nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2020‒04‒06
eighteen papers chosen by
Georg Man

  1. Finance of Islamic Ethics, Conventional Finance and Economic Growth: Applying Dynamic Panel Data By Abderraouf Mtiraoui
  2. Islamic Financial Development Between Trend and Stability in the MENA region: Application on Panel Data By Abderraouf Mtiraoui
  3. Quantity and Quality Measures of Financial Development: Implications for Macroeconomic Performance By Hiro Ito; Masahiro Kawai
  4. The Circular Relationship Between Productivity Growth and Real Interest Rates By Antonin Bergeaud; Gilbert Cette; Rémy Lecat
  5. Growth without Full Capacity Utilization And Full Capacity Utilization Without Growth By Federico Bassi
  6. The impact of uncertainty and certainty shocks By Schüler, Yves S.
  7. The Global Financial Resource Curse By Gianluca Benigno; Luca Fornaro; Martin Wolf
  8. Not All Profit Shifting Is Created Equal? An Analysis of Internal Debt By Zarko Kalamov
  9. (Ir)rational explorers in the financial jungle: modelling Minsky with heterogeneous agents By Alessia Cafferata; Marwil J. Dávila-Fernández; Serena Sordi
  10. Determinants of Foreign Direct Investment and its Impact on Economic Performance in DRC By Dieumerci Zumbu; Claude Sumata
  11. Real Estate Prices and Corporate Investment: Theory and Evidence of Heterogeneous Effects across Firms By Denis Fougere; Rémy Lecat; Simon Ray
  12. Risk pooling, leverage, and the business cycle By Dindo, Pietro; Modena, Andrea; Pelizzon, Loriana
  13. International credit markets and global business cycles By Patrick Pintus; Yi Wen; Xiaochuan Xing
  14. Forecasting Stock Market Recessions in the US: Predictive Modeling using Different Identification Approaches By Felix Haase; Matthias Neuenkirch
  15. The Global Financial Cycle and US Monetary Policy in an Interconnected World By Stéphane Dées; Alessandro Galesi
  16. Provincial Trade, Financial Friction and Misallocation in China By Kwon, Ohyun; Fleisher, Belton M.; McGuire, William H.; Zhao, Min Qiang
  17. FinTech credit: a critical review of empirical research By Nicola Branzoli; Ilaria Supino
  18. Can Direct Innovation Subsidies Relax SMEs' Credit Constraints? By Raphaël Chiappini; Samira Demaria; Benjamin Montmartin; Sophie Pommet

  1. By: Abderraouf Mtiraoui (Université de Sousse)
    Abstract: The purpose of this article is to study, in the first place, the theoretical framework of the relationship between Islamic finance, conventional finance and economic growth. Second, we reviewed the review of the existing literature that highlights the nature of the relationship between financial development and economic growth, while considering the role played by Islamic finance as a catalyst for economic growth in the region. Investment orientation. Lastly, we empirically try to discover the impacts of Islamic finance and conventional finance on economic growth and therefore the relationship between conventional financial development and the financial development of Islamic ethics on economic growth. Our empirical validation is very diverse given the nature of the estimation methods used the GMM method in first differences and the GMM method in system for our study many Islamic country during twenty successive years (1990-2009).
    Abstract: L'objet de cet article est d'étudier, en premier lieu, le cadre théorique de la relation entre la finance islamique, la finance conventionnelle et la croissance économique. En second lieu, nous avons examiné la revue de la littérature existante qui met en lumière la nature de relation entre le développement financier et la croissance économique tout en tenant compte du rôle joué par la finance islamique, comme catalyseur de croissance économique, dans l'orientation des investissements. En dernier lieu, nous tentons empiriquement de découvrir les impacts de la finance islamique et la finance conventionnelle sur la croissance économique et par conséquent la relation entre le développement financier conventionnelle et le développement financier de l'éthique islamique sur la croissance économique. Notre validation empirique est très diversifiée vu la nature des méthodes d'estimation utilisées à savoir la méthode à effets fixes, la méthode à effets aléatoires, la méthode de GMM en différences premières et la méthode de GMM en système pour notre région d'étude durant vingt ans successifs.
    Keywords: Islamic Finance,Conventional Finance,Economic Growth,Dynamic Panel Model,Finance Islamique,Finance Conventionnelle,Croissance économique,Modèle Panel dynamique
    Date: 2019–10–04
  2. By: Abderraouf Mtiraoui (Université de Sousse)
    Abstract: Drawing on a review of the innovative literature, we first examine theoretically the nature of the relationship between financial development and economic growth, while taking into account the role played by Islamic finance in steering investment and public spending. which takes into account the effective human (education) in the presence of conventional finance. Finally, we try empirically to discover the influences of Islamic finance as a trend towards economic growth describing the stability and sustainability of any financial system used and hence the relationship between Islamic financial development and economic growth. Our empirical validation is based on a panel data application for our MENA region over a long period of 20 years (1990-2009).
    Abstract: En appuyant sur une revue de la littérature innovante, nous examinons en premier lieu théoriquement la nature de relation entre le développement financier et la croissance économique tout en tenant compte du rôle joué la finance islamique dans le sens d'orientation des investissements et des dépenses publiques qui prend en considération l'efficace humaine (éducation) en présence de la finance conventionnelle. Nous essayons en dernier lieu empiriquement de découvrir les influences de la finance islamique comme étant une tendance sur la croissance économique décrivant la stabilité et durabilité de n'importe quel système financier utilisé et par conséquent la relation entre le développement financier islamique sur la croissance économique. Notre validation empirique est basée une application sur les données de panel pour notre région MENA durant une longue période de 20 ans successifs (1990-2009).
    Keywords: Islamic financial development,Economic growth,Panel data,Développement Financier Islamique,Croissance Economique,Les Données De Panel
    Date: 2019–08–26
  3. By: Hiro Ito (Portland State University); Masahiro Kawai (Economic Research Institute for Northeast Asia (ERINA))
    Abstract: Financial development is often measured by financial depth such as the stock of private credit and market capitalization as a share of GDP. Such a measure focuses on the quantity aspect of financial development. In this paper, we propose measures that capture both the quantity and quality aspects of financial market development. For quantity measures, we construct a composite index with multiple variables which gauge the size and depth of the banking, equity, bond, and insurance markets. For quality measures, we create a composite index that reflects the degree of financial market diversity, liquidity and efficiency, and the institutional environment. The last factor captures the development of legal systems and institutions, human capital, and information and telecommunications infrastructure. We find that the quantity and quality measures are highly correlated with each another for advanced economies and Asian emerging market economies, but not for other economies. The disaggregated components of the quality measures suggest that it is the level of legal and institutional development that differentiates advanced economies from emerging and developing economies in terms of the quality measures. Compared to advanced economies, emerging and developing economies tend to have low levels of market diversity, liquidity, and efficiency. Our simple regression analysis shows that the quality measure of financial development has a positive effect on output growth and negative effects on output volatility and inflation for the sample of emerging and developing economies with relatively high-quality financial development. We also observe that a higher level of financial development, particularly in terms of quality, tends to lead to greater financial openness, and that greater financial openness tends to be associated with low growth, high growth volatility and high inflation for emerging and developing economies with low quality measures of financial development, while such undesirable impacts of financial openness can be mitigated by raising the quality of financial development.
    Keywords: financial development, financial liberalization, financial openness
    JEL: E44 G2 O16
    Date: 2018–04
  4. By: Antonin Bergeaud; Gilbert Cette; Rémy Lecat
    Abstract: In most advanced economies, both real interest rates and productivity growth have decreased since the early 1990s. In this paper, we explore the mechanism whereby a circular relationship links these two quantities. While productivity is a key driver of potential output which affects the level of interest rates, the level of interest rates is a determinant of the expected return from investment projects, and thus of the productivity level required for investment. In our model, absent of a technology shock, this specific relationship can only converge to an equilibrium where growth and interest rates are both low. We test this using macroeconomic data on 17 OECD countries and simulate the effect of a temporary productivity shock.
    Keywords: : Productivity,Slowdown, Secular Stagnation, Interest Rates.
    JEL: O43 O47 O57 E43
    Date: 2019
  5. By: Federico Bassi (Centre d'Economie de l'Université de Paris Nord (CEPN))
    Abstract: Despite empirical evidence of permanent damages to GDP after the 2008 global financial crisis, there is little theoretical consensus about the impact of the crisis on the unobservable rate of capacity utilization. In this paper, we investigate how the rate of capacity utilization reacts to shocks by testing the hypothesis that the normal rate of capacity utilization is exogenous and constant, against the alternative hypothesis that it is endogenous to demand and can vary with time. We find that the normal rate is more likely to be a shifting attractor or a time-varying trend instead of a fixed center of gravity. Hence, temporary shocks do not necessarily translate into permanent losses of productive capacity but they can also translate into lower degrees of utilization of the capacity in place. We show indeed that the effects of the 2008 financial crisis on EU countries were highly heterogeneous, and we find three different trajectories. A first cluster of countries recovered the pre-crisis rate of capacity utilization and accumulation, despite a permanent destruction of productive capacity. A second cluster of countries absorbed the shock through a lower rate of capacity utilization and accumulation with no permanent destruction of productive capacity; a third cluster of countries absorbed the shock through a massive destruction of productive capacity and a negative rate of growth, despite an increasing rate of utilization.
    Keywords: Normal rate of capacity utilization, Hysteresis, Secular stagnation
    JEL: C32 C51 E12 E22 E32
    Date: 2020–03
  6. By: Schüler, Yves S.
    Abstract: I propose a Bayesian quantile VAR to identify and assess the impact of uncertainty and certainty shocks, unifying Bloom's (2009) two identification steps into one. I find that an uncertainty shock widens the conditional distribution of future real economic activity growth, in line with a risk shock. Conversely, a certainty shock (a shock strongly decreasing uncertainty) narrows the conditional distribution of future real activity growth. In addition to the difference in signs, I show that the two shocks are different shocks. Each shock impacts the real economy uniquely. I support this with the underlying events: For instance, uncertainty shocks relate to events such as Black Monday and 9/11, but also to fears about future negative economic outcomes. In contrast, certainty shocks often link to phases of irrational exuberance. Commonly, no distinction is made between uncertainty and certainty shocks. I show that uncertainty shocks become more important if distinguished from certainty shocks.
    Keywords: Bayesian quantile VAR,uncertainty shocks,tail risks,irrational exuberance
    JEL: C32 E44 G01
    Date: 2020
  7. By: Gianluca Benigno; Luca Fornaro; Martin Wolf
    Abstract: Since the late 1990s, the United States have received large capital flows from developing countries and experienced a productivity growth slowdown. Motivated by these facts, we provide a model connecting international financial integration and global productivity growth. The key feature is that the tradable sector is the engine of growth of the economy. Capital flows from developing countries to the United States boost demand for U.S. non-tradable goods. This induces a reallocation of U.S. economic activity from the tradable sector to the non-tradable one. In turn, lower profits in the tradable sector lead firms to cut back investment in innovation. Since innovation in the United States determines the evolution of the world technological frontier, the result is a drop in global productivity growth. We dub this effect the global financial resource curse. The model thus offers a new perspective on the consequences of financial globalization, and on the appropriate policy interventions to manage it.
    Keywords: global productivity growth, international financial integration, Capital flows, U.S. productivity growth slowdown, low global interest rates, Bretton Woods II, export-led growth
    JEL: E44 F21 F41 F43 F62 O24 O31
    Date: 2020–02
  8. By: Zarko Kalamov
    Abstract: This paper analyzes how internal debt financing of multinational firms affects high-tax countries. It uses a dynamic small open economy model and takes into account that internal debt impacts both the multinational firms’ investment decisions and the government's tax policy. The government has incentives to redistribute income from firm owners to workers. If the government’s redistributive motive is not too strong, internal debt reduces welfare in the short term by decreasing tax revenues. However, debt financing stimulates capital accumulation and exerts a positive long term welfare impact. If the multinational firm additionally manipulates transfer prices, the adverse short term welfare effects may extend to the long term.
    Keywords: internal debt, profit shifting, tax havens
    JEL: F23 H25 H70
    Date: 2020
  9. By: Alessia Cafferata; Marwil J. Dávila-Fernández; Serena Sordi
    Abstract: Over the past decades, several scholars have formalised Minsky's profound insight that increasing fiancial fragility accompanies periods of economic stability. It must be noted, however, that a deep assessment of the role of expectations formation with heterogeneous agents has been provided only by those contributions focusing on stock-market price dynamics. Macroeconomic models dealing with debt dynamics, on the other hand, have not yet presented such an account. It is our purpose to fil this gap in the literature by formalising switches between different heuristics in a model where solvency aspects matter. Our system is capable of generating time-series that reproduce important empirical stylised facts such as fat-tails and asymmetric skewness. In the absence of a stochastic component, the model still leads to sensitivity to initial conditions. Moreover, while the destabilising role of extrapolative behaviour is part of conventional wisdom, we show under which conditions fundamentalists, the existence of resource constraints, and the time horizon of the economic unit may also lead to instability.
    Keywords: Financial instability; real-financial interactions; heterogeneous expec-tations; complex dynamics; Minsky
    JEL: G01 C61 D84
    Date: 2020–02
  10. By: Dieumerci Zumbu (Université protestante au Congo - Université protestante au Congo); Claude Sumata (Université protestante au Congo - Université protestante au Congo)
    Date: 2020
  11. By: Denis Fougere (OSC - Observatoire sociologique du changement - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique); Rémy Lecat (Centre de recherche de la Banque de France - Banque de France); Simon Ray (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: In this paper, we investigate the effect of real estate prices on productive investment. We build a theoretical framework of firms' investment with credit rationing and real estate collateral. We show that real estate prices affect firms' borrowing capacities through two channels. An increase in real estate prices raises the value of the firms' pledgeable assets and mitigates the agency problem characterizing the creditor–entrepreneur relationship. It simultaneously cuts the expected profit due to the increase in the cost of inputs. We test our theoretical predictions using a large French database. We do find heterogeneous effects of real estate prices on productive investment depending on the position of the firms in the sectoral distributions of real estate holdings.
    Keywords: financial constraints,Firms' investment,Real estate prices,Collateral channel,Financial constraints JEL classification: D22,G30,O52,R30
    Date: 2019–09
  12. By: Dindo, Pietro; Modena, Andrea; Pelizzon, Loriana
    Abstract: This paper studies the impact of financial sector size and leverage on business cycles and risk-free rates dynamics. We model a general equilibrium productive economy where financial intermediaries provide costly risk mitigation to households by pooling the idiosyncratic risks of their investment activities. We find that leverage amplifies variations of intermediaries' relative size, but may also mitigate the business cycle. Moreover, it makes risk-free rates pro-cyclical. Households benefit the most when the financial sector is neither too small, thus avoiding high consumption fluctuations and costly mitigation, nor too big, so that fewer resources are lost after intermediation costs.
    Keywords: Business Cycle,Frictions,Leverage,Mitigation,Risk Pooling
    JEL: E13 E32 E69 G12
    Date: 2020
  13. By: Patrick Pintus (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); Yi Wen (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); Xiaochuan Xing (Yale University [New Haven])
    Abstract: This paper stresses a new channel through which global financial linkages contribute to the co‐movement in economic activity across countries. We show in a two‐country setting with borrowing constraints that international credit markets are subject to self‐fulfilling variations in the world real interest rate. Those expectation‐driven changes in the borrowing cost in turn act as global shocks that induce strong cross‐country co‐movements in both financial and real variables (such as asset prices, gross domestic product, consumption, investment, and employment). When firms around the world benefit from unexpectedly low debt repayments, they borrow and invest more, which leads to excessive supply of collateral and of loanable funds at a low interest rate, thus fueling a boom both at home and abroad. As a consequence, business cycles are synchronized internationally. Such a stylized model thus offers one way to rationalize both the existence of a world business‐cycle component, documented by recent empirical studies through dynamic factor analysis, and the factor's intimate link to global financial markets.
    Keywords: world interest rate,international co-movement,self-fulfilling equilibria
    Date: 2019–03
  14. By: Felix Haase; Matthias Neuenkirch
    Abstract: Stock market recessions are often early warning signals for financial or economic crises. Hence, forecasting bear markets is important for investors, policymakers, and economic agents in general. In our two-step procedure, we first identify stock market regimes in the US using three different techniques (Markov-switching models, dating rules, and a naïve moving average). Second, we predict recessions in the S&P 500 with the help of several modeling approaches, utilizing the information of 92 macro-financial variables. Our results suggest that several variables are suitable for forecasting recessions in stock markets in-sample and out-of-sample. Our early warning models for the US equity market, in particular those using principal components to aggregate the information in the macro-financial variables, provide a statistical improvement over several benchmarks. In addition, these generate economic value by boosting returns, improving the sharp ratio and the omega, and substantially reducing drawdowns.
    Keywords: Dating Algorithms, Markov-Switching Models, Predictions, Principal Component Analysis, Specific-to-General Approach, Stock Market Recessions
    JEL: C53 G11 G17
    Date: 2020
  15. By: Stéphane Dées; Alessandro Galesi
    Abstract: We assess the international spillovers of US monetary policy with a large-scale global VAR which models the world economy as a network of interdependent countries. An expansionary US monetary policy shock contributes to the emergence of a Global Financial Cycle, which boosts macroeconomic activity worldwide. We also find that economies with floating exchange rate regimes are not fully insulated from US monetary policy shocks and, even though they appear to be relatively less affected by the shocks, the differences in responses across exchange rate regimes are not statistically significant. The role of US monetary policy in driving these macrofinancial spillovers gets even reinforced by the complex network of interactions across countries, to the extent that network effects roughly double the direct impacts of US monetary policy surprises on international equity prices, capital flows, and global growth.
    Keywords: : Trilemma, Global Financial Cycle, Monetary Policy Spillovers, Network Effects.
    JEL: C32 E52 F40
    Date: 2019
  16. By: Kwon, Ohyun (Drexel University); Fleisher, Belton M. (Ohio State University); McGuire, William H. (University of Washington Tacoma); Zhao, Min Qiang (Xiamen University)
    Abstract: We study the implications of financial-market imperfections on labor and capital misallocation in China. Financial friction stems from private sectors' credit constraints that limit the efficient use of capital relative to state firms. Our model can jointly explain labor flows out of and capital flows into the Chinese provinces with high capital market distortion. To formally test this hypothesis, we propose a measure of regional financial friction based on our model. We show that the underlying financial friction can be inferred by differences-in-differences in the market shares of private and state sectors and their marginal rental rates of capital. Our regression results show that our measure of financial friction has robust explanatory power regarding interprovincial capital and labor flows. Our structural analysis shows that improving financial friction in China can lead to 3.9% welfare gain in China.
    Keywords: financial friction, regional capital flows, Chinese economy
    JEL: R12 H3 E5 O5 F4
    Date: 2020–03
  17. By: Nicola Branzoli (Bank of Italy); Ilaria Supino (Bank of Italy)
    Abstract: FinTech credit has attracted significant attention from academics and policymakers in recent years. Given its growing importance, in this paper we provide an overview of the empirical research on FinTech credit to households and non-financial corporations (NFCs). We focus on three broad topics: i) the factors supporting the development of innovative business models for credit intermediation, such as marketplace lending; ii) the benefits of new credit risk assessment data and methods; iii) the implications of these innovations for access to credit. Three main messages emerge from the literature. First, the growth of lenders with innovative business models is mainly driven by the degree of local economic development and of competition in the banking sector. Second, new data and methods can improve traditional credit risk models because they are particularly helpful in screening opaque borrowers, such as those with scant credit history. Third, FinTech borrowers generally lack (or have limited) access to finance and tend to be riskier than traditional bank borrowers.
    Keywords: artificial intelligence, credit, digital technologies, FinTech, marketplace lending
    JEL: G21 G22 G23 G24
    Date: 2020–03
  18. By: Raphaël Chiappini (Université de Bordeaux; LAREFI); Samira Demaria (Université Côte d'Azur, France; GREDEG CNRS); Benjamin Montmartin (SKEMA Business School; Université Côte d'Azur, France); Sophie Pommet (Université Côte d'Azur, France; GREDEG CNRS)
    Abstract: Credit constraints hamper the ability of SMEs to undertake innovative activities. Promoting access to external funding for SMEs represents therefore an important challenge for policymakers. This paper investigates whether innovation subsidies provided by the French public investment bank to SMEs have translated into better access to bank and other external financing through an indirect certification effect. We exploit a unique database covering the period 2000-2010 to construct a quasi-natural experiment and evaluate the causal impact of these subsidies on SMEs' financial constraints. If we find a significant improvement in the access to bank financing for subsidized firms, the effect is heterogeneous and mainly concentrated on small firms operating in high-tech sectors. Moreover, such public support does not seem to improve the access to other external sources of financing which can be explained by the low development risk-capital markets in France.
    Keywords: Credit constraints, innovation policy, certification effect, Mahalanobis distance matching, difference-in difference
    JEL: O33 O38
    Date: 2020–03

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