nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2020‒05‒04
ten papers chosen by
Georg Man

  1. The Adverse Effect of Finance on Growth By Maxime Fajeau
  2. Endogenous Growth and Monetary Policy: How Do Interest-Rate Feedback Rules Shape Nominal and Real Transitional Dynamics? By Gustavo Iglésias; Pedro Mazeda Gil
  3. La crédibilité des politiques monétaires affecte-t-elle la croissance économique en Afrique subsaharienne? By Tadadjeu Wemba, Dessy-Karl; Essiane, Patrick-Nelson Daniel
  4. Quel rôle pour les banques centrales dans la promotion de la croissance économique ? By Stéphanie Ilunga; Christian Pinshi
  5. Redistribution, Inequality, and Efficiency with Credit Constraints By Yoseph Y. Getachew; Stephen J. Turnovsky
  6. Credit Supply Driven Boom-Bust Cycles By Yavuz Arslan; Bulent Guler; Burhan Kuruscu
  7. Bank Lending Standards, Loan Demand, and the Macroeconomy: Evidence from the Korean Bank Loan Other Survey By Sangyup Choi
  8. Growth and instability in a small open economy with debt By Leonor Modesto; Carine Nourry; Thomas Seegmuller; Alain Venditti
  9. Bank Competition and Financial Stability:Evidence from the U.S. Banking Deregulation By Yifei Cao; Jenyu Chou; Ian Gregory-Smith; Alberto Montagnoli
  10. The Interaction Between Macroprudential Policy and Financial Stability By Zoe Venter

  1. By: Maxime Fajeau (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: Since the global financial crisis of 2008, a strand of the literature has documented a threshold beyond which financial development tends to affect growth adversely. The evidence, however, rests heavily on internal instrument identification strategies, whose reliability has received surprisingly little attention so far in the finance-growth literature. Therefore, the present paper conducts a reappraisal of the non-linear conclusion twofold. First, in light of new data, second, by a thorough assessment of the identification strategy. Evidence points out that a series of unaddressed issues affecting the system-gmm setup results in spurious threshold regressions and overfitting of outliers. Simple cross-country analysis still suggests a positive association for low levels of private credit. However, adequately accounting for country heterogeneity, along with a more contained use of instruments, points to an overall damaging influence of financial development on economic growth. This association is stronger for more recent periods.
    Keywords: Finance,Growth,Non-linearity,System GMM,Panel Data
    Date: 2020–04
  2. By: Gustavo Iglésias; Pedro Mazeda Gil
    Abstract: Monetary authorities have followed interest-rate feedback rules in apparently different ways over time and across countries. The literature distinguishes, in particular, between active and passive monetary policies in this regard. We address the nominal and real transitional-dynamics implications of these different types of monetary policy, in the context of a monetary growth model of R&D and physical capital accumulation. In this setup, well-behaved transitional dynamics occurs under both active and passive monetary policies. We carry out our study from three perspectives: the convergence behaviour of catching-up economies; a structural monetary-policy shock (i.e., a change in the long-run inflation target); and real industrialpolicy shocks (i.e., a change in R&D subsidies or in manufacturing subsidies). We uncover a new channel through which institutional factors (the characteristics of the monetary-policy rule) influence the economies’ convergence behaviour and through which monetary authorities may leverage (transitional) growth triggered by structural shocks.
    JEL: E41 O31 O41
    Date: 2020
  3. By: Tadadjeu Wemba, Dessy-Karl; Essiane, Patrick-Nelson Daniel
    Abstract: This study proposes to highlight the effect of greater Monetary Policy Credibility (CPM) on economic growth in Sub-Saharan Africa (SSA) during the period 1980-2017. The econometric approach based on dynamic panel data is mainly used for our estimates. The main results show a limited and insignificant effect of the credibility indicator on economic activity, mainly due to the ineffectiveness of the monetary policy transmission channels. This contradiction has led us to recommend for our part the promotion of a monetary policy oriented towards improving economic growth in Sub-Saharan Africa, but without however prejudicing the constraint of price stability.
    Keywords: Monetary Policy; Economic growth; Price stability; Sub-Saharan Africa
    JEL: E58 E61 O43 O55
    Date: 2019–12
  4. By: Stéphanie Ilunga; Christian Pinshi (UNIKIN - University of Kinshasa)
    Date: 2020–04–18
  5. By: Yoseph Y. Getachew (University of Pretoria, Pretoria, South Africa); Stephen J. Turnovsky (University of Washington, Seattle, WA 98105)
    Abstract: We develop a model that characterizes the joint determination of income distribution and macroeconomic aggregate dynamics. We identify multiple channels through which alternative public policies such as transfers, consumption and income taxes, and public investment will affect the inequality—efficiency trade off. Some policy changes can affect net income inequality both directly, and indirectly by inducing structural changes in the private-public capital ratio. This in turn influences market inequality and determines the distribution of the next period’s investment and net income. Income tax and transfers have both a direct income effect and an indirect substitution effect, whereas the consumption tax has only the latter. After developing some theoretical propositions summarizing these policy tradeoffs, we present extensive numerical simulations motivated by the South African National Development Plan 2030, the objective of which is to tame soaring inequality and increase per capita GDP. Our numerical simulations illustrate how the judicious combination of these policies may help achieve these targets. The simulations also suggest that the sharp decline in private-public capital ratio coupled with high degree of complementarity between the public and private capitals could be behind the persistence of market inequality in South Africa during the last two decades.
    Keywords: Redistribution policies, Incomplete Capital Market, Idiosyncratic shocks, Efficiency, Inequality
    JEL: D31 O41
    Date: 2020–04
  6. By: Yavuz Arslan; Bulent Guler; Burhan Kuruscu
    Abstract: Can shifts in the credit supply generate a boom-bust cycle similar to the one observed in the US around 2008? To answer this question, we develop a general equilibrium model that combines a rich heterogeneous agent overlapping-generations structure of households who make housing tenure decisions and borrow through long-term mortgages, firms that finance their working capital through short-term loans from banks, and banks whose ability to intermediate funds depends on their capital. Using a calibrated version of this framework, we find that shocks to banks’ leverage can generate sizable boom-bust cycles in the housing market, the banking sector, and the rest of the macroeconomy, which provides strong support for the credit supply channel. The deterioration of bank balance sheets during the bust, the existence of highly leveraged households, and the general equilibrium feedback from the credit supply to household labor income significantly amplify the bust. Moreover, mortgage credit growth across the income distribution is consistent with recent findings that were otherwise argued to be against the credit supply channel. A comparison of the model outcomes across credit supply, house price expectation, and productivity shocks suggests that housing busts accompanied by severe banking crises are more likely to be generated by credit supply shocks.
    Keywords: Credit Supply, House Prices, Financial Crises, Household and Bank Balance Sheets, Leverage, Foreclosures, Consumption, and Output.
    JEL: E21 E32 E44 E60 G20
    Date: 2020–04–20
  7. By: Sangyup Choi (Yonsei University)
    Abstract: Using the bank loan officer surveys from 12 countries, we document a novel cyclical pattern found in bank lending standards and loan demand, which differs between market-based and bank-based economies; in particular, the lending rate fails to reflect the credit market conditions in bank-based economies. Using the Korean economy as an example, we demonstrate the failure of identification of loan supply shocks when relying on the lending rate and propose novel identifying schemes by exploiting the information from the survey. Our findings suggest that disentangling the supply and demand factors of credit shocks is crucial to understand their macroeconomic effects.
    Keywords: Bank loan officer survey, Sign-restriction VARs, Bank lending shocks, Credit market disequilibrium, Bank-based economies
    JEL: E32 E44 E51
    Date: 2020–04–12
  8. By: Leonor Modesto (UCP, Catolica Lisbon School of Business and Economics & IZA); Carine Nourry (Aix-Marseille Univ, CNRS, EHESS, Ecole Centrale, AMSE); Thomas Seegmuller (Aix-Marseille Univ, CNRS, EHESS, Ecole Centrale, AMSE); Alain Venditti (Aix-Marseille Univ, CNRS, EHESS, Ecole Centrale, AMSE & 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
    JEL: E32 F43 H63
    Date: 2020–04
  9. By: Yifei Cao (School of Economics, University of Nottingham Ningbo China); Jenyu Chou (School of Economics, University of Nottingham Ningbo China); Ian Gregory-Smith (Department of Economics, University of Sheffield, UK); Alberto Montagnoli (Department of Economics, University of Sheffield, UK)
    Abstract: This paper examines the causal relationship between banking competition and financial stability. We find that an exogenous competition shock significantly improved the stability of banks, consistent with the ‘competition-stability hypothesis’. We show that banks improved their cost efficiency and reduced credit risks in response to U.S. banking deregulation. In addition, we show the competition shock had a larger impact on banks who were initially operating in a less competitive environment. Our findings provide the first quasi-natural experimental evidence on the non-linear relationship between bank competition and financial stability.
    Keywords: Bank Competition, Bank Risk, Financial Stability, Banking Deregulation
    JEL: G18 G20 G21 G28
    Date: 2020–04
  10. By: Zoe Venter
    Abstract: In this paper, an index of domestic macroprudential policy tools is constructed and the effectiveness of these tools in controlling credit growth is studied using a dynamic panel data model for the period between 2000 and 2017. The empirical analysis includes two panels namely an EU panel of 27 countries and a Latin American panel of 7 countries, and the paper also looks at a case study of Chile, Colombia, Japan, Portugal and the UK. Our main results find that the cumulative index of macroprudential policy tools does not have a statistically significant impact on credit growth when considering a panel of 27 EU countries. When considering the case of Japan, a tighter capital conservation buffer leads to a decrease in the credit supply. When looking at a panel of 7 Latin American countries, our main results show that a tightening of the capital conservation buffer results in an increase in the credit supply. A tightening of the loan-to-value ratio results in a decrease in the credit supply in the panel of 7 Latin American countries. Lastly, a tightening in the overall macroprudential policy tool stance results in a decrease in credit supply in Japan and an increase in credit supply in Portugal.
    Keywords: Macroprudential Policy, Credit Booms, Capital Flows, Financial Stability, Systematic Risk, EU, Latin America
    JEL: E58 F55 G01
    Date: 2020–04

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