nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2020‒04‒20
thirteen papers chosen by
Georg Man

  1. Islamic financial development between investment and economic growth in the MENA region and The East Asia and the Pacific By Abderraouf Mtiraoui
  2. Gouvernance, Finance islamique et Croissance Economique dans Quelques Nations Islamiques By Abderraouf Mtiraoui
  3. Financial Inclusion and Economic Growth: The Role of Governance in Selected MENA Countries By Emara, Noha; El Said, Ayah; Pearlman, Joseph
  4. Economic Growth and Financial Stability in MENA Countries: Does Exporting Oil Matters? By Emara, Noha; Zhang, Xiaojun; Liu, Shangchao
  5. Are the liquidity and collateral roles of asset bubbles different? By Lise Clain-Chamosset-Yvrard; Xavier Raurich; Thomas Seegmuller
  6. Government Incentives for Entrepreneurship By Josh Lerner
  7. A Fisherian Approach to Financial Crises: Lessons from the Sudden Stops Literature By Javier Bianchi; Enrique G. Mendoza
  8. Banking Crises without Panics By Matthew Baron; Emil Verner; Wei Xiong
  9. Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach By Gianluca Benigno; Andrew Foerster; Christopher Otrok; Alessandro Rebucci
  10. On shadow banking and fiÂ…nancial frictions in DSGE modeling By Philipp Kirchner
  11. Measuring the effects of U.S. uncertainty and monetary conditions on EMEs' macroeconomic dynamics By Rivolta, Giulia; Trecroci, Carmine
  12. Intra-regional spillovers from Nigeria and South Africa to the rest of Africa: New evidence from a FAVAR model By Omoshoro-Jones, Oyeyinka Sunday; Bonga-Bonga, Lumengo
  13. The public costs of climate-induced financial instability By Francesco Lamperti; Valentina Bosetti; Andrea Roventini; Massimo Tavoni

  1. By: Abderraouf Mtiraoui (Université de Sousse)
    Abstract: The purpose of this paper is to study, in the first place, the theoretical relationship between Islamic financial development, investment and economic growth. Second, we empirically try to discover the interaction between "Islamic financial development, investment and economic growth". Our empirical study highlights the direct effects of Islamic financial development on growth and investment. Finally, we also clarify the indirect effects of Islamic financial development on growth through Investment and vice versa, also on other socio-economic indicators over the period from 1990 to 2018, while using the model with simultaneous equations for the MENA region and East Asia and the Pacific.
    Abstract: Le but de ce papier est d'étudier, en premier lieu, la relation théorique entre le développement financier islamique, l'investissement et la croissance économique. En second lieu, nous tentons empiriquement de découvrir l'interaction entre « développement financier islamique, Investissement et la croissance économique ». Notre étude empirique met en lumière les effets directs du développement financier islamique sur la croissance et sur l'investissement. En dernier lieu, nous clarifions aussi les effets indirects du développement financier islamique sur la croissance à travers l'investissement et inversement, aussi sur les autres indicateurs socio-économiques au cours de la période allant de (1990-2018), tout en utilisant le modèle à des équations simultanées pour la région MENA et l'Asie de l'Est et Pacifique.
    Keywords: Développement financier Islamique,Investissement,Croissance Economique,Modèles à Équations Simultanées
    Date: 2020–03–28
  2. By: Abderraouf Mtiraoui (Université de Sousse)
    Abstract: The object of this article is to study, first of all, the relation between the Islamic finance and the economic growth. Secondly, we develop a review of the literature which highlights the nature of relation between the financial development and the economic growth and also the nature of the articulation between the governance as the quality indicator of governance and the economic growth while taking into account the role of the Islamic finance, as catalyst of economic growth in the orientation of the investments and the public spending and which makes more effective the action of governance. Lastly, we try empirically to discover the direct and indirect effects of the Islamic finance and the governance on the economic growth and consequently the relation enters the Islamic financial development measured by the bank credits of the private sector divided by the GDP and the governance on the economic growth. Our empirical try is based on a method of estimation used to know the model in simultaneous equations for our region of study MENA and the Asia Pacific during well determined period.
    Abstract: L'objet de cet article est d'étudier, en premier lieu, la relation entre la finance islamique et la croissance économique. En second lieu, nous développons une revue de la littérature qui met en lumière la nature de relation entre le développement financier et la croissance économique et aussi la nature de l'articulation entre la gouvernance comme indicateur de qualité de gouvernance et la croissance économique tout en tenant compte du rôle de la finance islamique, comme catalyseur de croissance économique dans l'orientation des investissements et des dépenses publiques et qui rend plus efficace l'action de gouvernance. En dernier lieu, nous tentons empiriquement de découvrir les effets directs et indirects de la finance islamique et la gouvernance sur la croissance économique et par conséquent la relation entre le développement financier islamique mesuré par les crédits bancaires du secteur privé divisé par le PIB et la gouvernance sur la croissance économique. Notre essai empirique est basé sur une méthode d'estimation utilisée à savoir le modèle à des équations simultanées pour dans Quelques Nations Islamiques durant une période bien déterminée.
    Keywords: Gouvernance,Finance Islamique,Croissance économique and Modèles à équations simultanées J
    Date: 2020–03–29
  3. By: Emara, Noha; El Said, Ayah; Pearlman, Joseph
    Abstract: Financial Inclusion - access to financial products by households and firms - is one of the main albeit challenging priorities, both for Advanced Economies (AEs) as well as Emerging Markets (EMs), even more so for the latter. Financial inclusion facilitates consumption smoothing, lowers income inequality, enables risk diversification, and tends to positively affect economic growth. Financial stability is another rising priority among policy makers. This is evident in the re-emergence of macroprudential policies after the global financial crisis, minimizing systemic risk, particularly risks associated with rapid credit growth. However, there are significant policy trade-offs that could exist between both financial inclusion and financial stability, with mixed evidence on the link between the two objectives. Given the importance of macroprudential policies as a toolbox to achieve financial stability, we examine the impact of macroprudential policies on financial inclusion - a potential cause for financial instability if not carefully implemented. Using panel regressions for 67 countries over the period 2000-2014, our results point to mixed effects of macroprudential policies. The usage (and tightening) of some tools, such as the debt-to-income ratio, appear to reduce financial inclusion whereas others, such as the required reserve ratio (RRR), increase it. Specifically, both institutional quality and financial development appear to increase the effectiveness of macroprudential policies on financial inclusion. Institutional quality helps macroprudential policies boost financial inclusion, with mixed effects as a result of financial development, but the results are more significant when we include either institutional quality or financial development. This leads us to believe that macroprudential policies conditional on better institutional quality and financial development improves financial inclusion. This has important policy implications for financial stability.
    Keywords: Financial Inclusion; Governance; Financial Stability; MENA; Macroprudential Policies
    JEL: C21 C23 O4
    Date: 2019
  4. By: Emara, Noha; Zhang, Xiaojun; Liu, Shangchao
    Abstract: Using system panel GMM dynamic panel on a sample of nineteen MENA countries over the period 1990 – 2014, the study estimates the effect of financial stability on economic growth. Using the principal component analysis to create a composite index of financial stability consisting of a banking crisis dummy variable, the ratio of credit to government and state-owned enterprises to GDP, and the ratio of domestic credit to private sector as a percent of GDP, the estimation results show financial stability in the MENA region is important for boosting economic growth in the region. Furthermore, when dividing the sample between oil and non-oil exporters, the results suggests no statistically significant difference between the two groups in terms of the impact of financial stability on economic growth. Our results are robust to the use of different fixed effects and random effects estimation methodologies.
    Keywords: Financial Stability; Economic Growth; System GMM; Fixed Effects; MENA Countries
    JEL: N2 N25 O16 O40
    Date: 2019–06–01
  5. By: Lise Clain-Chamosset-Yvrard (Univ. Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France); Xavier Raurich (University of Barcelona, Department of Economics, Av. Diagonal 696, 08034 Barcelona (Spain)); Thomas Seegmuller (Aix-Marseille Univ, CNRS, EHESS, Ecole Centrale, AMSE, Marseille, France.)
    Abstract: Several recent papers introduce different mechanisms to explain why asset bubbles are observed in periods of larger growth. These papers share common assumptions, heterogeneity among traders and credit market imperfection , but differ in the role of the bubble, used to provide liquidities or as collateral in a borrowing constraint. In this paper, we introduce heterogeneous traders by considering an overlapping generations model with households living three periods. Young households cannot invest in capital, while adults have access to investment and face a borrowing constraint. Introducing bubbles in a quite general way, encompassing the different roles they have in the existing literature, we show that the bubble may enhance growth when the borrowing constraint is binding. More significantly, our results do not depend on the-liquidity or collateral-role attributed to the bubble. We finally extend our analysis to a stochas-tic bubble, which may burst with a positive probability. Because credit and bubble are no more perfectly substitutable assets, the liquidity and collateral roles of the bubble are not equivalent. Growth is larger when bubbles play the liquidity role, because the burst of a bubble used for liquidity is less damaging to agents who invest in capital.
    JEL: E44 G11
    Date: 2020–04
  6. By: Josh Lerner
    Abstract: In the dozen years since the Global Financial Crisis, there has been a surge of interest on the part of governments in promoting entrepreneurial activity, largely by providing financing. This essay explores these policies, focusing on financial incentives to entrepreneurs and the intermediaries who fund them. The motivation for these efforts is clear: the well-documented relationships between economic growth, innovation, entrepreneurship and venture capital. Yet despite good intentions, many of these public initiatives have ended in disappointment. I argue that these failures have not simply been a matter of bad luck. Instead, the unfortunate outcomes have reflected the fundamental structural issues that make it difficult for governments to launch sustained successful efforts to promote entrepreneurship over sustained periods. I highlight several critical challenges, and outline two principles that might render these efforts more effective.
    JEL: G18 G24 H81
    Date: 2020–03
  7. By: Javier Bianchi; Enrique G. Mendoza
    Abstract: Sudden Stops are financial crises defined by a large, sudden current-account reversal. They occur in both advanced and emerging economies and result in deep recessions, collapsing asset prices, and real exchange-rate depreciations. They are preceded by economic expansions, current-account deficits, credit booms, and appreciated asset prices and real exchange rates. Fisherian models (i.e. models with credit constraints linked to market prices) explain these stylized facts as an outcome of Irving Fisher's debt-deflation mechanism. On the normative side, these models feature a pecuniary externality that provides a foundation for macroprudential policy (MPP). We review the stylized facts of Sudden Stops, the evidence on MPP use and effectiveness, and the findings of the literature on Fisherian models. Quantitatively, Fisherian amplification is strong and optimal MPP reduces sharply the size and frequency of crises, but it is also complex and potentially time-inconsistent, and simple MPP rules are less effective. We also provide a new MPP analysis incorporating investment. Using a constant debt-tax policy, we construct a crisis probability-output frontier showing that there is a tradeoff between financial stability and long-run output (i.e., reducing the probability of crises reduces long-run output).
    JEL: E3 E37 E44 F41 G01 G18
    Date: 2020–03
  8. By: Matthew Baron; Emil Verner; Wei Xiong
    Abstract: We examine historical banking crises through the lens of bank equity declines, which cover a broad sample of episodes of banking distress both with and without banking panics. To do this, we construct a new dataset on bank equity returns and narrative information on banking panics for 46 countries over the period 1870-2016. We find that even in the absence of panics, large bank equity declines are associated with substantial credit contractions and output gaps. While panics can be an important amplification mechanism, our results indicate that panics are not necessary for banking crises to have severe economic consequences. Furthermore, panics tend to be preceded by large bank equity declines, suggesting that panics are the result, rather than the cause, of earlier bank losses. We also use bank equity returns to uncover a number of forgotten historical banking crises and to create a banking crisis chronology that distinguishes between bank equity losses and panics.
    JEL: G01 G21
    Date: 2020–03
  9. By: Gianluca Benigno; Andrew Foerster; Christopher Otrok; Alessandro Rebucci
    Abstract: We estimate a workhorse DSGE model with an occasionally binding borrowing constraint. First, we propose a new specification of the occasionally binding constraint, where the transition between the unconstrained and constrained states is a stochastic function of the leverage level and the constraint multiplier. This specification maps into an endogenous regime-switching model. Second, we develop a general perturbation method for the solution of such a model. Third, we estimate the model with Bayesian methods to fit Mexico's business cycle and financial crisis history since 1981. The estimated model fits the data well, identifying three crisis episodes of varying duration and intensity: the Debt Crisis in the early-1980s, the Peso Crisis in the mid-1990s, and the Global Financial Crisis in the late-2000s. The crisis episodes generated by the estimated model display sluggish and long-lasting build-up and stagnation phases driven by plausible combinations of shocks. Different sets of shocks explain different variables over the business cycle and the three historical episodes of sudden stops identified.
    JEL: C11 E30 F41 G01
    Date: 2020–04
  10. By: Philipp Kirchner (University of Kassel)
    Abstract: At the forefront of macroeconomic research on the causes of the Great Financial Crisis (GFC) was and still is the usage of dynamic stochastic general equilibrium (DSGE) models. To capture the nonlinearities of the GFC, these models were enriched with a variety of fiÂ…nancial frictions. This paper focuses on a special subset of these frictions, the shadow banking system. We provide a structured review of the strand of literature that considers shadow banking in DSGE setups and draw particular attention to the modeling approach as well as impact of shadow banking. Our analysis allows the following conclusions: fiÂ…rstly, models featuring shadow banking are better able to simulate realistic movements in the business cycle that are of comparable magnitude to the GFC. Secondly, the models consider ampliÂ…cation channels between the fiÂ…nancial sector and the real economy that proved to be of importance during the crisis. Thirdly, the models display a good explanatory power of Â…financial stability measures in the light of shadow banking.
    Keywords: Shadow Banking, DSGE, Financial Frictions, Financial Intermediation, Great Financial Crisis.
    JEL: E10 E44 E32
    Date: 2020
  11. By: Rivolta, Giulia; Trecroci, Carmine
    Abstract: We explore empirically the transmission of U.S. financial and macroeconomic uncertainty to emerging market economies (EMEs). We start by assuming that there are crucial differences between volatility and uncertainty, and between the latter and its shocks. With the help of Bayesian vector autoregressions, we first identify two measures of U.S. uncertainty shocks, which appear to explain the dynamics of output developments better than conventional volatility measures. Next, we find evidence that adverse shocks to U.S. aggregate uncertainty are associated with marked contractions in some EMEs’ business cycles. However, we detect significant cross-country heterogeneity in the responses of EMEs’ business cycles to U.S uncertainty shocks. We also find generalized declines in stock market values, which supports the so-called Global Financial Cycle hypothesis.
    Keywords: Uncertainty, Monetary policy, Asset prices, Emerging markets.
    JEL: C11 C31 E44 E52 E58 F36
    Date: 2020–04–01
  12. By: Omoshoro-Jones, Oyeyinka Sunday; Bonga-Bonga, Lumengo
    Abstract: This paper examines the effects of intraregional spillovers propagated by Nigeria and South Africa on real economic activities and interest rates movement in three African regional blocs (i.e., ECOWAS, SADC and CEMAC) employing the factor augmented VAR (FAVAR) modelling approach over the period 1980Q2–2015Q1. Moreover, a counterfactual analysis, based on the same modelling approach, is conducted to assess what would happen to the real activities and monetary policy indicators of the three regional blocs in the absence of real and monetary shocks from the two countries. The paper finds that while the influence of Nigeria is limited to ECOWAS, South Africa plays an influential role on the real sectors and financial systems of all the regional blocs, albeit with short-lived impacts on ECOWAS and CEMAC. Moreover, the results of the counterfactual analysis show that real and financial activities in the SADC regions are highly influenced by South Africa. Our result suggests that countries with proper coordination of macroeconomic and monetary policies as well as organised financial market should be the sources of contagion and spillover, mostly at regional level.
    Keywords: FAVAR, growth shocks, intra-regional spillovers, monetary policy
    JEL: C55 E52 F42 F44
    Date: 2020–04–07
  13. By: Francesco Lamperti; Valentina Bosetti; Andrea Roventini; Massimo Tavoni
    Abstract: Recent evidence suggests that climate change will significantly affect macro-economic growth and several productive elements of modern economies, such as workers and land [Dell et al., 2009, Burke et al., 2015, Carleton and Hsiang, 2016]. Although historical records indicate that economic shocks lead to financial instability, few studies have focused on the impacts of climate change on the financial system [Dietz et al., 2016, Dafermos et al., 2018]. This paper evaluates a global economy where multiple banks provide credit to production activities exposed to climate damages. We use an agent based climate-macroeconomic model calibrated on stylized facts, future scenarios and climate impact functions [Nordhaus, 2017] affecting labour and capital. Results indicate that climate change will increase the frequency of banking crises (+26-148%). The public costs of rescuing insolvent banks will cause an additional burden of about 5-to-15% of GDP per year, and an increase of public debt to GDP by a factor of 2. We estimate that around 20% of such effects are caused by the deterioration of banks' balance-sheets. Macroprudential regulation attenuates bailout costs, but only moderately. Our results show that leaving out the financial system from climate-economy integrated assessment may lead to an underestimation of climate impacts, and that financial regulation can play a role in mitigating them.
    Keywords: Climate Change; Climate Impacts; Financial Crises; Public Debt; Macroprudential Policy.
    Date: 2019–12–31

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