nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2020‒03‒30
fifteen papers chosen by
Georg Man

  1. Fiscal Discipline, Financial Development & Economic Growth in Nigeria By Evans, Olaniyi
  2. Understanding Economic Growth in Ghana in Comparative Perspective By Geiger,Michael Tobias; Trenczek,Jan; Wacker,Konstantin M.
  3. Financial variables as predictors of real growth vulnerability By Reichlin, Lucrezia; Ricco, Giovanni; Hasenzagl, Thomas
  4. On the interplay between speculative bubbles and productive investment By Xavier Raurich; Thomas Seegmuller
  5. Risks to Human Capital By Mehran Ebrahimian; Jessica Wachter
  6. Financial Inclusion and Achievements of Sustainable Development Goals (SDGs) in ASEAN By Ahmad Ma'ruf
  7. Structural Reforms to Set the Growth Ambition By Rovo,Natasha
  8. Labor Market Institutions and the Effects of Financial Openness By Shang-Jin Wei; Jun Nie; Qingyuan Du
  9. The Non-Linear Relationship between Financial Access and Domestic Savings By Emara, Noha; KASA, Hicran
  10. Unlocking Access to Finance for SMEs: A Cross-Country Analysis By Armand Fouejieu; Anta Ndoye; Tetyana Sydorenko
  11. Capital Market Integration with Multiple Convergence Clubs: The Case of Prewar Japan By Tetsuji Okazaki; Koji Sakai
  12. Demographic impacts on life cycle portfolios and financial market structures By Weifeng Liu; Phitawat Poonpolkul
  13. Blockchain Technology and the Financial Market: An Empirical Analysis By Evans, Olaniyi
  14. The Impact of Conflict and Political Instability on Banking Crises in Developing Countries By Ali Compaore; Montfort Mlachila; Rasmané Ouedraogo; Sandrine Sourouema
  15. Low-carbon transition risks for finance By Gregor Semieniuk; Emanuele Campiglio; Jean-Francois Mercure; Ulrich Volz; Neil R. Edwards

  1. By: Evans, Olaniyi
    Abstract: Fiscal discipline is very vital to the development and growth of all the countries of the world. The literature, nonetheless, stresses that developing nations such as Nigeria are mostly prone to challenges emanating from fiscal indiscipline. The current study therefore empirically investigates the effects of fiscal discipline in the form of policy uncertainty, corruption, budgeting reforms, fiscal policy sustainability and crowding-out on financial development and economic growth using the ARDL bounds testing approach for the case of Nigeria in the 1980-2017 period. The study shows that policy uncertainty, corruption and fiscal deficits have significant negative relationship with financial development and economic growth both in the short and long-run. Higher levels of uncertainty, corruption and fiscal deficits will lead to reduced levels of financial development and economic growth. In other words, fiscal policy crowds out financial development. Also, debts have significant negative relationship with financial development and economic growth in the long run, meaning that non-sustainable fiscal policy have damaging effects on financial development and economic growth in the long run. However, budget reforms have significant positive relationship with financial development and economic growth in the long run. Further, financial development has significant positive relationship with economic growth in the short- and the long-run, meaning that financial development in itself is important for economic growth.
    Keywords: Fiscal discipline; non-sustainable fiscal policy; financial development; policy uncertainty; corruption; budgeting reforms; crowding-out effects; economic growth
    JEL: G0 G2 H30
    Date: 2020
  2. By: Geiger,Michael Tobias; Trenczek,Jan; Wacker,Konstantin M.
    Abstract: Ghana has experienced a decade of solid and exceptionally high growth. Between 2005 and 2015, income nearly doubled. This paper analyzes the factors driving this impressive growth performance, using tools such as structural change decompositions and growth regressions. For the comparative perspective, the paper compares Ghana with its structural and aspirational peers. The paper finds that the contribution of structural change to growth has been limited and attributes this to labor that was freed up in agriculture not being absorbed by high-productivity sectors. Looking at factors that drove growth since 2000, financial development and infrastructure had the most important impacts. A benchmark analysis suggests that those areas should remain the policy focus over the longer term, but that near-term priority should be given to stabilization policies.
    Keywords: International Trade and Trade Rules,Inflation,Food Security,Labor Markets,Food&Beverage Industry,Business Cycles and Stabilization Policies,Plastics&Rubber Industry,Construction Industry,Textiles, Apparel&Leather Industry,Pulp&Paper Industry,Common Carriers Industry,General Manufacturing
    Date: 2019–01–10
  3. By: Reichlin, Lucrezia; Ricco, Giovanni; Hasenzagl, Thomas
    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
  4. By: Xavier Raurich (Departament de Teoria Econòmica and CREB Universitat de Barcelona - Departament de Teoria Econòmica and CREB Universitat de Barcelona); Thomas Seegmuller (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The aim of this paper is to study the interplay between long term productive investments and more short term and liquid speculative ones. A three-period lived overlapping generations model allows us to make this distinction. Agents have a portfolio decision. When young, they can invest in human capital that is a productive long term investment that provides a return during the following two periods. When young or in the middle age, they can invest in a bubble. Young individuals can also borrow on a credit market to finance the productive investment. However, the amount borrowed is limited by a credit constraint. We show that the existence of a stationary bubble raises productive investment and production when the bubleless economy is credit constrained and dynamically efficient. Indeed, young agents sell short the bubble to increase productive investments, whereas traders at middle age transfer wealth to old age. The bubble allows to relax the credit constraint. We outline that a permanent technological shock inducing either a larger return of capital in the short term or a similar increase in the return of capital in both periods raises productive capital, production and the bubble size. We use our framework to discuss the effect on the occurrence of bubbles of financial regulation and fiscal policy.
    Keywords: Bubble,Efficiency,Vintage capital,Credit,Short sellers,Overlapping generations
    Date: 2019–01
  5. By: Mehran Ebrahimian; Jessica Wachter
    Abstract: What is the connection between financing constraints and the equity premium? To answer this question, we build a model with inalienable human capital, in which investors finance individuals who can potentially become skilled. Though investment in skill is always optimal, it does not take place in some states of the world, due to moral hazard. In other states of the world, individuals acquire skill; however outside investors and individuals inefficiently share risk. We show that this simple moral hazard problem and the resultant financing friction leads to a realistic equity premium, a low riskfree rate, and severe negative consequences for distribution of wealth and for welfare. When investment fails to take place, the economy enters an endogenous disaster state. We show that the possibility of these disaster states distorts risk prices, even under calibrations in which they never occur in equilibrium.
    JEL: G12 G32
    Date: 2020–03
  6. By: Ahmad Ma'ruf (Department of Economics, Universitas Muhammadiyah Yogyakarta, Indonesia Author-2-Name: Febriyana Aryani Author-2-Workplace-Name: Institute of Public Policy and Economic Studies, Yogyakarta, 55293, Indonesia 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 - Financial Inclusion is an essential agenda at the ASEAN level. Increasing financial inclusion aims to develop the economic capacity of the population to reduce poverty and encourage income distribution. This study aims to analyze the relationship of financial inclusion to the achievement of Sustainable Development Goals (SDGs) in the aspect of poverty alleviation in ASEAN.Methodology/Technique - This study uses a quantitative approach. The data used is secondary data in the period between 2010 and 2018. Data processing uses multiple regression. The financial inclusion dimensions analyzed are the socioeconomic dimension and the infrastructure dimension.Findings - Financial Inclusion has a negative and significant relationship with the achievement of sustainable development goals (SGDs) in the aspect of poverty alleviation in ASEAN.Novelty - The statement that the development of countries in ASEAN to realize SDGs on poverty eradication becomes very important. This study is essential for policymakers regarding poverty alleviation and financial inclusion development. This study contributes to the financial inclusion literature in ASEAN with an emphasis on the socioeconomic dimension.
    Keywords: Financial Inclusion; Sustainable Development Goals; Poverty; ASEAN.
    JEL: G00 G28
    Date: 2019–12–30
  7. By: Rovo,Natasha
    Abstract: The effect of structural reforms on growth in Europe and Central Asia is assessed by looking separately at each supply-side channel: capital, labor, and productivity, with the last estimated using the stochastic frontier approach. By controlling for the interaction with the economic cycle, the paper also investigates whether timing matters. Improvements in human capital, regulatory quality, and government effectiveness have the most impact on potential growth, along with financial development. European Union accession may also boost growth, mainly by encouraging capital deepening. However, changes in labor market regulation and tariffs may have ambiguous effects. Applying the results to Serbia, the analysis demonstrates that closing certain structural gaps with the frontier would help boost its potential.
    Date: 2020–03–09
  8. By: Shang-Jin Wei; Jun Nie; Qingyuan Du
    Abstract: We propose a new channel to explain why developing countries may fail to benefit from financial globalization, based on labor market institutions. In our model, financial openness in a developing country with a rigid labor market leads to capital outflow, and both employment and output fall. In contrast, financial openness in a developing country with a flexible labor market benefits the country. Our model suggests that enhancing labor market flexibility is a complementary reform for developing countries opening capital accounts.
    Keywords: Developing Countries; Capital Account LIberalization; Labor Market Rigidity; Financial Openness; Unemployment
    JEL: E24 F41 F44 J08
    Date: 2019–11–26
  9. By: Emara, Noha; KASA, Hicran
    Abstract: This paper examines the impact of financial access on the accumulation of domestic savings in sixteen emerging market economies included in the Morgan Stanley Capital International emerging market index. The countries represent Asia, Latin America, Europe, Middle East, and Africa. We use the System Generalized Method of Moments panel estimation methodology on annual data (representing) spanning the period 1980-2018. Principal component analysis allows us to create a financial access index as a linear combination of two variables measured per 100,000 adults: number of bank branches per and number of ATMs. We also use the common control variables for a domestic saving regression including current account balance, real interest rate, the age dependency ratio, inflation, and domestic credit and private sector growth in our analysis. The results of the paper reveal a convex and non-monotonic statistically significant relationship between financial access and domestic savings. The financial access index has a non-linear effect on domestic savings with a cutoff point of 86.5 points. Our results indicate that improvement in financial access may increase the savings rate initially by 0.0173%, leading to an increase in investments, further improvement in financial access leads to slight decline of about 0.0002% in savings as households’ precautionary savings decrease.
    Keywords: Financial Access, Domestic Savings, Emerging Markets, System GMM
    JEL: G21 G23 O43
    Date: 2020–03–20
  10. By: Armand Fouejieu; Anta Ndoye; Tetyana Sydorenko
    Abstract: Countries in the MENAP and CCA regions have the lowest levels of financial inclusion of small and medium enterprises (SMEs) in the world. The paper provides empirical evidence on the drivers of SME access to finance for a large sample of countries, and identifies key policy priorities for these two regions: economic and institutional stability, competition, public sector size and government effectiveness, credit information infrastructure (e.g., credit registries), the business environment (e.g., legal frameworks for contract enforcement), and financial supervisory and regulatory capacity. The analysis also shows that improving credit information, economic competition, the business environment along with economic development and better governance would help close the SME financial inclusion gap between MENAP and CCA regions and the best performers. The paper concludes on the need to adopt holistic policy strategies that take into account the full range of macro and institutional requirements and reforms, and prioritize these reforms in accordance with each country’s specific characteristics.
    Date: 2020–03–13
  11. By: Tetsuji Okazaki (Faculty of Economics, The University of Tokyo); Koji Sakai (Division of Economics, Kyoto Sangyo University)
    Abstract: This paper examines capital market integration in prewar Japan, using a methodology that allows for multiple equilibria in convergence. Specifically, we apply the method of log t regression and the club convergence test proposed by Phillips and Sul (2007) to examine the convergence of prefectural loan rates and detect the convergence clubs that followed heterogeneous transition paths. Whereas prefectural loan rates were converging towards two equilibria from 1888–1900, all the prefectural loan rates converged towards a unique equilibrium from 1901–1926. From 1927, however, the prefectural loan rates diverged again, and four different convergence clubs emerged. Restrictive regulation imposed by the Bank Law of 1928 reduced competition in local markets, increased barriers to interregional capital mobility, and, thereby, reversed capital market integration.
    Date: 2020–03
  12. By: Weifeng Liu; Phitawat Poonpolkul
    Abstract: This paper provides a framework to endogenize rates of return for risk-free bonds and risky capital in an overlapping generation model. The rate of return on capital is endogenized by introducing idiosyncratic production shocks to avoid computation challenges associated with aggregate production shocks in the literature. The framework enables the interaction between financial markets and macroeconomic conditions in a production economy. Based on this framework, the paper first examines life-cycle portfolio choice without demographic change, and illustrates that several factors such as borrowing costs, labor income and production risk play important roles in life-cycle portfolios. The paper then investigates the impacts of population aging on macroeconomic conditions, life-cycle behaviors and financial market structures. The results show that population aging leads to higher capital-labor ratios, and reduces the rates of return on both assets. The bond market shrinks significantly, and capital decreases if the fertility rate declines but increases if the mortality rate declines, leading to structural change in financial markets. The impacts on life-cycle variables are quite different in the fertility and mortality cases particularly at the late stage of life.
    Keywords: Demographic change, portfolio choice, financial market structure, risk premium, idiosyncratic production shock, overlapping generation model.
    JEL: J11 G11 C63 C68 E21 E23
    Date: 2020–03
  13. By: Evans, Olaniyi
    Abstract: This study investigates the relationship between blockchain technology and the financial market. The US and China are used as case studies for the 2008–2016 period using fully modified least square and Toda-Yamamoto causality technique. The estimates show that blockchain technology has positive and significant relationship with the financial market in the US and China. In other words, the higher the levels of blockchain innovation in these countries, the more developed the financial markets. This suggests that the presence of blockchain innovation in financial markets spurs financial development. Blockchain innovation is therefore a positive significant factor for well-developed financial markets. The findings also indicate that macroeconomic factors such as lagged financial development, GDP per capita, the growth rate of GDP, FDI and trade openness have significant and positive relationship with financial development in the two countries. Among the institutional variables, government effectiveness has significant and positive effects only in the US.
    Keywords: Blockchain technology; bitcoin; smart contracts; financial markets
    JEL: E2 F3 O3
    Date: 2018–06–18
  14. By: Ali Compaore (CERDI - Centre d'Études et de Recherches sur le Développement International - Clermont Auvergne - UCA - Université Clermont Auvergne - CNRS - Centre National de la Recherche Scientifique); Montfort Mlachila (CERDI - Centre d'Études et de Recherches sur le Développement International - Clermont Auvergne - UCA - Université Clermont Auvergne - CNRS - Centre National de la Recherche Scientifique); Rasmané Ouedraogo (IMF - IMF - International Monetary Fund); Sandrine Sourouema
    Date: 2020–03–05
  15. By: Gregor Semieniuk (Political Economy Resaerch Institute and Department of Economics, University of Massachusetts Amherst); Emanuele Campiglio (Institute of Ecological Economics, Vienna University of Economics and Business); Jean-Francois Mercure (Department of Geography, University of Exeter); Ulrich Volz (SOAS Centre for Sustainable Finance & Department of Economics, SOAS University of London); Neil R. Edwards (Environment, Earth and Ecosystems, The Open University, UK)
    Abstract: Transition risks for finance arise from the transition to a low-carbon economy, which can disrupt the ability of carbon-intensive industries to meet their financial obligations and lead to abrupt changes in asset valuations of affected firms and default on their debt. An understanding of these risks is key for any ambitious emissions reduction programme, such as that implied by the Paris Agreement. Insight from theory and study of past transitions is of limited help, as these see financial risks mostly flowing from speculation with rising industries propped up by a set of new vastly more productive technologies. The current transition instead requires policy to quickly render a set of currently productive high-carbon industries unprofitable, stranding their assets, so the risks are located in the declining industries. Absent a unified framework of the interaction of real and financial aspects of the transition, one set of studies conceptualises and quantifies asset stranding and other transition costs in declining industries, and a separate one estimates the potential impact of these transition costs on the financial system. Combining these two research strands and modelling the feedback of financial distress on the real economy will require more research, which could help integrate transition risks into the cost analysis of mitigation in integrated assessment models. An important insight from the past transitions literature is that once low-carbon industries are rendered more profitable than high-carbon ones, financial risks could also build in these newly rising industries due to speculation.
    Keywords: Transition risks, low-carbon economy, declining industries, stranded assets, financial distress
    JEL: E32 E44 G17 G32 L16 N2 O3
    Date: 2020–03

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