nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2020‒04‒27
fourteen papers chosen by
Georg Man

  1. Growth Effects of Financial Market Instruments: The Ghanaian Experience By Ekundayo P. Mesagan; Isaac A. Ogbuji; Yasiru O. Alimi; Anthonia T. Odeleye
  2. Die Entwicklung der islamischen Finanzierung zwischen der Zweckmäßigkeit der Wahl und der Nachhaltigkeit des Projekts: Anwendung auf Paneldaten in der MENA-Region By Abderraouf Mtiraoui
  3. Are the liquidity and collateral roles of asset bubbles different? By Lise Clain-Chamosset-Yvrard; Xavier Raurich; Thomas Seegmuller
  4. Growth-and-risk trade-off By Laeven, Luc; Perez-Quiros, Gabriel; Rivas, María Dolores Gadea
  5. Interlinkages between external debt financing, credit cycles and output fluctuations in emerging market economies By Akhilesh K. Verma; Rajeswari Sengupta
  6. The dynamics of non-performing loans during banking crises: a new database By Ari, Anil; Ratnovski, Lev; Chen, Sophia
  7. Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach By Gianluca Benigno; Andrew Foerster; Christopher Otrok; Alessandro Rebucci
  8. Weighing up the Credit-to-GDP gap: A cautionary note By Oezer Karagedikli; Ole Rummel
  9. Growth and instability in a small open economy with debt By Leonor Modesto; Carine Nourry; Thomas Seegmuller; Alain Venditti
  10. Government Consumption, Government Debt and Economic Growth By Shahrzad Ghourchian; Hakan Yilmazkuday
  11. Capital Controls and Income Inequality By Zheng Liu; Mark M. Spiegel; Jingyi Zhang
  12. Taxation of financial assets and capital market development in Nigeria By Inganga Eno L; Chidozie Emenuga
  13. A Decision Tree for Digital Financial Inclusion Policymaking By Stijn Claessens; Liliana Rojas-Suarez
  14. Tax effort in Sub-Saharan African countries : evidence from a new dataset By Emilie Caldeira; Ali Compaoré; Alou Dama; Mario Mansour; Grégoire Rota-Graziosi

  1. By: Ekundayo P. Mesagan (Pan-Atlantic University, Lagos, Nigeria); Isaac A. Ogbuji (University of Lagos, Nigeria); Yasiru O. Alimi (University of Lagos, Nigeria); Anthonia T. Odeleye (University of Lagos, Nigeria)
    Abstract: This study analyses the growth effects of financial market instruments in Ghana between 1991 and 2017. We use the ARDL bounds testing approach to analyse data on real GDP per capita, monetary policy rate, treasury bill rate, stocks traded, bank credits, stock turnover, market capitalisation, foreign direct investment, and gross investment. Findings show the existence of a long-run relationship between both short- and long-term financial market indicators and economic growth. Also, results confirm that long-term financial instruments perform better than the short-term instruments in boosting the country’s economy in the short-run, while in the long-run, both short-term and long-term financial indicators positively impact economic growth in Ghana. We recommend that the bank of Ghana should consider lowering the bank rate further from the current annual rate of 16.0% to enhance bank credits, boosts domestic investment, and improve growth in the long-run.
    Keywords: Financial Market Instruments, Market Capitalisation, Economic Growth, ARDL Bounds Test
    JEL: E13 E43 E51 G20 O47
    Date: 2019–01
  2. By: Abderraouf Mtiraoui (Université de Sousse)
    Abstract: Based 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 orienting investment and spending which takes into account the effective human (education) in the presence of conventional finance. Lastly, we try empirically to discover the influences of Islamic finance as an opportunity for economic growth that can describe the sustainability of any financial system used during the adaptation of this Islamic financial system as a project during a period of time. well determined and therefore the relationship between Islamic financial development on economic growth. Our empirical validation is based on an application on panel data for our MENA region over a long period of 30 years (1990-2019).
    Abstract: En se basant 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 opportunité pour la croissance économique qui peut décrivant une durabilité de n'importe quel système financier utilisé durant l'adaptation de ce système financier islamique comme un projet durant une période bien déterminée 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 30 ans successifs (1990-2019).
    Keywords: Croissance économique,Données de panel,Développement financier islamique,Opportunité,Durabilité
    Date: 2020–09–27
  3. By: Lise Clain-Chamosset-Yvrard (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Xavier Raurich (University of Barcelona, Department of Economics); 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: 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.
    Keywords: Liquidity,Bubble,Collateral,Crowding-in effect,Growth
    Date: 2020–04–07
  4. By: Laeven, Luc; Perez-Quiros, Gabriel; Rivas, María Dolores Gadea
    Abstract: We study the effects of credit over the business cycle, distinguishing between expansions and contractions. We find that there is a growth and risk trade-off in the pace of credit growth over the business cycle. While rapid credit growth tends to be followed by deeper recessions, we also find that credit growth has a positive impact on the duration of expansions. This poses a trade-off for the policymaker: Limiting the buildup of financial risk to avoid a deep recession can negatively affect the cumulation of economic growth during the expansion. We show that intermediate levels of credit growth maximize long-term growth while limiting volatility. Macroprudential policies should be used to manage this growth and risk trade-off, striking a balance between allowing expansions to last longer and avoiding deep recessions. JEL Classification: C22, E32, E61
    Keywords: business cycles, credit growth, financial crisis, GDP-at-risk, macroprudential policies
    Date: 2020–04
  5. By: Akhilesh K. Verma (Indira Gandhi Institute of Development Research); Rajeswari Sengupta (Indira Gandhi Institute of Development Research)
    Abstract: We examine the role of external debt financing (EDF) in shaping the credit cycle and output fluctuations in nine major emerging economies. We show that sharp fluctuations in EDF flows are significantly associated with credit surge and stop episodes in emerging market economies (EMEs). However the association is asymmetric in nature - a stop episode in EDF flows is more likely to bring about a credit stop episode compared to an EDF surge episode. We extend our framework to analyze the joint spillover of EDF flows and credit cycles on business cycle fluctuations in these EMEs. We find that EDF lows and credit together have a strong association with output growth. After dividing the sample into EDF surge and stop phases, we find evidence of asymmetric spillover of credit on output growth. Credit decline during EDF stop episode leads to a larger decline in GDP growth relative to the impact of an increase in credit growth during EDF surges. Our analysis points to the vulnerability of credit cycles of EMEs to the sharp movement in EDF flows which in turn is largely synchronized with external financing conditions. The strong negative spillover of EDF stop phases on the business cycle is a cause of concern for policymakers in EMEs who seek to insulate their economies from such external shocks.
    Keywords: External debt finance, Credit cycle, Dynamic panel GMM, Business cycle
    JEL: E47 E51 F34 F65 G15
    Date: 2020–04
  6. By: Ari, Anil; Ratnovski, Lev; Chen, Sophia
    Abstract: This paper presents a new dataset on the dynamics of non-performing loans (NPLs) during 88 banking crises since 1990. The data show similarities across crises during NPL build-ups but less so during NPL resolutions. We find a close relationship between NPL problems—elevated and unresolved NPLs—and the severity of post-crisis recessions. A machine learning approach identifies a set of pre-crisis predictors of NPL problems related to weak macroeconomic, institutional, corporate, and banking sector conditions. Our findings suggest that reducing pre-crisis vulnerabilities and promptly addressing NPL problems during a crisis are important for post-crisis output recovery. JEL Classification: E32, E44, G21, N10, N20
    Keywords: banking crises, crisis resolution, debt, non-performing loans, recessions
    Date: 2020–04
  7. 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.
    Keywords: Financial Crises; Endogenous Regime-Switching; Bayesian Estimation; Business Cycles; Mexico; Occasionally Binding Constraints
    JEL: C11 E3 F41 G01
    Date: 2020–03–30
  8. By: Oezer Karagedikli (South East Asian Central Banks (SEACEN)); Ole Rummel (South East Asian Central Banks (SEACEN))
    Abstract: It has been argued that credit-to-GDP gaps (credit gap) are useful early warning indicators for banking crises. In addition, the Basel Committee on Banking Supervision has also advocated using these gaps - estimated using a one-sided Hodrick-Prescott filter with a smoothing parameter of 400,000 - to inform policy on the appropriate counter-cyclical capital buffer. We use the weighted average representation of the same filter and show that it attaches high weights to observations from the past, including the distant past: up to 40 lags (10 years) of past data are used in the calculation of the one-sided trend/permanent component of the credit-to-GDP ratio. We show how past data that belongs to the ‘old-regime’ prior to the crises continue to influence the estimates of the trend for years to come. By using narrative evidence from a number of countries that experienced deep financial crises, we show that this leads to some undesirable influence on the trend estimates that is at odds with the post-crisis environment.
    JEL: J31 J64
    Date: 2020
  9. By: Leonor Modesto (UCP, Catolica Lisbon School of Business and Economics, IZA - Forschungsinstitut zur Zukunft der Arbeit - Institute of Labor Economics); Carine Nourry (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); 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); Alain Venditti (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, EDHEC - EDHEC Business School)
    Abstract: The relationship between public debt, growth and volatility is investigated in a Barro-type (1990) endogenous growth model, with three main features: we consider a small open economy, international borrowing is constrained and households have taste for domestic public debt. Therefore, capital, public debt and the international asset are not perfect substitutes and the economy is characterized by an investment multiplier. Whatever the level of the debt-output ratio, the existing BGP features expectation-driven fluctuations. If the debt-output ratio is low enough, there is also a second BGP with a lower growth rate. Hence, lower debt does not stabilize the economy with credit market imperfections. However, a high enough taste for domestic public debt may rule out the BGP with lower growth. This means that if the share of public debt hold by domestic households is high enough, global indeterminacy does not occur.
    Keywords: small open economy,public debt,credit constraint,indeterminacy
    Date: 2020–04
  10. By: Shahrzad Ghourchian (Oklahoma City University); Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: This paper compares the effects of government consumption and government debt on economic growth by using data from 83 countries, including both developed and developing markets, over the period between 1960 and 2014. Linear regressions reveal that the negative effects of government consumption are relatively higher than the negative effects of government debt. A nonlinear investigation further suggests that the restrictions on government expenditure to prevent negative growth are shown to be more important for countries with lower trade openness, lower inflation, or higher financial depth, whereas the restrictions on government debt are shown to be more important for countries with higher trade openness, lower inflation or higher financial depth.
    Keywords: Government Consumption, Government Debt, Economic Growth, Thresholds, Cross-Country Analysis
    JEL: H50 H63 O23 O47
    Date: 2020–02
  11. By: Zheng Liu; Mark M. Spiegel; Jingyi Zhang
    Abstract: We examine the distributional implications of capital account policy in a small open economy model with heterogeneous agents and financial frictions. Households save through deposits in both domestic and foreign banks. Entrepreneurs finance investment with borrowed funds from domestic banks and foreign investors. Domestic banks engage in costly intermediation of deposits from households and loans to entrepreneurs. Government capital account policy consists of taxes on outflows and inflows. Given policy, a temporary decline in the world interest rate leads to a surge in inflows, benefiting entrepreneurs and hurting households. Raising inflow taxes or reducing outflow taxes mitigate this redistribution. However, in the long run liberalization of either inflows or outflows reduces inequality. The model’s short-run implications are supported by empirical evidence. Based on instrumental variable estimation with a panel of emerging market economies, we demonstrate that increases in private capital inflows raise income inequality, while increases in outflows reduce it. These effects are significant and robust to a wide variety of empirical specifications.
    Keywords: Capital flows; income distribution; heterogeneous agents; financial frictions; small open economy
    JEL: D63 F32 F38
    Date: 2020–04–14
  12. By: Inganga Eno L; Chidozie Emenuga
  13. By: Stijn Claessens (Bank for International Settlements); Liliana Rojas-Suarez (Center for Global Development)
    Abstract: In recent years, a large number of countries have implemented policy changes to advance financial inclusion, especially by using digital financial services (DFS). However, results are mixed. While some countries are achieving impressive inclusion gains, others continue to fall short of expectations. How to properly diagnose the country-specific root causes of this shortfall and prioritize needed actions is a pressing question for policymakers in charge of designing and implementing financial inclusion strategies. Building on the Growth Diagnostic work by Hausmann and others, this paper provides an analytical framework (a decision tree) to identify country-specific constraints blocking progress with financial inclusion; that is, binding constraints. Using a deductive top down approach and dividing constraints between supply and demand factors, the tree analyzes various potential causes (branches in the tree). To identify the most relevant constraints, the methodology calls for analysis of the markets for financial services (particularly DFS) using observed (or shadow) prices and quantities. For its benchmarking approach, it proposes a wide-ranging set of indicators, including aggregate and micro-level statistics as well as survey data to reflect providers’ and consumers’ perceptions. For ease of exposition and illustrative purposes, the discussion of the tree uses many country examples. Recognizing constraints differ by financial service, trees are presented for payments and transfers, store of value, and credit services.
    Keywords: Financial inclusion, digital financial inclusion, financial regulation, financial system, decision tree, policy making
    JEL: D18 D53 G20 G28 O57 O16
    Date: 2020–02–27
  14. By: Emilie Caldeira (CERDI - Centre d'Études et de Recherches sur le Développement International - Clermont Auvergne - UCA - Université Clermont Auvergne - CNRS - Centre National de la Recherche Scientifique); Ali Compaoré (CERDI - Centre d'Études et de Recherches sur le Développement International - Clermont Auvergne - UCA - Université Clermont Auvergne - CNRS - Centre National de la Recherche Scientifique); Alou Dama (CERDI - Centre d'Études et de Recherches sur le Développement International - Clermont Auvergne - UCA - Université Clermont Auvergne - CNRS - Centre National de la Recherche Scientifique); Mario Mansour (International Monetary Fund (IMF)); Grégoire Rota-Graziosi (CERDI - Centre d'Études et de Recherches sur le Développement International - Clermont Auvergne - UCA - Université Clermont Auvergne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper proposes (i) a new database of tax revenue for 42 Sub-Saharan African countries (SSA) over the period 1980-2015, (ii) an estimate of tax effort for these countries, and (iii) some replication analyses of previous tax effort estimations. The database results from statistical information of the African Department of the International Monetary Fund (IMF). In particular, it allows distinguishing tax revenue from the natural resource sector from the other economic sectors. SSA countries collected on average 13.2 percent of GDP in non-resource tax revenue over the studied period and their average estimated tax effort is 0.58. In other words, SSA countries could raise 22.75 percent of GDP in non-resource taxes if they fully used their potential. In line with previous analyses, we find that countries' stage of development measured by per-capita income, financial development, and trade openness are important factors improving tax revenue in the region, while natural resource endowment and the importance of the agriculture sector reduce unambiguously the non-resource tax-to-GDP ratio. Finally, beyond the originality of the database itself and the empirical results, this work participates explicitly to the replication principle given its online development with R software (
    Keywords: Tax effort,Sub-Saharan Africa,Stochastic frontier analysis
    Date: 2020–04–15

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