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

  1. On Financial Development and Economic Growth in the Arab Republic of Egypt By Mohieldin,Mahmoud; Hussein,Khaled; Rostom,Ahmed Mohamed Tawfick
  2. The finance-growth nexus: is finance supply-leading or demand-following in islamic finance ? evidence from Malaysia By Ibrahim, Norhaslina; Masih, Mansur
  3. Impact of FDI on economic growth: The role of country income levels and institutional strength By Baiashvili, Tamar; Gattini, Luca
  4. Effects of Monetary Policy in a Model with Cash-in-Advance Constraints on R&D and Capital Accumulation By Daiki Maeda; Yuki Saito
  5. China’s Continuing Credit Boom By Alex Etra; Aaron Rosenblum; Jeffrey B. Dawson
  6. Business cycles,bilateral trade and international financial intergration : Evidence from Economic Community of West African States (ECOWAS) By Zouri, Stéphane
  7. Global Recessions By Kose, M. Ayhan; Sugawara, Naotaka; Terrones, Marco E.
  8. Connecting Silos : On linking macroeconomics and finance, and the role of econometrics therein By van der Wel, M.
  9. Probit Modelling and Evaluation of Banking Sector Fragility within the West African Monetary Zone. By Mogaji, Peter Kehinde
  10. Political Connections and Financial Constraints : Evidence from Transition Countries By Bussolo,Maurizio; De Nicola,Francesca; Panizza,Ugo G.; Varghese,Richard
  11. The climate risk for the finance in Italy By Ivan Faiella; Danila Malvolti

  1. By: Mohieldin,Mahmoud; Hussein,Khaled; Rostom,Ahmed Mohamed Tawfick
    Abstract: This paper discusses the evolution of the Egyptian banking sector and the main trends in financial development in the Arab Republic of Egypt. The paper examines empirically the relationship between the development of the financial sector and economic growth in Egypt between 1980 and 2016. It draws comparisons based on critical financial indicators between Egypt and selected emerging markets and developing economies, using a new data set of financial development indexes released by the International Monetary Fund. Econometric time-series modeling of bivariate regressions for real growth per capita and measures of financial development, to assess the relationship between financial development and economic growth in Egypt, yields three specific findings. First; there is a strong association between real growth per capita and financial development measured. Second; access to and the efficiency of banking services are not associated with real per capita income. Third, the Financial Markets Access Index?which compiles data on market capitalization outside the top 10 largest companies and the number of corporate issuers of debt?indicates that there is a robust association with real per capita gross domestic product. The main policy implications suggest that there should be a stronger focus on promoting a more proactive role for the financial services industry in Egypt. There is an especially critical role for bank financing to support the private sector to maintain an inclusive growth momentum. Further development of the capital market will promote the sustainability of such economic growth.
    Date: 2019–09–12
  2. By: Ibrahim, Norhaslina; Masih, Mansur
    Abstract: This paper attempts to investigate the Granger-causality between Islamic banks and economic growth. Malaysia is taken as a case study. The methodology adopted is the standard time series techniques. The results tend to suggest that Islamic bank financing leads growth and other variables, being the most exogenous compared to others. In other words, the finance is supply-leading rather than demand-following in the context of Islamic finance in Malaysia. Thus, this finding has clear policy implications for the government to keep on enhancing Islamic banks’ development leading to a positive economic growth.
    Keywords: GDP, Islamic Banks, Vector-Error Correction Model, Long Run Structural Modelling, Variance Decompositions
    JEL: C22 C58 E44
    Date: 2018–06–15
  3. By: Baiashvili, Tamar; Gattini, Luca
    Abstract: Foreign direct investment (FDI) is generally considered a driving factor to economic growth. Nevertheless, empirical evidence is rather mixed, reporting a positive, neutral, or even negative relationship of FDI with growth. Our investigation concentrates on the impact of FDI inflows on growth and their effect mediated by income levels and the quality of the institutional environment. Specifically, we focus the interaction between country income levels - including low-, middle- and high-income countries - and FDI. This was not analysed thoroughly in earlier studies. Moreover, we deploy a new perspective to look into the FDI effects on growth mediated by institutional quality whereby we make use of country income levels as the key elements to peer-reference countries. Our study is based on 111 countries, stretching from developed economies to developing and emerging markets starting in 1980. Our estimations make use of panel GMM techniques robust to sample size, instrument proliferation and endogeneity concerns. We find that FDI benefits do not accrue mechanically and evenly across countries. We detect an inverted-U shaped relationship between countries' income levels and the size of FDI impact on growth. Moving from low to middle-income countries the effect gets larger. On the other hand, it diminishes again transitioning to high income countries. Finally yet importantly, we find that absorptive capacity matters in channelling FDI effects. Institutional factors have a mediating positive effect on FDI within country income groups, whereby countries with better-developed institutions relative to their income group peers show a positive impact of FDI on growth.
    Keywords: Foreign Direct Investment (FDI),growth,income levels,institutions,absorptive capacity,global panel,Economics
    JEL: C33 F21 E02 O43 O47
    Date: 2020
  4. By: Daiki Maeda; Yuki Saito
    Abstract: To examine the effect of monetary policy on economic growth, we formulate an endogenous growth model with cash-in-advance constraints on R&D and capital accumulation as endogenous growth engines. Within this framework, we show that the relationship between economic growth and the nominal interest rate can be an inverted-U shape. Moreover, we demonstrate that the welfare-maximizing level of the nominal interest rate is larger than the growth rate-maximizing level of the nominal interest rate.
    Date: 2020–02
  5. By: Alex Etra (Executive Office); Aaron Rosenblum; Jeffrey B. Dawson (Research and Statistics Group)
    Abstract: Debt in China has increased dramatically in recent years, accounting for roughly one-half of all new credit created globally since 2005. The country?s share of total global credit is nearly 25 percent, up from 5 percent ten years ago. By some measures (as documented below), China?s credit boom has reached the point where countries typically encounter financial stress, which could spill over to international markets given the size of the Chinese economy. To better understand the associated risks, it is important to examine the drivers of China?s expansion in credit, the increasing complexity of its financial system, and evidence that its supply of credit may be growing more rapidly than reported. Note, however, that there are several features of China?s financial system that reduce the threat of a financial disruption.
    Keywords: China; Macroeconomics; Credit; International Economics; Banking; Financial Institutions
    JEL: G2
  6. By: Zouri, Stéphane
    Abstract: This paper identifies the determinants of synchronization of business cycles in ECOWAS because it allows decision-makers to better target their economic policies. It is relevant given the willingness of ECOWAS heads of state to create a single currency by 2020. Indeed, conducting actions in the direction of the synchronization of business cycles is important because the asymmetries of the cycles observed within a monetary union determine its sustainability. Unlike previous studies in this area, it is innovative as it takes into account international financial integration. In addition, it proposes new measures to increase the quality of results. Finally, it takes into account the structure of trade by analyzing inter-regional links. The results show that bilateral trade and financial openness are determinants of the synchronization of business cycles in the region. However, they show that, trade channel dominates financial openness channel. In addition, the results show that the weakness of intra-community trade doesn’t constitute a barrier to monetary union.
    Keywords: business cycles, trade intensity, financial integration, ECOWAS.
    JEL: E32 F15 F36 O55
    Date: 2019–07–22
  7. By: Kose, M. Ayhan; Sugawara, Naotaka; Terrones, Marco E.
    Abstract: The world economy has experienced four global recessions over the past seven decades: in 1975, 1982, 1991, and 2009. During each of these episodes, annual real per capita global GDP contracted, and this contraction was accompanied by weakening of other key indicators of global economic activity. The global recessions were highly synchronized internationally, with severe economic and financial disruptions in many countries around the world. The 2009 global recession, set off by the global financial crisis, was by far the deepest and most synchronized of the four recessions. As the epicenter of the crisis, advanced economies felt the brunt of the recession. The subsequent expansion has been the weakest in the post-war period in advanced economies as many of them have struggled to overcome the legacies of the crisis. In contrast, most emerging market and developing economies weathered the 2009 global recession relatively well and delivered a stronger recovery than after previous global recessions
    Keywords: Global economy; global expansion; global recession; global recovery; synchronization of cycles
    JEL: E32 F44 N10 O47
    Date: 2020–02
  8. By: van der Wel, M.
    Abstract: The crises of this century have stressed how intertwined macroeconomics and finance are in practice. This intertwinement was absent in most economic models. This led to calls for economists to step out of their specialized silos. Since then, the literature of macro-finance, which studies the relationship between asset prices and economic fluctuations, has been developed. In this inaugural address, I argue for a prominent role of econometrics to study the macro-finance interaction. Key elements such as mixed frequencies and the selection of factors can be incorporated using recent econometric advances. I discuss some of the results, such as estimation of continuous-time equilibrium models for macroeconomic and financial series, as well as characteristics of trading on financial markets after macroeconomic news releases. Finally, I discuss the outstanding challenges, which include developing a yield curve model based on macroeconomic foundations, modeling how financial markets anticipate news releases, and developing a macro-finance model for European bond markets taking into account the large heterogeneity across the continent.
    Keywords: Macro-Finance, Econometrics, Financial Econometrics, Fixed Income, Time Series Econometrics, Term Structure of Interest Rates, macro-economie, economische crises, econometrische modellen, financiering, obligaties, tijdreeksen
    JEL: C58
    Date: 2020–01–31
  9. By: Mogaji, Peter Kehinde
    Abstract: This paper aims at investigating the fragility of banking sectors within the West African Monetary Zone and drawing inferences on the implications of the instability (or otherwise) of the banking systems for the proposed currency union in West Africa. As a matter of relevance and significance, the degree of fragility of the six banking sectors within the WAMZ was investigated so as to determine the extent to which this future currency union in prone to banking sector-induced financial instability which could bring the feasibility and sustainability of the currency union into jeopardy and doubt. Drawing from the theoretical underpinnings of probit model, multivariate probit regression models of banking sector fragility were constructed for the banking sectors in the member countries of the WAMZ. Determinants of the probability of crisis within these banking sectors were employed in multivariate probit models specification with annual data of these six WAMZ countries spanning over a period of time between 1980 and 2013 in which event approach was adopted in identifying episodes of banking problems over this 14-year period. The study noted the stability (or otherwise) of the Nigerian banking sector as paramount, conveying crucial implications for overall banking sector of the proposed WAMZ, given the country's banking strength and presence across the whole sub-continent. From the general outcomes of the probability tests of banking fragility across the WAMZ, banking systems within the zone portend moderate stability which gives assurance of a stable monetary integration of the WAMZ for now
    Keywords: Banking Fragility, Banking Stability, Probit Modelling, WAMZ
    JEL: F36 F45 G21
    Date: 2018–12–31
  10. By: Bussolo,Maurizio; De Nicola,Francesca; Panizza,Ugo G.; Varghese,Richard
    Abstract: This paper examines whether political connections ease financial constraints faced by firms. Using firm-level data from six Central and Eastern European economies, the paper shows that politically connected firms: (i) have high levels of leverage, (ii) have low levels of profitability, (iii) are less capitalized, (iv) have low marginal productivity of capital, and (v) do not invest more than unconnected firms. Next, the paper shows that connected firms borrow more because they have easier access to credit and that political connections lead to a misallocation of capital. The results are consistent with the idea that political connections distort capital allocation and may have welfare costs.
    Keywords: Economics and Finance of Public Institution Development,State Owned Enterprise Reform,Economic Theory&Research,Economic Growth,Industrial Economics,Financial Regulation&Supervision,De Facto Governments,Public Sector Administrative&Civil Service Reform,Public Sector Administrative and Civil Service Reform,Administrative&Civil Service Reform,Democratic Government,Armed Conflict
    Date: 2019–08–06
  11. By: Ivan Faiella (Banca d'Italia); Danila Malvolti (Ministry of Economy and Finance)
    Abstract: The increasing attention paid to the possible consequences of climate change for the financial sector has strengthened international cooperation on green finance, with initiatives from both the industry and the institutions. International surveys show that so far there has been no adequate growth in awareness of the risks linked to climate change and the opportunities linked to the transition towards a low carbon economy. Evidence acquired on Climate-Related Financial Risk (CRFR) disclosure in Italy has confirmed the same conclusions. We have therefore identified three steps with the aim of encouraging financial institutions to take CRFR into account in their corporate risk management strategies: 1) create a information hub to gather the information required for assessing the CRFR; 2) compile a list of the information not yet available; 3) define standard methodologies that allow the climate scenarios to be part of the decision-making processes of financial institutions.
    Keywords: climate change, financial risk, Italy
    JEL: G21 P48 Q54
    Date: 2020–02

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