nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2020‒03‒23
twelve papers chosen by
Georg Man

  1. Once Upon a Time in the Banking Sector: Historical Insights into Banking Competition By Sergio Correia; Stephan Luck
  2. Credit, banking fragility and economic performance By Jérôme Creel; Paul Hubert; Fabien Labondance
  3. Financing nascent industry : Leverage, politics, and performance in Imperial Russia By Gregg, Amanda; Nafziger, Steven
  4. An estimated DSGE model with financial accelerator: the case of Tunisia By Hager Ben Romdhane
  5. Financial Variables as Predictors of Real Growth Vulnerability By Lucrezia Reichlin; Giovanni Ricco; Thomas Hasenzagl
  6. Deus ex Machina? A Framework for Macro Forecasting with Machine Learning By Marijn A. Bolhuis; Brett Rayner
  7. Global Macro-Financial Cycles and Spillovers By Jongrim Ha; M. Ayhan Kose; Christopher Otrok; Eswar S. Prasad
  8. Financial Cycles in Asset Markets and Regions By Beirne, John
  9. Bank Survival in Central and Eastern Europe By Evzen Kocenda; Ichiro Iwasaki
  10. Monetary Policy Transmission in Emerging Markets and Developing Economies By Luis Brandao-Marques; R. G Gelos; Thomas Harjes; Ratna Sahay; Yi Xue
  11. Inflation : Concepts, Evolution, and Correlates By Ha,Jongrim; Ivanova,Anna; Ohnsorge,Franziska Lieselotte; Unsal Portillo Ocando,Derya Filiz
  12. Bank credit in uncertain times: Islamic vs. conventional banks By Huseyin Mehmet Bilgin; Gamze Danisman; Ender Demir; Amine Tarazi

  1. By: Sergio Correia (Board of Governors); Stephan Luck
    Abstract: How does competition among banks affect credit growth and real economic growth? In addition, how does it affect financial stability? In this blog post, we derive insights into this important set of questions from novel data on the U.S. banking system during the nineteenth century.
    Keywords: Economic history; banking
    JEL: G2 N2 N2
  2. By: Jérôme Creel (Sciences Po-OFCE, ESCP Europe); Paul Hubert (Sciences Po-OFCE); Fabien Labondance (Université de Bourgogne Franche-Comté - CRESE - Sciences Po-OFCE)
    Abstract: Drawing on European Union data, this paper investigates the hypothesis that private credit and banking sector fragility may affect economic growth. We capture banking sector fragility both with the ratio of bank capital to assets and non-performing loans. We assess the effect of these three variables on the growth rate of GDP per capita, using the Solow growth model as a guiding framework. We observe that credit has no effect on economic performance in the EU when banking fragilities are high. However, the potential fragility of the banking sector measured by the non- performing loans decreases GDP per capita.
    Keywords: Private credit, Capital to assets ratio, Non-performing loans
    JEL: G10 G21 O40
    Date: 2020–01
  3. By: Gregg, Amanda; Nafziger, Steven
    Abstract: This paper explores the dynamics of corporate finance during the early stages of industrial growth by examining a newly constructed panel database of Imperial Russian industrial corporations’ balance sheets. We document large differences in financial strategies and outcomes across industries, over time, over firms’ life cycles, and between two Russian corporation types. Russian corporations’ profits and dividend payouts followed the Russian business cycle. Russian corporate debt ratios mostly follow modern capital structure theories, but tangible assets were not associated with higher debt levels, suggesting that Russian corporate debt was short-term, that collateral was irrelevant, or that agency problems dominated. We also find evidence that investors needed to be compensated for poor protections, since dividends were valued and widely-held corporations enjoyed greater returns. While the evidence suggests the presence of these and other frictions, our findings are consistent with the Imperial Russian financial system functioning well enough to enable early industrial development.
    JEL: N23 N63 G32
    Date: 2020–03–08
  4. By: Hager Ben Romdhane (Central Bank of Tunisia)
    Abstract: This paper estimates an open economy DSGE model with financial accelerator à la Bernanke et al. (1999)2, enriched with wage rigidities and imperfect exchange rate pass through. The objective of this paper is to assess the importance of financial frictions and their role in the transmission of transitory shocks in the Tunisian Economy. The model is estimated by Bayesian technics via Metropolis Hasting algorithm. Using Tunisian data, we obtain an estimate for the external risk premium, indicating the importance of the financial accelerator and the potential balance sheet vulnerabilities for macroeconomic fluctuations. Furthermore, results of the impulse responses functions model support that the inclusion of the financial accelerator magnifies the impact of shocks thereby increasing real fluctuations.
    Keywords: DSGE, Financial frictions, Bayesian estimation
    Date: 2020–03–03
  5. By: Lucrezia Reichlin (London Business School, Now-Casting Economics, and CEPR); Giovanni Ricco (University of Warwick and OFCE-SciencesPo, and CEPR); Thomas Hasenzagl (University of Minnesota)
    Abstract: We evaluate the role of financial conditions as predictors of macroeconomic risk first in the quantile regression framework of Adrian et al. (2019b), which allows for non-linearities, and then in a novel linear semi-structural model as proposed by Hasenzagl et al. (2018). We distinguish between price variables such as credit spreads and stock variables such as leverage. We find that (i) although the spreads correlate with the left tail of the conditional distribution of GDP growth, they provide limited advanced information on growth vulnerability; (ii) nonfinancial leverage provides a leading signal for the left quantile of the GDP growth distribution in the 2008 recession; (iii) measures of excess leverage conceptually similar to the Basel gap, but cleaned from business cycle dynamics via the lenses of the semi-structural model, point to two peaks of accumulation of risks – the eighties and the first eight years of the new millennium, with an unstable relationship with business cycle chronology.
    Keywords: Financial cycle, business cycle, credit, financial crises, downside risk, entropy, quantile regressions
    JEL: E32 E44 C32 C53
    Date: 2020–02
  6. By: Marijn A. Bolhuis; Brett Rayner
    Abstract: We develop a framework to nowcast (and forecast) economic variables with machine learning techniques. We explain how machine learning methods can address common shortcomings of traditional OLS-based models and use several machine learning models to predict real output growth with lower forecast errors than traditional models. By combining multiple machine learning models into ensembles, we lower forecast errors even further. We also identify measures of variable importance to help improve the transparency of machine learning-based forecasts. Applying the framework to Turkey reduces forecast errors by at least 30 percent relative to traditional models. The framework also better predicts economic volatility, suggesting that machine learning techniques could be an important part of the macro forecasting toolkit of many countries.
    Date: 2020–02–28
  7. 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.
    JEL: C1 C32 E32 F4
    Date: 2020–02
  8. By: Beirne, John (Asian Development Bank Institute)
    Abstract: We provide a comprehensive analysis of financial cycles in asset markets and regions. Using a large sample of 38 advanced and emerging economies to enable a comparative assessment, the analysis conforms with the prevailing literature on financial cycles pertaining to advanced economies, but finds that equity market cycles in emerging market economies in Asia, Latin America, and Eastern Europe may be a more useful gauge of the financial cycle compared to cycles in credit and property markets. Similar to more advanced economies, it is found that financial and business cycles in emerging economies are synchronized, albeit partially and with some cross-country heterogeneity. This underscores the importance for policy makers to be vigilant of interlinkages between real and financial sectors, pointing toward a need for carefully designed macroprudential policies. Finally, we find that financial cycles in emerging markets remain vulnerable to global risk aversion in financial markets and spillovers from the United States, thereby reinforcing the importance of continuing to strengthen domestic macroeconomic fundamentals, and develop further local financial sectors through targeted structural reforms.
    Keywords: financial cycle; business cycle; emerging markets
    JEL: C38 E32 E44
    Date: 2019–12–09
  9. By: Evzen Kocenda (Institute of Economic Studies, Charles University); Ichiro Iwasaki (Institute of Economic Research, Hitotsubashi University)
    Abstract: We analyze factors linked to bank survival on large dataset covering 17 CEE markets during the period of 2007-2015 by estimating the Cox proportional hazards model. We group banks across countries and according to their financial soundness. The overall financial development improves survival probabilities and its impact exhibits decreasing marginal returns as it is strongest in countries with lower level of financial development and banking reforms and in banks with low level of solvency. Measures of ownership structure, legal form, and corporate governance are the key economically significant factors that exhibit strongest economic effect on bank survival. Financial performance indicators predict bank survival rate with intuitively expected positive impact but their effect, in terms of economic significance, is smaller in comparison to other factors as well as the impact found in developed markets. Effect of above factors is most pronounced for banks with low financial soundness in term of their solvency. Results also appear to indicate that it makes exit more likely during the global financial crisis (GFC), shortly afterwards, and during the initial stage of the European sovereign debt crisis. The results are robust with respect to size, age, and alternative assumptions on survival distribution.
    Keywords: bank survival, banking reform, European emerging markets, survival and exit determinants, hazards model
    JEL: C14 D02 D22 G33
    Date: 2020–03
  10. By: Luis Brandao-Marques; R. G Gelos; Thomas Harjes; Ratna Sahay; Yi Xue
    Abstract: Central banks in emerging and developing economies (EMDEs) have been modernizing their monetary policy frameworks, often moving toward inflation targeting (IT). However, questions regarding the strength of monetary policy transmission from interest rates to inflation and output have often stalled progress. We conduct a novel empirical analysis using Jordà’s (2005) approach for 40 EMDEs to shed a light on monetary transmission in these countries. We find that interest rate hikes reduce output growth and inflation, once we explicitly account for the behavior of the exchange rate. Having a modern monetary policy framework—adopting IT and independent and transparent central banks—matters more for monetary transmission than financial development.
    Date: 2020–02–21
  11. By: Ha,Jongrim; Ivanova,Anna; Ohnsorge,Franziska Lieselotte; Unsal Portillo Ocando,Derya Filiz
    Abstract: In the past four to five decades, inflation has fallen around the world, with median annual global consumer price inflation down from a peak of 16.6 percent in 1974 to 2.6 percent in 2017. This decline began in advanced economies in the mid-1980s and in emerging market and developing economies in the mid-1990s. By 2000, global inflation had stabilized at historically low levels. Lower inflation has been accompanied by reduced inflation volatility, especially in advanced economies. This improvement in inflation outcomes has stemmed in large part from structural economic changes, including improved monetary and fiscal policy frameworks as well as international trade and financial liberalization. Lower and more stable inflation has often been associated with better growth and development outcomes, partly by reducing uncertainty, fostering a more efficient allocation of resources, and helping preserve financial stability.
    Date: 2019–02–13
  12. By: Huseyin Mehmet Bilgin (Faculty of Political Science, Istanbul Medeniyet University, Istanbul, Turkey); Gamze Danisman (Faculty of Management, Kadir Has University, Istanbul, Turkey); Ender Demir (Faculty of Tourism, Istanbul Medeniyet University, Istanbul, Turkey); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges)
    Abstract: This paper explores whether the impact of economic uncertainty on credit growth differs for Islamic vs. conventional banks. Using a sample of 416 banks (58 Islamic and 358 conventional) in 12 countries, the findings indicate that an increase in economic uncertainty significantly decreases the credit growth of conventional banks but does not have any significant impact on Islamic banks' credit growth. Our results are robust to alternative specifications and addressing endogeneity concerns using GMM estimators. We further observe that our findings are stronger for the following countries: (1) countries with explicit deposit insurance protection system for Islamic banks, (2) lower foreign dominance, and (3) countries with a higher share of deposits and assets in Islamic banks.
    Keywords: Conventional Banks,Economic Uncertainty,Islamic Banks,Credit
    Date: 2020–02–12

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