nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2020‒02‒17
eleven papers chosen by
Georg Man

  1. Insurance Policy Thresholds for Economic Growth in Africa By Simplice A. Asongu; Nicholas M. Odhiambo
  2. Coexistence of Physical and Crypto Assets in a Stochastic Endogenous Growth Model By Alexis Derviz
  3. Rural financial intermediation and poverty reduction in Ghana: A micro-level analysis By Danquah Michael; Iddrisu Abdul; Ohemeng Williams; Barimah Alfred
  4. Enterprising women in Southern Africa: When does land ownership matter? By Brixiová, Zuzana; Kangoye, Thierry; Tregenna, Fiona
  5. Foreign Direct Investment, Information Technology and Economic Growth Dynamics in Sub-Saharan Africa By Simplice A. Asongu; Nicholas M. Odhiambo
  6. The Aggregate Consequences of Default Risk: Evidence from Firm-level Data By Timothy J. Besley; Isabelle A. Roland; John Van Reenen
  7. Forecasts of the Lost Recovery By Abhi Gupta; Pearl Li; Marco Del Negro; Michael Cai; Marc Giannoni
  8. Debt and Financial Crises By Wee Chian Koh; M. Ayhan Kose; Peter S. Nagle; Franziska L. Ohnsorge; Naotaka Sugawara
  9. Stages of Development of Payment Systems : Leapfrogging across Countries and MENA's Place in the World By Gevaudan,Clement; Lederman,Daniel
  10. The economic forces driving fintech adoption across countries By Jon Frost
  11. Finance and Inequality By Martin Cihak; Ratna Sahay

  1. By: Simplice A. Asongu (Yaoundé/Cameroon); Nicholas M. Odhiambo (Pretoria, South Africa)
    Abstract: This study investigates the role of insurance in economic growth on a panel of forty-eight countries in Africa for the period 2004-2014. The research question the study seeks to answer is the following: what thresholds of insurance penetration positively affect economic growth in Africa? The empirical evidence is based on Generalized Method of Moments. Life insurance increases economic growth while the effect of non-life insurance is not significant. Increasing both life insurance and non-life insurance has negative net effects on economic growth. From an extended analytical exercise, 4.149 of life insurance premium (% of GDP) is the minimum critical mass required for life insurance to positively affect economic prosperity while 1.805 of non-life insurance premium (% of GDP) is the minimum threshold required for non-life insurance to positively affect economic prosperity. Thresholds are also provided from the Hansen (1999) Panel Threshold Regression technique using a balanced sample of 28 countries.
    Keywords: Insurance; Economic Growth
    JEL: I28 I30 G20 O16 O55
    Date: 2019–01
  2. By: Alexis Derviz
    Abstract: We study a stochastic dynamic model with risky real investment and a positive long-term growth rate. With growing wealth, the economy gets clogged with increasing complexity costs (the classical "Leviathanian" inefficiencies in the form of implicit taxation and abuse of power, red tape, outlays on conflict resolution between special interest groups, etc.). To escape the Leviathan, agents can, in addition to the usual investment in physical capital, access the universe of crypto assets outside the reach of the mainstream state-supported economy. Crypto assets enjoy no legal protection, so converting them back into the real life consumption good is risky (due to digital criminality, hacking, regulatory crackdowns, etc.). A global ergodic solution is found for this model, demonstrating that crypto and conventional assets are capable of long-term coexistence, although the use of crypto assets, far from being universal, tends to be the choice of the wealthier part of the population.
    Keywords: Crypto assets, DSGE, ergodic distribution, full distribution solution, investment
    JEL: C61 C63 D58 E02 E26 G23
    Date: 2019–12
  3. By: Danquah Michael; Iddrisu Abdul; Ohemeng Williams; Barimah Alfred
    Abstract: The financial sector in rural areas, where most of the poor people in sub-Saharan Africa are found, has transformed massively in recent times, notably through the increased penetration of several types of rural financial intermediaries in addition to rural and community banks and microfinance institutions.Using recent household survey data, we ascertain the access of rural populations to various types of financial services, and the influence of rural financial intermediation on poverty reduction, in Ghana. By accounting for the potential endogeneity of access to financial services, we show that rural households with access to basic financial services are significantly more likely to be non-poor than those without such access.In order to more sustainably tackle the goal, highlighted in the Sustainable Development Goals, of eliminating global hunger or extreme poverty, the poor must be allowed to obtain meaningful access to financial services through the design of efficient pro-poor financial products.
    Date: 2020
  4. By: Brixiová, Zuzana; Kangoye, Thierry; Tregenna, Fiona
    Abstract: Limited access to finance is one of the major barriers for women entrepreneurs in Africa. This paper presents a model of start-ups in which firms’ sales and profits depend on their productivity and access to credit. However, due to the lack of collateral assets such as land, female entrepreneurs have more constrained access to credit than do men. Testing the model on data from the World Bank Enterprise Surveys in Eswatini, Lesotho, and Zimbabwe, we find land ownership to be important for female entrepreneurial performance in terms of sales levels. This finding suggests that the small Southern African economies would benefit from removing obstacles to women’s land tenure and enabling financial institutions to lend against movable collateral. While land ownership is linked with higher sales levels, it seems less critical for sales growth and innovation where access to short term loans for working capital seems to be key.
    Keywords: entrepreneurial sales,innovation,credit,land,gender,Africa
    JEL: G21 L26 D24 O17
    Date: 2020
  5. By: Simplice A. Asongu (Yaoundé/Cameroon); Nicholas M. Odhiambo (Pretoria, South Africa)
    Abstract: The research assesses how information and communication technology (ICT) modulates the effect of foreign direct investment (FDI) on economic growth dynamics in 25 countries in Sub-Saharan Africa for the period 1980-2014. The employed economic growth dynamics areGross Domestic Product (GDP) growth, real GDP and GDP per capita while ICT is measured by mobile phone penetration and internet penetration. The empirical evidence is based on the Generalised Method of Moments. The study finds that both internet penetration and mobile phone penetration overwhelmingly modulate FDI to induce overall positive net effects on all three economic growth dynamics. Moreover, the positive net effects are consistently more apparent in internet-centric regressions compared to “mobile phone†-oriented specifications. In the light of negative interactive effects, net effects are decomposed to provide thresholds at which ICT policy variables should be complemented with other policy initiatives in order to engender favorable outcomes on economic growth dynamics. Practical and theoretical implications are discussed.
    Keywords: Economic Output; Foreign Investment; Information Technology; Sub-Saharan Africa
    JEL: E23 F21 F30 L96 O55
    Date: 2019–01
  6. By: Timothy J. Besley; Isabelle A. Roland; John Van Reenen
    Abstract: This paper studies the implications of perceived default risk for aggregate output and productivity. Using a model of credit contracts with moral hazard, we show that a firm’s probability of default is a sufficient statistic for capital allocation. The theoretical framework suggests an aggregate measure of the impact of credit market frictions based on firm-level probabilities of default which can be applied using data on firm-level employment and default risk. We obtain direct estimates of firm-level default probabilities using Standard and Poor’s PD Model to capture the expectations that lenders were forming based on their historical information sets. We implement the method on the UK, an economy that was strongly exposed to the global financial crisis and where we can match default probabilities to administrative data on the population of 1.5 million firms per year. As expected, we find a strong correlation between default risk and a firm’s future performance. We estimate that credit frictions (i) cause an output loss of around 28% per year on average; (ii) are much larger for firms with under 250 employees and (iii) that losses are overwhelmingly due to a lower overall capital stock rather than a misallocation of credit across firms with heterogeneous productivity. Further, we find that these losses accounted for over half of the productivity fall between 2008 and 2009, and persisted for smaller (although not larger) firms
    JEL: D24 E32 L11 O47
    Date: 2020–01
  7. By: Abhi Gupta; Pearl Li; Marco Del Negro; Michael Cai; Marc Giannoni
    Abstract: The years following the Great Recession were challenging for forecasters for a variety of reasons, including an unprecedented policy environment. This post, based on our recently released working paper, documents the real-time forecasting performance of the New York Fed dynamic stochastic general equilibrium (DSGE) model in the wake of the Great Recession. We show that the model?s predictive accuracy was on par with that of private forecasters and proved to be quite a bit better, at least in terms of GDP growth, than that of the median forecasts from the Federal Open Market Committee?s (FOMC) Summary of Economic Projections (SEP).
    Keywords: Great Recession; Real-time Forecasts; DSGE Models; Financial Frictions
    JEL: C1 C3 C5 E4 E4
  8. By: Wee Chian Koh (World Bank); M. Ayhan Kose (World Bank, Brookings Institution, CAMA); Peter S. Nagle (World Bank); Franziska L. Ohnsorge (World Bank, CAMA); Naotaka Sugawara (World Bank)
    Abstract: Emerging market and developing economies have experienced recurrent episodes of rapid debt accumulation over the past fifty years. This paper examines the consequences of debt accumulation using a three-pronged approach: an event study of debt accumulation episodes in 100 emerging market and developing economies since 1970; a series of econometric models examining the linkages between debt and the probability of financial crises; and a set of case studies of rapid debt buildup that ended in crises. The paper reports four main results. First, episodes of debt accumulation are common, with more than 500 episodes occurring since 1970. Second, around half of these episodes were associated with financial crises which typically had worse economic outcomes than those without crises— after 8 years output per capita was typically 6-10 percent lower and investment 15-22 percent weaker in crisis episodes. Third, a rapid buildup of debt, whether public or private, increased the likelihood of a financial crisis, as did a larger share of short-term external debt, higher debt service, and lower reserves cover. Fourth, countries that experienced financial crises frequently employed combinations of unsustainable fiscal, monetary and financial sector policies, and often suffered from structural and institutional weaknesses.
    Keywords: Financial crises, currency crises, debt crises, banking crises, public debt, private debt, external debt.
    JEL: E32 E61 G01 H12 H61 H63
    Date: 2020–02
  9. By: Gevaudan,Clement; Lederman,Daniel
    Abstract: This paper studies the relationship between the level of economic development and the incidence of three forms of payments across countries, namely the incidence of bank accounts, digital payments, and mobile money accounts among the adult populations across countries. It presents simple statistical tests of leapfrogging, the phenomenon by which poor countries surpass rich countries in the provision of payments mechanisms. It contributes to a broader and long-standing literature on stages of development, as well as to the literature on financial development and access to finance. The findings suggest that there is evidence of"absolute"and"relative"leapfrogging, with both terms defined in the paper. In addition, the Middle East and North Africa region, on average, suffers from a notable underperformance gap across all observed stages of payment-systems development. This finding suggests that the region suffers from structural impediments to the development of its financial and banking systems that go well beyond the adoption of digital-technology tools.
    Keywords: ICT Economics,Economic Growth,Industrial Economics,Economic Theory&Research,Financial Sector Policy,Telecommunications Infrastructure,Financial Structures
    Date: 2020–01–07
  10. 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 traditional 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 manifest themselves in new guises.
    Keywords: fintech, digital innovation, financial inclusion, financial regulation
    JEL: E51 G23 O33
    Date: 2020–02
  11. By: Martin Cihak; Ratna Sahay
    Abstract: The study examines empirical relationships between income inequality and three features of finance: depth (financial sector size relative to the economy), inclusion (access to and use of financial services by individuals and firms), and stability (absence of financial distress). Using new data covering a wide range of countries, the analysis finds that the financial sector can play a role in reducing inequality, complementing redistributive fiscal policy. By expanding the provision of financial services to low-income households and small businesses, it can serve as a powerful lever in helping create a more inclusive society but—if not well managed—it can amplify inequalities.
    Keywords: Financial crises;Financial systems;Financial services;Macroprudential policies and financial stability;Financial institutions;SDN,inequality,Sahay,high inequality,financial service,develop economy
    Date: 2020–01–17

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