farshad R.; Weiss, Christoph T.
    Abstract: Using panel data on Egyptian firms to explore cyclical and structural determinants of access to finance, we find that firms with more educated and more experienced managers are more likely to open a checking account, often a prerequisite for obtaining credit. Firms that started operating in the informal sector before registering are less likely to engage with the banking system. Exploiting data on the location of firms and bank branches, we also show that firms located in areas with a greater presence of banks that invest more in government debt are more likely to be credit constrained due to crowding out of the private sector.
    Keywords: financial constraints,crowding out,managerial skills
    JEL: G21 O15 O17
    Date: 2019
  11. By: Imène Berguiga (ERUDITE research team, IHEC, University of Sousse, Tunisia); Philippe Adair (ERUDITE research team, University Paris Est Créteil, France)
    Abstract: A pooled sample of 3,075 Micro, Small, and Medium-sized Enterprises (MSMEs) is designed as for Egypt, Morocco and Tunisia from the World Bank Enterprises Survey (WBES) as of 2013. The adjusted sample complies with international standards, although it does not remove all the biases encapsulated within the WBES. A subsample of 709 MSMEs applied for a loan on the demand side, including those that were granted a loan on the supply side and those that were rejected by financial institutions. The absence of Financial inclusion and lack of Collateral are the main reasons for this imbalance. A binary logit model including interaction variables addresses both the demand and the supply side. Salient findings on the demand side are that the characteristics of MSMEs -Size, Age, Registration and Financial inclusion influence loan demand, whereas the characteristics of managers and the Interest rate have no impact. Conversely, the characteristics of MSMEs play no role upon loan supply, whereas Financial inclusion and Collateral exert a major impact on the supply side. There is a mismatch as for loan supply from microfinance according to the microfinance industry vs. the WBES data source.
    Date: 2019–09–20
  12. By: Mutarindwa, Samuel; Schäfer, Dorothea; Stephan, Andreas
    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 origins,colonial history,financial institutions,banking systems,Hausman-Taylor estimation
    JEL: G21 G38 G39 K40
    Date: 2020

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