nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2020‒06‒08
eighteen papers chosen by
Georg Man

  1. The Inverted-U Relationship Between Credit Access and Productivity Growth By Philippe Aghion; Antonin Bergeaud; Gilbert Cette; Rémy Lecat; Hélène Maghin
  2. Working Paper 323- Mobile Financial and Banking Services Development in Africa By Christian Lambert Nguena
  3. Finance Between Islamic Ethics, Conventional Reality and Economic Growth in the MENA Region By Abderraouf Mtiraoui; Feriel Gabsi
  4. Foreign aid and economic performance in Tanzania By Timothy S. Nyoni
  5. Working Paper 318 - A DGE Model for Growth and Development Planning: Malawi By Chuku Chuku; Jacob Oduor; Anthony Simpasa; Peter Mwanakatwe
  6. Measuring Financial Access; 10 Years of the IMF Financial Access Survey By Marco A Espinosa-Vega; Kazuko Shirono; Hector Carcel Villanova; Esha Chhabra; Bidisha Das; Yingjie Fan
  7. Natural Catastrophes and Financial Development: An Empirical Analysis By Roman Horvath
  8. Drivers of Credit Penetration in Eastern India By Rajesh, Raj; Das, Anwesha
  9. Financial Access, Governance and the Persistence of Inequality in Africa: Mechanisms and Policy instruments By Vanessa S. Tchamyou
  10. Formal and informal institutions’ lending policies and access to credit by small-scale enterprises in Kenya: An empirical assessment By Rosemary Atieno
  11. Working Paper 317 - Women Self-Selection out of the Credit Market in Africa By Hanan Morsy; Amira El-Shal; Andinet Woldemichael
  12. Financial sector reforms, macroeconomic instability and the order of economic liberalization: The evidence from Nigeria By Sylvanus I. Ikhide; Abayomi A. Alawode
  13. Government Ability, Bank-Specific Factors and Profitability - An insight from banking sector of Vietnam By Nguyen, V.C.
  14. Cultural Diversity and Foreign Direct Investment By Wei Feng; Yanrui Wu; Yue Fu
  15. Loan supply and bank capital: A micro-macro linkage By Kick, Thomas; Malinkovich, Swetlana; Merkl, Christian
  16. Macroprudential capital requirements with non-bank finance By Dempsey, Kyle P.
  17. On the credit-to-GDP gap and spurious medium-term cycles By Schüler, Yves
  18. The impact of financial constraints on tradable and non-tradable R&D investments in Portugal By Magalhaes, Manuela

  1. By: Philippe Aghion (Harvard University [Cambridge]); Antonin Bergeaud (PSE - Paris School of Economics); Gilbert Cette (Centre de recherche de la Banque de France - Banque de France, 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); Rémy Lecat (Centre de recherche de la Banque de France - Banque de France); Hélène Maghin
    Abstract: We identify two counteracting effects of credit access on productivity growth: on the one hand, better access to credit makes it easier for entrepreneurs to innovate; on the other hand, better credit access allows less efficient incumbent firms to remain longer on the market, thereby discouraging entry of new and potentially more efficient innovators. We first develop a simple model of firm dynamics and innovation‐based growth with credit constraints, where the above two counteracting effects generate an inverted‐U relationship between credit access and productivity growth. Then we test our theory on a comprehensive French manufacturing firm‐level dataset. We first show evidence of an inverted‐U relationship between credit constraints and productivity growth when we aggregate our data at the sectoral level. We then move to firm‐level analysis, and show that incumbent firms with easier access to credit experience higher productivity growth, but that they also experience lower exit rates, particularly the least productive firms among them. To support these findings, we exploit the 2012 Eurosystem's Additional Credit Claims programme as a quasi‐experiment that generated an exogenous extra supply of credits for a subset of incumbent firms.
    Keywords: credit constraint,firms,growth,interest rate,productivity
    Date: 2019–01
  2. By: Christian Lambert Nguena (University of Dschang)
    Abstract: Using a new database for mobile financial and banking services across countries, we analyze propoor and inclusive growth in developing countries and show the importance of mobile financial and banking development. This paper uses several econometric techniques to investigate mobile finance and banking benchmarking, determinants, and real impacts on inclusive growth in developing countries in Africa. The statistical benchmarking analysis reveals that there is a positive link between mobile banking development and economic development. Estimation of our model, using different specification and estimation techniques, shows the same result: a positive impact of mobile finance and banking development on both pro-poor and inclusive economic growth. These main findings suggest that policies to boost mobile finance and banking development in Africa should be viewed as measures that would yield fruit in the medium to long terms. Moreover, we find determinants of mobile finance and banking to be: banking sector domestic credit, human capital, remittances, credible monetary policy, infrastructure, and trade. Since mobile banking development matters for pro-poor and inclusive growth, African governments should pursue good performance in terms of these determinants by implementing specific and robust economic policies. JEL classification: G21, R1, O4Keywords: Mobile finance and banking, Africa, principal component analysis, financial innovation, financial inclusion
    Date: 2019–08–21
  3. By: Abderraouf Mtiraoui (Université de Sousse); Feriel Gabsi
    Date: 2018–07–28
  4. By: Timothy S. Nyoni (University of Dar Es Salaam)
  5. By: Chuku Chuku (Research Department, African Development Bank); Jacob Oduor (Tanzania Country Office, African Development Bank); Anthony Simpasa (Nigeria Country Department, African Development Bank); Peter Mwanakatwe (Malawi Country Office, African Development Bank)
    Abstract: It was Margaret Thatcher who said, “plan your work for today and every day, then work your plan". Yet many national development plans in Africa have failed because they were either not well planned or the plans were not well worked out. We present a fully specified medium-scale dynamic general equilibrium model that can be used as the macroeconomic framework for development planning. Structural peculiarities of low-income developing economies are emphasized, including limited access to credit markets by households, a prominent natural resource sector, limited labour and capital mobility, absorptive capacity constraints, and corruption leakages, among others. The model is applied to Malawi and provides a systematic way to assess the implications of alternative policy options for a new national development plan. Key insights from the policy experiments conducted with the model are as follows: (i) there is a $1.2 billion public investment requirement to move per capita income up to about $1000; (ii) debt trajectories are sustainable because investment literally pays for itself by generating future growth and a broader tax base; (iii) the traded sector contracts temporarily in favour of an expansion of the nontraded sector; (iv) growth rates under commercial borrowing options are lower, mainly because of the crowding-out effect that commercial borrowing has on private investment and consumption; (v) mild and gradual fiscal adjustments significantly improves debt indicators; and, (vi) finally, persistent adverse precipitation shocks in the form of drought spells can lead to a contraction of growth rates by up to 2 percentage points. JEL Classification: E61,O21,H54
    Keywords: DGE, public investments, debt sustainability, weather shocks, growth forecasts, macroeconomic outcomes, Malawi
    Date: 2019–08–20
  6. By: Marco A Espinosa-Vega; Kazuko Shirono; Hector Carcel Villanova; Esha Chhabra; Bidisha Das; Yingjie Fan
    Abstract: This departmental paper marks the 10th anniversary of the IMF Financial Access Survey (FAS). It offers a retrospective of the FAS database, along with some reflections as to its future directions. Since its 2009 launch, the FAS has provided granular data on access to and use of financial services. It is a supply-side database with annual global coverage based on data sourced directly from financial service providers—aimed at supporting policymakers to target and evaluate financial inclusion policies. Its data collection has kept pace with financial innovation, such as the rise of mobile money and growing demand for gender-disaggregated data—and the FAS must continue to evolve.
    Keywords: Financial inclusion;Financial institutions;Inclusive growth;Economic development;Financial inclusion;Financial institutions;Inclusive growth;Economic development
    Date: 2020–05–12
  7. By: Roman Horvath (Institute of Economic Studies, Faculty of Social Sciences, Charles University Opletalova 26, 110 00, Prague, Czech Republic)
    Abstract: We estimate the causal effect of natural catastrophes on financial development. We focus on largest catastrophes in developing economies in 1960-2016, employ synthetic control method to compute the counterfactual and use the credit to GDP ratio as the measure of financial development. Our estimates show that the effects of natural catastrophes are sizable, statistically significant and long-lasting. We find that a decade after the catastrophe, credit/GDP ratio remains approximately 30% below its counterfactual. This result suggests that large-scale natural catastrophes severely undermine financial intermediation in developing economies.
    Keywords: Natural catastrophes, financial development, synthetic control method
    JEL: G00 O11 Q54 Q56
    Date: 2020–05
  8. By: Rajesh, Raj; Das, Anwesha
    Abstract: This article highlights that the eastern region of India continues to lag behind other regions in harnessing the potential of bank credit as an instrument to promote growth and development, notwithstanding concerted policy efforts to further financial inclusion in the region. While enhancing access to credit remains critical to strengthen credit penetration in the region, empirical findings suggest that factors influencing demand for credit – per capita income, level of industrial activity and availability of infrastructure such as road network and power supply – also matter.
    Keywords: Bank Credit, Financial Inclusion, Infrastructure, Income, CD ratio, Eastern India
    JEL: E51 G21 R51
    Date: 2019–08–04
  9. By: Vanessa S. Tchamyou (Yaounde, Cameroon)
    Abstract: The aim of this paper is to investigate policy instruments by which the persistence of inequality is affected through financial development channels in 48 African countries for the period 1996 – 2014. Financial dynamic channels of depth (money supply and liquid liabilities), efficiency (at banking and financial system levels), activity (from banking and financial system perspectives) and stability are used. Political (“voice and accountability” and political stability), economic (government effectiveness and regulation quality) and institutional (rule of law and corruption-control) governance policy instruments are also involved. The empirical evidence is based on the Generalised Method of Moments (GMM). The results show that financial depth and financial stability are the best channels of reducing inequality. Moreover, the relevance of these financial channels is significantly apparent when policy instruments are exclusively governance variables. The comparative relevance of governance dynamics in the persistence of inequality is discussed. The study responds to two recent policy and scholarly challenges, notably: the persistence of inequality in Africa and the relevance of governance in addressing income inequality by means of financial access.
    Keywords: Finance; Governance; Inequality; Modelling; Africa
    JEL: O16 O10 I30 C50 O55
    Date: 2020–01
  10. By: Rosemary Atieno (University of Nairobi, Kenya)
  11. By: Hanan Morsy (Research Department, African Development Bank); Amira El-Shal (Research Department, African Development Bank); Andinet Woldemichael (Research Department, African Development Bank)
    Abstract: Women are disproportionately disadvantaged in access to finance in Africa. While supply-side detriments, such as high interest rates and collateral requirements, are well documented in the literature, little is understood about how demand-side factors contribute to the observed gender gap in access to finance. This paper provides the first empirical evidence on how women managers’ perception about their creditworthiness contributes to the large gender gap in Africa, particularly in the Northern region. One of the innovations of the paper is introducing a theoretical model using the credit market framework with imperfect and asymmetric information to explain what may drive loan applicants to self-select. We use firm-level data for 47 African countries from the World Bank Enterprise Survey. We find that women entrepreneurs in Africa, in general, and in North Africa, in particular, are more likely to self-select themselves out of the credit market due to low perceived creditworthiness compared to their men counterparts. The results also suggest that the observed self-selection behavior is not a response mechanism to current discriminatory lending practices by the banks. The results are robust to different empirical specifications. The findings will inform policies towards greater financial inclusion of women in the region.
    Keywords: Gender Inequality; Access to Finance; Perception of Creditworthiness; Discrimination; Imperfect Information; Africa; North Africa.
    Date: 2019–07–24
  12. By: Sylvanus I. Ikhide; Abayomi A. Alawode (Obafemi Awolowo University Ile-Ife, Nigeria)
  13. By: Nguyen, V.C.
    Abstract: To the best of our knowledge, a very few studies have focused on the effects of government ability on bank performance in developing and emerging countries. The aim of this work is to study the impact of government ability, bank-specific factors on profitability in the banking system in Vietnam. Using a panel data analysis in the period over 2014-2018, the study analyzes based on the methods of fixed, random effects, and pooled ordinary least squares. Data were collected from Vietnam’s Stock Exchange, General Statistics Office, and Worldwide Governance Indicators. Our results demonstrate that government ability has negatively affected bank efficiency while economic growth will not affect bank efficiency. In addition, the prime bank-specific factors that can significantly impact on bank efficiency are non-performing loan, loan-to-deposit ratio, loan loss reserves. A bank with a higher loan-to-deposit ratio can positively impact on the probability of a bank. In contrast to the risk, a bank with a greater risk as well as a higher level in non-performing loan in operation will negatively impact on its efficiency.
    Date: 2020–03–24
  14. By: Wei Feng (School of Management and Economics, Southeast University, China); Yanrui Wu (Economics Discipline, Business School, University of Western Australia); Yue Fu (School of Management and Economics, Southeast University, China)
    Abstract: In this paper, we first propose a theoretical model and derive hypotheses about the relationship between cultural diversity and foreign direct investment (FDI). We then test these hypotheses through regression analysis of a dataset of 230 Chinese cities covering the period of 2000-2014. It is shown that cultural diversity and FDI absorption are negatively correlated. The main mechanism is that cultural diversity impedes human capital development and hence obstructs FDI absorption. However, this negative relationship disappears gradually over time. In addition, it is also shown that there are threshold and spatial spillover effects. This research not only enriches the theory of FDI location, but also has implications for FDI policy-making.
    Keywords: Cultural diversity, FDI absorption, Economic growth, China
    JEL: F21 F41 G18
    Date: 2020
  15. By: Kick, Thomas; Malinkovich, Swetlana; Merkl, Christian
    Abstract: In the presence of financial frictions, banks' capital position may constrain their ability to provide loans. The banking sector may thus have important feedback effects on the macroeconomy. To shed new light on this issue, we combine two approaches. First, we use microeconomic balance sheet data from Germany and estimate banks' loan supply response to capital changes. Second, we modify the model of Gertler and Karadi (2011) such that it can be calibrated to the estimated partial equilibrium elasticity of bank loan supply with respect to bank capital. Although the targeted elasticity is remarkably different from the one in the baseline model, banks continue to be an important originator and amplifier of macroeconomic shocks. Thus, combining microeconometric results with macroeconomic modeling provides evidence on the effects of the banking sector on the macroeconomy.
    Keywords: DSGE,Bank Capital,Loan Supply,Financial Frictions
    JEL: E24 E32 E44
    Date: 2020
  16. By: Dempsey, Kyle P.
    Abstract: I analyze the impact of raising capital requirements on the quantity, composition, and riskiness of aggregate investment in a model in which firms borrow from both bank and non-bank lenders. The bank funds loans with insured deposits and costly equity, monitors borrowers, and must maintain a minimum capital to asset ratio. Non-banks have deep pockets and competitively price loans. A tight capital requirement on the bank reduces risk-shifting and decreases bank leverage, reducing the risk of costly bank failure. In response, though, the bank can change both price and non-price contract terms. This may induce firms to substitute out of bank finance, leading to a theoretically ambiguous effect on the profile of aggregate investment. Quantitatively, I find that the bank's incentive to insure itself against issuing costly equity and competition from the non-bank sector mutes the long run impact of raising capital requirements. Increasing the capital requirement from 8% to 26% eliminates bank failures with effectively no change in the quantity or riskiness of aggregate investment. JEL Classification: G2, E5, E6, E32, E44
    Keywords: banking, business cycles, capital requirements
    Date: 2020–05
  17. By: Schüler, Yves
    Abstract: The Basel III framework advises considering a reference indicator at the country level to guide the setting of the countercyclical capital buffer: the credit-to-GDP gap. In this paper, I provide empirical evidence suggesting that the credit-to-GDP gap is subject to spurious medium-term cycles, i.e. artificial boom-bust cycles with a maximum duration of around 40 years.
    Keywords: Basel III,Hodrick-Prescott filter,detrending
    JEL: C10 E32 E58 G01
    Date: 2020
  18. By: Magalhaes, Manuela
    Abstract: We develop a directed technical change model with two sectors, tradable and non-tradable, and dynamic firms’ decisions to invest in R&D in the presence of financial constraints. The model establishes a linkage between R&D decisions, product and process innovations, future productivity, profits, and credit constraints. The model is estimated using Portuguese firms’ data of the tradable and non-tradable sectors. We find that the previous R&D investments raises the innovating probabilities, the innovating probabilities are higher in the tradable sector, and the startup costs of innovation tend to be higher than the maintenance costs. The results also show complementary between the R&D benefits and the firm’s financial strength, diminishing marginal returns to capital on innovation benefits, and high heterogeneity of the innovation costs across industries. Finally, when the firms’ financial strength and the trade-off between tradable and non-tradable goods are considered, the R&D benefits in the non-tradable sector do not compensate its cost given the higher productivity and innovation probabilities of the tradable sector. As a result, the R&D investments in the tradable sector illustrates a misallocation of financial resources.
    Keywords: : Credit constraints, firm-level data, productivity, R&D, tradable and non-tradable goods.
    JEL: O31 O32
    Date: 2020–04–04

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