nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2020‒05‒25
eleven papers chosen by
Georg Man

  1. Antiquity and capitalism: The finance-growth perspective By Dombi, Akos; Grigoriadis, Theocharis; Zhu, Junbing
  2. An empirical analysis of the Determinants of Real GDP Growth in Sierra Leone from 1980-2018 By Barrie, Mohamed Samba
  3. Agriculture, Land Access and Economic Growth in Africa: An Instrumental Variable Approach By Chukwudi Charles Olumba
  4. Renationalizing finance for development: policy space and public economic control in Bolivia By Naqvi, Natalya
  5. Dissecting Mechanisms of Financial Crises: Intermediation and Sentiment By Arvind Krishnamurthy; Wenhao Li
  6. Learning, house prices and macro-financial linkages By Pauline Gandré
  7. Global and domestic financial cycles: variations on a theme By Iñaki Aldasoro; Stefan Avdjiev; Claudio Borio; Piti Disyatat
  8. Identifying Aggregate Shocks with Micro-level Heterogeneity: Financial Shocks and Investment Fluctuation By Xing Guo
  9. Governance and the Capital Flight Trap in Africa By Simplice A. Asongu; Joseph Nnanna
  10. Institutional diversity in domestic banking sectors and bank stability: A cross-country study By Christopher F Baum; Dorothea Schäfer; Caterina Forti Grazzini
  11. Working Paper 328 - The Cost of Inaction: Obstacles and Lost Jobs in Africa By Andinet Woldemichael; Margaret Joldowski

  1. By: Dombi, Akos; Grigoriadis, Theocharis; Zhu, Junbing
    Abstract: This paper explores the impact of antiquity on capitalism through the finance-growth nexus. We define antiquity as the length of established statehood (i.e., state history) and agricultural years. We argue that extractive institutions and deeply entrenched interest groups may prevail in societies with ancient roots. The paper offers an in-depth analysis of one particular channel through which extractive institutions may impair economic growth: the finance-growth channel. We propose that in countries with ancient statehood, the financial sector might be captured by powerful economic and political elites leading to a distorted finance-growth relationship. We build a model in which the equilibrium relationship between companies and banks depends on the entrenchment of the economic elites and the length of established statehood. To validate our argument empirically, we run panel-threshold regressions on a global sample between 1970 and 2014. The regression results are supportive and show that financial development - measured by the outstanding amount of credit - is negative for growth in states with ancient institutional origins, while it is positive in relatively younger ones.
    Keywords: antiquity,finance-growth nexus,interest groups,rent-seeking
    JEL: C70 N20 O16 O17 O47
    Date: 2020
  2. By: Barrie, Mohamed Samba
    Abstract: The purpose of the research was the exploration of macroeconomic determinants of economic growth in Sierra Leone for the period, 1980- 2018, and whether there exist an association between the determinants and economic growth is long-term and short-term. The research methodology was quantitative and it was limited to eight mostly macro-fiscal variables and the empirical model employed was the Autoregressive Distributed Lag model. The findings revealed foreign direct investment was positive in both the short and long run but only statistically significant at the 10% level in the short-run dynamic model. Gross capital formation and population growth were also positive and statistically significant in determining RGDP growth in both the static long-run and dynamic short-run models. Openness to trade has a negative and significant impact on RGDP growth in the short run but insignificant in the long run. On the other hand, real exchange fluctuations, domestic credit rate, private remittances are negative and statistically significant towards RGDP growth. The dummy variable war is significant in both long and short-run but exerted no negative impact on RGDP. The other dummy variable Ebola had the expected negative sign both in the long run and short-run but it is also statistically insignificant. Also, applying the Bounds test Cointegration model, the findings revealed a statistically significant long-run association between economic growth and the specified determinants (F-statistics value= 15.18749, and an upper bound value or I(1) value = 2.08). Furthermore, the error correction model applied to determine the short-run deviation from the long-run had the expected sign, and was statistically insignificant (ECM = -0.131559), indicating convergence towards equilibrium occurred at the rate of 13% in the period under review. However, the research was limited to predominantly macro-fiscal variables, future research must also look at the impact of monetary variables.
    Keywords: Growth determinants,Sierra Leone,ARDL approach,applied econometrics,macro-fiscal variables
    Date: 2020
  3. By: Chukwudi Charles Olumba
    Abstract: Key Findings 1. Since the year 2014, Africa has been experiencing declining economic growth. 2. The size of agricultural land area remains almost unchanged in the last decade when compared to the steady rate of agricultural land expansion over the last century. 3. In terms of the gross value of production, Africa recorded the highest production in the year 2013 after which the value declined by about 30% in the year 2016. 4. The study found a statistically significant influence of the agricultural sector in enhancing economic growth in Africa. 5. The study succeeded in providing empirical evidence that the growth in agricultural output which had positive impact on economic growth was due to the expansion of the land area used for agriculture. 6. Domestic credit provided by financial sector and inflation rate play significant role in explaining Africa’s.
    Keywords: Agricultural and Food Policy, Environmental Economics and Policy, Food Security and Poverty, International Development
    Date: 2019–04–30
  4. By: Naqvi, Natalya
    Abstract: After years of placing faith in the markets, we are seeing a revival of interest in statist economic policy across the world, particularly with regards to finance. How much policy space do previously liberalized developing countries still have to renationalize their financial sectors by exerting direct control over the process of credit allocation, despite the constraints posed by economic globalization? Under what conditions do they actually use this policy space? Bolivia is an especially important case because it is one of the few peripheral countries that implemented strongly interventionist financial reform in the 2010s. Using Bolivia as a least likely case, I argue that two factors, increased availability of external financing sources, and domestic popular mobilization, create favorable conditions for developmentalist financial reform because these make it possible to reduce external conditionalities and overcome opposition by the domestic financial sector. Popular mobilizations paved the way for reform by bringing developmentalist policymakers to power and exerting pressure on them to 1. Maximize policy space by diversifying into newly available alternative sources of foreign borrowing to reduce external conditionalities, and 2. Mitigate the importance of disinvestment threats by domestic economic elites by incrementally increasing public ownership and control of the economy.
    Keywords: business power; development; finance; Globalization; industrial policy; policy space
    JEL: F3 G3
    Date: 2019–12–17
  5. By: Arvind Krishnamurthy; Wenhao Li
    Abstract: We develop a model of financial crises with both a financial amplification mechanism, via frictional intermediation, and a role for sentiment, via time-varying beliefs about an illiquidity state. We confront the model with data on credit spreads, equity prices, credit, and output across the financial crisis cycle. In particular, we ask the model to match data on the frothy pre-crisis behavior of asset markets and credit, the sharp transition to a crisis where asset values fall, disintermediation occurs and output falls, and the post-crisis period characterized by a slow recovery in output. We find that a pure amplification mechanism quantitatively matches the crisis and aftermath period but fails to match the pre-crisis evidence. Mixing sentiment and amplification allows the model to additionally match the pre-crisis evidence. We consider two versions of sentiment, a Bayesian belief updating process and one that overweighs recent observations. We find that both models match the crisis patterns qualitatively, generating froth pre-crisis, non-linear behavior in the crisis, and slow recovery. The non-Bayesian model improves quantitatively on the Bayesian model in matching the extent of the pre-crisis froth.
    JEL: G01
    Date: 2020–05
  6. By: Pauline Gandré
    Abstract: In the US, the linkages between the housing market, the credit market and the real sector have been striking in the past decades. To explain these linkages, I develop a small-scale DSGE model in which agents update non-rational beliefs about future house price growth, in accord with recent survey data evidence. Conditional on subjective house price beliefs, expectations are model-consistent. In the model with non-rational expectations, both standard productivity shocks and shocks in the credit sector generate endogenously persistent booms in house prices. Long-lasting excess volatility in house prices, in turn, affects the financial sector (because housing assets serve as collateral for household and entrepreneurial debt), and propagates to the real sector. This amplification and propagation mechanism improves the ability of the model to explain empirical puzzles in the US housing market and to explain the macro-financial linkages during 1985-2019. The learning model can also replicate the predictability of forecast errors evidenced in survey data.
    Keywords: Housing booms, Financial Accelerator, Business Cycles, Non-rational Expectations, Learning.
    JEL: D83 D84 E32 E44 G12
    Date: 2020
  7. By: Iñaki Aldasoro; Stefan Avdjiev; Claudio Borio; Piti Disyatat
    Abstract: We compare and contrast two prominent notions of financial cycles: a domestic variant, which focuses on how financial conditions within individual economies lead to boom-bust cycles there; and a global variant, which highlights how global financial conditions affect individual economies. The two notions share a common analytical basis - the "procyclicality" of the financial system. Yet a number of distinguishing features stand out. These include differences in: (i) the underlying components - financial asset prices and capital flows for the global financial cycle (GFCy) versus credit and property prices for the domestic financial cycle (DFC); (ii) their empirical properties - the GFCy has a shorter duration and is primarily linked with traditional business cycles, while the DFC has a longer duration and is predominantly linked with medium-term business cycles; and (iii) the policy focus - "dilemma versus trilemma" for the GFCy, "lean versus clean" for the DFC. Despite these differences, the two cycles tend to come together around crises. Finally, we show that traditional GFCy measures mainly reflect developments in advanced economies and that a simple alternative measure is much more relevant for emerging market economies.
    Keywords: global financial cycle, financial cycle, business cycle, capital flows
    JEL: F30 F40 E32 E50
    Date: 2020–05
  8. By: Xing Guo
    Abstract: This paper identifies the aggregate financial shocks and quantifies their effects on business investment based on an estimated DSGE model with firm-level heterogeneity. On average, financial shocks contribute only 1.1% of the variation in U.S. public firms' aggregate investment. The negligible aggregate relevance of financial shocks mainly results from the interaction between firm-level heterogeneity and general equilibrium effects. Following a contractionary financial shock, financially constrained firms are directly forced to cut investment, which dampens the aggregate investment demand and lowers the capital good price. The lower capital good price motivates the financially unconstrained firms to invest more, which largely cancels out the financial shock's direct effect in aggregation. If the firm-level heterogeneity is removed, the implied relevance of financial shocks to aggregate investment will be 50 times larger. This sharp difference indicates that representative firm models could overstate the relevance of financial shocks in driving the business cycle fluctuation and highlights the importance of micro-level heterogeneity in identifying the aggregate shocks.
    Keywords: Business fluctuation and cycles; Firm dynamics
    JEL: E22 G32
    Date: 2020–05
  9. By: Simplice A. Asongu (Yaoundé/Cameroon); Joseph Nnanna (The Development Bank of Nigeria, Abuja, Nigeria)
    Abstract: The study examines the use of governance tools to fight capital flight by reducing the capital flight trap. Two overarching policy syndromes are addressed in the study. It first assesses whether governance is an effective deterrent to the capital flight trap in Africa, before examining what thresholds of government quality are required to fight the capital flight trap in the continent. The following findings are established. Evidence of a capital flight trap is apparent because past values of capital flight have a positive effect on future values of capital flight. The net effects from interactions of the capital flight trap with political stability, regulation quality, economic governance and corruption-control on capital flight are positive. The critical masses at which “voice & accountability” and regulation quality can complement the capital flight trap to reduce capital flight are respectively, 0.120 and 0.680, which correspond to the best performing countries. Policy implications are discussed.
    Keywords: governance; capital flight; capital flight trap; Africa
    JEL: C50 E62 F34 O55 P37
    Date: 2020–01
  10. By: Christopher F Baum (Boston College; DIW Berlin); Dorothea Schäfer (DIW Berlin; Jönköping International Business School); Caterina Forti Grazzini (European Central Bank; FU Berlin)
    Abstract: This paper analyzes the causal relationship between institutional diversity in domestic banking sectors and bank stability. We use a large bank- and country-level unbalanced panel data set covering the EU member states’ banking sectors between 1998 and 2014. Constructing two distinct indicators for measuring institutional diversity, we find that a high degree of institutional diversity in the domestic banking sector positively affects bank stability. The positive relationship between domestic institutional diversity and bank stability is stronger in times of crisis, providing evidence that diversity can help to absorb both financial and real shocks. In particular, greater institutional diversity smooths bank earnings risk in times of crisis. Our results are economically meaningful and offer important insights to the ongoing economic policy debate on how to reshape the architecture of the banking sector.
    Keywords: Institutional Diversity; Shannon Index; Gini-Simpson Index; Bank Stability; Financial Crisis; Bank Competition
    JEL: G01 G20 G21 G28
    Date: 2020–05–09
  11. By: Andinet Woldemichael (Research Department, African Development Bank); Margaret Joldowski (Charles H. Dyson School of Applied Economics and Management, Cornell University)
    Abstract: In a competitive market, the constant “churning” of firms into and out of business boosts productivity, economic growth, and net job creation. Without competitive markets, however, firm exit, and the failures of firm entry could be due to obstacles other than competition and innovation. In African countries, incumbent firms and potential entrants face immense obstacles: a difficult political environment, burdensome business regulations, inadequate infrastructure, and limited access to finance. This report investigates the extent to which such obstacles hinder job creation in general and firm dynamism, particularly. Using World Bank Enterprise Survey (ES) panel data that covers 18 African countries, the report quantifies the number of jobs lost due to obstacles. It finds that a single obstacle reduces annual employment growth by 0.1–0.34 percentage point. Hence, by removing key business obstacles, Africa could boost new job creation and save many existing high-quality jobs. JEL Classification: D22; L11; L25; O43; J23
    Keywords: Unemployment, labor demand, constraints, firm dynamism; doing business
    Date: 2019–12–31

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