nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2020‒02‒24
fifteen papers chosen by
Georg Man

  1. Analyzing the importance of forward orientation in financial development-growth nexus: Evidence from big data By Taniya Ghosh; Prashant Mehul Parab; Sohini Sahu
  2. Exits from the Poverty Trap and Growth Accelerations in a Dual Economy Model By Jean-Claude Berthélemy
  3. The impact of macroprudential policies on industrial growth By Carlos Madeira
  4. Productivity Growth and Value Chains in Four European Countries By Izabela Karpowicz; Nujin Suphaphiphat
  5. Does Financial Development Amplify Sunspot Fluctuations? By Takuma Kunieda; Kazuo Nishimura
  6. Discerning Good from Bad Credit Booms; The Role of Construction By Giovanni Dell'Ariccia; Ehsan Ebrahimy; Deniz O Igan; Damien Puy
  7. Understanding the relationship between poverty, inequality and growth: a review of existing evidence By Mcknight, Abigail
  8. Global macro-financial cycles and spillovers By Jongrim Ha; M. Ayhan Kose; Christopher Otrok; Eswar S. Prasad
  9. Credit Cycles in Countries in the MENA Region -- Do They Exist ? Do They Matter? By Aghabarari,Leila; Rostom,Ahmed Mohamed Tawfick
  10. Managing GDP Tail Risk By Thibaut Duprey; Alexander Ueberfeldt
  11. Debt and financial crises By Wee Chian Koh; M. Ayhan Kose; Peter S. Nagle; Franziska L. Ohnsorge; Naotaka Sugawara
  12. How Should Credit Gaps Be Measured? An Application to European Countries By Chikako Baba; Salvatore Dell'Erba; Enrica Detragiache; Olamide Harrison; Aiko Mineshima; Anvar Musayev; Asghar Shahmoradi
  13. The Growth of Murky Finance By Asani Sarkar; Samuel Antill; David Hou
  14. Financial and Human Capital of Microentrepreneurs and Financing by Microfinance Institutions (MFIs) in Cameroon By Serge MESSOMO ELLE
  15. Basel III Implementation and SME Financing : Evidence for Emerging Markets and Developing Economies By Fisera,Boris; Horvath,Roman; Melecky,Martin

  1. By: Taniya Ghosh (Indira Gandhi Institute of Development Research); Prashant Mehul Parab (Indira Gandhi Institute of Development Research); Sohini Sahu (Indian Institute of Technology Kanpur)
    Abstract: The paper analyzes how the citizens' attitude towards future, obtained using big data, affects the relationship between the nation's financial development and economic growth. All financial development indicators, except for one, show significant negative growth effects. We find that individual's attitude towards future as captured by future orientation index (FOI) plays a significant role in affecting this relation. In particular, FOI interacts with financial development, and weakens the negative effect of financial development on nation's economic growth.
    Keywords: Developing countries, Developed countries, Economic growth, Financial development, Future Orientation Index
    JEL: G2 O16 O47
    Date: 2019–11
  2. By: Jean-Claude Berthélemy (FERDI - Fondation pour les Etudes et Recherches sur le Développement International, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We propose a simple theoretical dual economy model to study the dynamics of an economy in which individuals move out of a poverty trap. These dynamics are characterized by growth acceleration. This model implies that poverty reduction could, under some circumstances, cause growth, rather than the other way around. We define a measurement of the growth impulse that could be triggered by independent exits from poverty and correlate it with observed growth accelerations. This correlation is both positive and significant, and it passes various robustness checks. .
    Keywords: Growth acceleration,poverty trap,poverty reduction
    Date: 2018–09–25
  3. By: Carlos Madeira
    Abstract: This paper analyzes the causal impact of macroprudential policies on growth, using industry-level data for 93 countries in order to overcome reverse-causality issues. I find that macroprudential tightenings have a negative impact on manufacturing growth, especially in the long-term and for industries with high external finance dependence. This impact is stronger in periods of higher growth and for advanced economies. However, macroprudential tightenings, especially capital supply measures, also contribute to a reduction in the long-term growth volatility, with a larger impact in financially dependent industries. The policy trade-off between higher growth and lower volatility is substantial, especially for advanced economies
    Date: 2020–01
  4. By: Izabela Karpowicz; Nujin Suphaphiphat
    Abstract: Advanced economies have been witnessing a pronounced slowdown of productivity growth since the global financial crisis that is accompanied in recent years by a withdrawal from trade integration processes. We study the determinants of productivity slowdown over the past two decades in four closely integrated European countries, Austria, Denmark, Germany and the Netherlands, based on firm-level data. Participation in global value chains appears to have affected productivity positively, including through its effect on TFP when facilitated by higher investment in intangible assets, a proxy for firm innovation. Other contributors to productivity growth in firms are workforce aging, access to finance, and skills mismatches.
    Date: 2020–01–31
  5. By: Takuma Kunieda (School of Economics, Kwansei Gakuin University); Kazuo Nishimura (Research Institute for Economics and Business Administration, Kobe University)
    Abstract: Does financial development amplify or contract sunspot fluctuations? To address this question, we explore a two-sector dynamic general equilibrium model with financial frictions and sector-specific production externalities. We first derive a condition for indeterminacy of equilibria to occur, and then, a sunspot variable is introduced in the economy with financial frictions. The outcome shows that if labor intensity in the consumption good sector from the social perspective is very large, financial development is more likely to magnify sunspot fluctuations, whereas if labor intensity in the intermediate good sector from the social perspective is very large, financial development is more likely to contract sunspot fluctuations
    Keywords: Two production sectors; financial frictions; sector-specific production externalities; sunspots
    JEL: E32 E44 O41
    Date: 2020–02
  6. By: Giovanni Dell'Ariccia; Ehsan Ebrahimy; Deniz O Igan; Damien Puy
    Abstract: Credit booms are a focal point for policymakers and scholars of financial crises. Yet our understanding of how the real sector behaves during booms, and why some booms may go bad, is limited. Despite a large and growing body of literature, most of the work has focused on aggregate economic activity, and relatively little is known about which industries benefit and which suffer during these episodes. This note aims to fill this gap by analyzing disaggregated output and employment data in a large sample of advanced and emerging market economies between 1970 and 2014.
    Keywords: Financial crisis;Bank credit;Credit booms;Employment;Real sector;Financial statistics;Financial crises;Total factor productivity;Credit boom,Value added,Employment,SDN,Value-Added,employment growth,construction sector,credit cycle,Haver
    Date: 2020–02–12
  7. By: Mcknight, Abigail
    Abstract: This paper reviews the theoretical literature and empirical evidence on the relationship between poverty, inequality and economic growth. It finds evidence that economic inequality is good for growth as well as new convincing evidence that inequality is bad for growth. Variation in data quality, methodologies, the range of countries included in different studies makes it difficult to compare the evidence. A recent hypothesis that the relationship between inequality and growth might be non-linear, with very low and very high levels of inequality being harmful to growth but a range in between where the relationship is not clearly defined might provide a means to unify some of the conflicting findings.
    Keywords: poverty; inequality; growth
    JEL: I32 D31 O47
    Date: 2019–07–18
  8. By: Jongrim Ha; M. Ayhan Kose; Christopher Otrok; Eswar S. Prasad
    Abstract: We develop a new dynamic factor model that allows us to jointly characterize global macroeconomic and financial cycles and the spillovers between them. The model decomposes macroeconomic cycles into the part driven by global and country-specific macro factors and the part driven by spillovers from financial variables. We consider cycles in macroeconomic aggregates (output, consumption, and investment) and financial variables (equity and house prices, and interest rates). We find that the global macro factor plays a major role in explaining G-7 business cycles, but there are also spillovers from equity and house price shocks onto macroeconomic aggregates. These spillovers operate mainly through the global macro factor rather than the country-specific macro factors (i.e., these spillovers affect business cycles in all G-7 economies) and are stronger in the period leading up to and following the global financial crisis. We find little evidence of spillovers from macroeconomic cycles to financial cycles.
    Keywords: Global business cycles, global financial cycles, common shocks, international spillovers, dynamic factor models
    JEL: E32 F4 C32 C1
    Date: 2020–02
  9. By: Aghabarari,Leila; Rostom,Ahmed Mohamed Tawfick
    Abstract: This paper estimates private sector credit cycles for most of the oil-importing and oil-exporting countries in the Middle East and North Africa. Credit cycles are the medium-term component in spectral analysis of real private sector credit growth. In addition, the paper estimates the credit cycles for several Western countries and Japan. The analysis finds substantial differences and rare similarities between credit cycles in the Middle East and North Africa and developed countries. Over 1964-2017, credit cycles in the Middle East and North Africa do not appear to be associated with real gross domestic product growth. They only explain a fraction of the growth in private sector credit, and they do not seem to be synchronized across oil exporters and oil importers.
    Keywords: Banks&Banking Reform,Oil&Gas,Macroeconomic Management,Economic Conditions and Volatility
    Date: 2019–11–19
  10. By: Thibaut Duprey; Alexander Ueberfeldt
    Abstract: We propose a novel framework to analyze how policy-makers can manage risks to the median projection and risks specific to the tail of gross domestic product (GDP) growth. By combining a quantile regression of GDP growth with a vector autoregression, we show that monetary and macroprudential policy shocks can reduce credit growth and thus GDP tail risk. So policymakers concerned about GDP tail risk would choose a tighter policy stance at the expense of macroeconomic stability. Using Canadian data, we show how our framework can add tail event information to projection models that ignore them and give policy-makers a tool to communicate the trade-offs they face.
    Keywords: Central bank research; Economic models; Financial stability; Financial system regulation and policies; Interest rates; Monetary Policy; Monetary policy framework
    JEL: E44 E52 E58 D8 G01
    Date: 2020–01
  11. By: Wee Chian Koh; M. Ayhan Kose; Peter S. Nagle; Franziska L. Ohnsorge; Naotaka Sugawara
    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
  12. By: Chikako Baba; Salvatore Dell'Erba; Enrica Detragiache; Olamide Harrison; Aiko Mineshima; Anvar Musayev; Asghar Shahmoradi
    Abstract: Assessing when credit is excessive is important to understand macro-financial vulnerabilities and guide macroprudential policy. The Basel Credit Gap (BCG) – the deviation of the credit-to-GDP ratio from its long-term trend estimated with a one-sided Hodrick-Prescott (HP) filter—is the indicator preferred by the Basel Committee because of its good performance as an early warning of banking crises. However, for a number of European countries this indicator implausibly suggests that credit should go back to its level at the peak of the boom after the credit cycle turns, resulting in large negative gaps that might delay the activation of macroprudential policies. We explore two different approaches—a multivariate filter based on economic theory and a fundamentals-based panel regression. Each approach has pros and cons, but they both provide a useful complement to the BCG in assessing macro-financial vulnerabilities in Europe.
    Keywords: Real interest rates;Interest rate policy;Credit booms;Credit expansion;Credit aggregates;Credit Cycle,Credit Gap,Countercyclical Capital Buffer,Macroprudential Policies,WP,BCG,real interest rate,output gap,fundamental variable
    Date: 2020–01–17
  13. By: Asani Sarkar; Samuel Antill; David Hou
    Abstract: Building upon previous posts in this series that discussed individual banks, we examine the historical growth of the entire financial sector, relative to the rest of the economy. This sector?s historically large share of the economy today (see chart below) and its role in disrupting the functioning of the real economy during the recent financial crisis have led to questions about the social value of costly financial services. While new regulations such as the Dodd-Frank Act impose restrictions on financial activities and increase their costs, especially those of large firms, our paper suggests that there may be limits to what regulation can achieve. In particular, we show that financial growth has occurred in the more opaque and harder to regulate sectors: private firms, shadow banks, and small nonbank financial firms. Moreover, we find that the stock market values these opaque areas of finance more, suggesting that they may expand even faster in the future.
    Keywords: firm size; Financial sector size; asset management; commercial banks; regulation; leverage; shadow banks
    JEL: G1 G2 N2
  14. By: Serge MESSOMO ELLE (Department of Banking and Finance University of Buea, Cameroon Author-2-Name: Author-2-Workplace-Name: Author-3-Name: Author-3-Workplace-Name: Author-4-Name: Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:)
    Abstract: Objective –This study determines the nature and the direction of how financial and human capital influence the financing of microentrepreneurs in Cameroon. Compared with past research, this work uses existing microentrepreneurs only, which are considered as the only ones having access to the financing of MFIs.Methodology/Technique – This study employs an explanatory approach and uses the Five Cs model and primary data to explain the influence of financial capital (capacity, collateral, capital and condition) and human capital (character) on the financing of microentrepreneurs by MFIs.Findings – On the one hand, the findings show that character, capacity and collateral significantly increase financing of microentrepreneurs by MFIs. On the other hand, the findings reveal that that condition is significant and has an inverse relationship with lending to microentrepreneurs. Collateral was found to be not significant.Novelty: Compared with past research, this work uses existing microentrepreneurs only, which are considered as the only ones having access to the financing of MFIs. This study examines the relationship between financial and human capital to capacity, collateral capital and condition and character of microentrepreneurs.Type of Paper: Empirical
    Keywords: Capacity; Character Collateral; Condition; Capital; Financing of Microentrepreneurs; Microfinance Institutions.
    JEL: G21 G32 L22 O15
    Date: 2019–12–13
  15. By: Fisera,Boris; Horvath,Roman; Melecky,Martin
    Abstract: This paper examines the effect of Basel III implementation on the access to finance of small and medium-size enterprises in 32 emerging markets and developing economies. Analyzing rich, repeated cross-sectional data and a panel of matched firm-bank data in a difference-in-differences setting with sample selection adjustment, the authors find a short-term, moderately negative effect of Basel III on small and medium-size enterprises'access to financing. The results suggest that firms with access to bank credit prior to Basel III implementation could have been affected less than firms that were initially on the fringes of financial inclusion?firms with only a bank account. The paper fails to find any additional heterogeneous effects across firm size or age, bank capitalization or liquidity, or across countries that transitioned to Basel III from Basel II versus Basel 2.5. Overall, the initial conditions of the banking system as well as of complementary business and financial regulation can co-determine the size of short-term costs from the newly implemented global financial regulation in emerging markets and developing economies.
    Date: 2019–12–02

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