nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2020‒07‒13
fourteen papers chosen by
Georg Man

  1. Islamic financial development between polic stability and economic growth in the MENA region: Estimate a model of Simultaneous equations By Abderraouf Mtiraoui; Mongi Lassoued; Amine Mtiraoui
  2. A Liberalization Spillover: From Equities to Loans By Xin Liu; Shang-Jin Wei; Yifan Zhou
  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 Gadea Rivas, Maria Dolores; Laeven, Luc; Pérez-Quirós, Gabriel
  5. Foreign Direct Investment and Growth Convergence in a North-South Framework By Vinicius Curti Cicero; Gilberto Tadeu Lima
  6. Economics and Politics: A Unifying Framework By Ramón E. López
  7. IMF Programs and Economic Growth in the DRC: Documentation, Impact and Prospects By Matata Ponyo Mapon; Jean-Paul K. Tsasa
  8. Cyclical Lending Standards: A Structural Analysis By Kaiji Chen; Patrick C. Higgins; Tao Zha
  9. Hysteresis and Business Cycles By Cerra, Valerie; Fatás, Antonio; Saxena, Sweta
  10. Business cycle implications of banking system heterogeneity and complexity By Oliver de Groot; Grzegorz Wesołowski
  11. Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach By Benigno, Gianluca; Foerster, Andrew; Otrok, Christopher; Rebucci, Alessandro
  12. The Big Bang: Stock Market Capitalization in the Long Run By Kuvshinov, Dmitry; Zimmermann, Kaspar
  13. The impact of interest rate liberalization on the corporate financing strategies of quoted companies in Nigeria By Davidson A. Omole; Gabriel O. Falokun
  14. The aggregate demand for bank capital By Harris, Milton; Opp, Christian; Opp, Marcus M.

  1. By: Abderraouf Mtiraoui (Université de Sousse, Lamided, ISG, Université de Sousse - LAMIDED); Mongi Lassoued (Université de Sousse); Amine Mtiraoui (Institut des Hautes Etudes Commerciales (Université de Sousse))
    Abstract: The purpose of this paper is to study the relationship between the development of Islamic finance and economic growth on the one hand while developing an innovative literature review highlighting the role of the development of Islamic finance and also the the nature of the joint between political stability as an indicator of quality of governance and economic growth. And on the other hand, we empirically try to discover the direct and indirect effects of the development of Islamic finance and political stability on economic growth and hence the relationship between Islamic financial developments measured by private sector bank loans divided by GDP and political stability on economic growth. Our empirical validation is based on an estimation method, namely the model with simultaneous equations in some MENA countries during the period (1990-2018).
    Abstract: Le but de cet article est d'étudier la relation entre le développement de la finance islamique et la croissance économique d'une part tout en développant une revue de littérature innovante mettant en évidence le rôle du développement de la finance islamique ainsi que la nature de l'articulation entre stabilité politique comme un indicateur de la qualité de la gouvernance et de la croissance économique. Et d'autre part, nous essayons empiriquement de découvrir les effets directs et indirects du développement de la finance islamique et de la stabilité politique sur la croissance économique et donc la relation entre les développements financiers islamiques mesurés par les prêts bancaires du secteur privé divisés par le PIB et la stabilité politique sur l'économie croissance. Notre validation empirique est basée sur une méthode d'estimation, à savoir le modèle à équations simultanées dans certains pays MENA au cours de la période (1990-2018).
    Keywords: Islamic financial development,Politic Stability,Models with simultaneous equation,Economic growth,Modèle à équations simultanées,Croissance économique,Stabilité politique,Développement financier islamique
    Date: 2019–10–21
  2. By: Xin Liu; Shang-Jin Wei; Yifan Zhou
    Abstract: The opening of equity markets to foreign investment appears to generate an enormously large positive growth effect (see Bekaert, Harvey, and Lundblad, 2005) in spite of a relatively small role of such markets for financing investment in most economies. We propose a possible spillover channel from equity market opening to lower costs of bank loans, which helps to explain this puzzle. From analyzing loan- and firm-level data associated with China’s introduction of the Qualified Foreign Institutional Investors (QFII) program, we find significant support for this channel. Furthermore, we show that a reduction in the risk premium is an important mechanism.
    JEL: F3 G15
    Date: 2020–06
  3. 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, Centrale Marseille, AMSE. 5 Boulevard Maurice Bourdet CS 50498 F-13205 Marseille cedex 1, 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 stochastic 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: Bubble, Liquidity, Collateral, Crowding-in effect, Growth
    JEL: E44 G11
    Date: 2020
  4. By: Gadea Rivas, Maria Dolores; Laeven, Luc; Pérez-Quirós, Gabriel
    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.
    Keywords: business cycles; credit growth; macroprudential policies
    JEL: C22 E32 E61
    Date: 2020–03
  5. By: Vinicius Curti Cicero; Gilberto Tadeu Lima
    Abstract: This paper develops a general extended version of the balance-of-payments constrained growth model that takes into consideration some often ignored aspects of growth in open economies - namely, the importance of capital flows in the long run, terms of trade changes and trade and payments interdependence among regions. Furthermore, this paper incorporates Thirlwall's analysis into a North-South model that takes into account four intrinsically connected channels through which FDI inflows can affect the productive structure of Southern region - capital accumulation, balance-of-payments components, technological change and income distribution - finding that it still explains uneven development, although reducing the distance between regions by easing the external restriction, that is indicate a more even development path. In addition, this article presents an empirical exercise that, although not conclusive when considering the income elasticities of import ratio, points to a quite relevant result: the non-consideration of income distribution effects in the import functions represents not only the omission of a relevant variable on econometric estimations but, mainly, the omission of an important theoretical channel to understand growth in open economies.
    Keywords: Foreign direct investment; Economic growth; Uneven development; North-South relations; Balance-of-Payments constraint; Functional distribution of income
    JEL: F21 E12 O11 F14
    Date: 2020–06–18
  6. By: Ramón E. López
    Abstract: This paper deals with economic growth, distribution and politics. The principal feature of this paper, which distinguishes itself from most existing literature, is that it integrates economic growth and political equilibria into a unifying framework. We study the distribution of power between the owners of capital (“the capitalists†) and the owners of human capital (“the workers†) and its relationship with the fundamental economic variables including capital market imperfections, economic growth, and inequality. We then develop a new model of politico-economic equilibrium in which economic power constitutes a key linkage between politics and economics. We show that all the fundamental economic variables, including economic power distribution, are in fact dependent on political conditions. We show that the performance of the economy is likely to be cyclical because of cyclical behavior of political conditions and vice versa, political cycles are in part originating in economic cycles. The model provides unique testable predictions, some of which we illustrate using US political and economic data for the period 1885-2016.
    Date: 2020–06
  7. By: Matata Ponyo Mapon; Jean-Paul K. Tsasa
    Abstract: At the end of 2012 the International Monetary Fund (IMF) has suspended its financial assistance to the Democratic Republic of the Congo (DRC). Due to inflationary pressures which occurred in the last quarter of 2016, several decision-makers called for a reopening of a formal cooperation with the IMF. This process was formally completed in December 2019. The restart of IMF programs was greeted with satisfaction by politicians and widely commented in the media. However, recent history shows that the DRC managed to achieve exceptional economic performance, between 2012 and 2016, without being in a formal cooperation with the IMF. Some people wonder whether IMF assistance is a curse for recipient countries? We argue that the underlying problem has nothing to do with accepting or not the IMF assistance, but rather in the ability of policy makers to establish effective leadership and good governance for the development and implementation supporting structural reforms.
    Date: 2020–06
  8. By: Kaiji Chen; Patrick C. Higgins; Tao Zha
    Abstract: Lending standards are a direct measure of credit conditions. We use the micro data merged from three separate sources to construct this measure and document that an uncertain macroeconomic outlook, rather than banks' balance sheet positions, was an important reason that a majority of banks tightened bank lending standards during the Great Recession. Our extensive data analysis disciplines how we introduce credit frictions in the banking sector into a macroeconomic model. The model estimation reveals that an exogenous shock to credit supply drives cyclical lending standards and accounts for a significant portion of fluctuations in bank loans and aggregate output.
    JEL: C51 C81 C82 E32 E44 G21
    Date: 2020–05
  9. By: Cerra, Valerie; Fatás, Antonio; Saxena, Sweta
    Abstract: Traditionally, economic growth and business cycles have been treated independently. However, the dependence of GDP levels on its history of shocks, what economists refer to as "hysteresis," argues for unifying the analysis of growth and cycles. In this paper, we review the recent empirical and theoretical literature that motivate this paradigm shift. The renewed interest in hysteresis has been sparked by the persistence of the Global Financial Crisis, as GDP in advanced economies remains far below the pre-crisis trends. The findings of the recent literature have far-reaching conceptual and policy implications. In recessions, monetary and fiscal policies need to be more active to avoid the permanent scars of a downturn. And in good times, running a high-pressure economy could have permanent positive effects.
    Keywords: Booms; business cycles; Crises; growth; hysteresis; Macroeconomic Policy; Persistence; recovery; Stabilization Policy
    JEL: E32 E60 O47
    Date: 2020–03
  10. By: Oliver de Groot (University of Liverpool Management School & CEPR); Grzegorz Wesołowski (Narodowy Bank Polski)
    Abstract: We investigate business cycle implications of banking system complexity and bank heterogeneity in individual leverage. We show that a more complex banking network generates higher individual bank leverage and increases economic volatility. Then, we build a general equilibrium business cycle model with three types of banks: deposittaking, intermediary and lending. Keeping constant aggregate leverage in the banking system, we vary individual leverage and show that an increase in lending bank leverage increases costs of business cycle fluctuations. We argue that this can be mitigated by policymakers taxing the returns of lending banks.
    Keywords: Financial intermediation; Network theory; Leverage; Welfare
    JEL: E32 E44 E51
    Date: 2020
  11. By: Benigno, Gianluca; Foerster, Andrew; Otrok, Christopher; Rebucci, Alessandro
    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 being 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, Tequila, and Global Financial Crises. The crisis episodes generated by the estimated model display sluggish and long-lasting build-up and stagnation phases driven by cocktails of shocks. Different sets of shocks explain different variables over the business cycle and the three historical episodes of sudden stops identified.
    Keywords: Bayesian estimation; business cycles; Endogenous Regime-Switching; financial crises; Mexico; occasionally binding constraints
    JEL: C11 E3 F41 G01
    Date: 2020–03
  12. By: Kuvshinov, Dmitry; Zimmermann, Kaspar
    Abstract: This paper studies long-run trends in stock market capitalization and their drivers. New annual data for 17 advanced economies reveal a striking time series pattern: the ratio of stock market capitalization to GDP was roughly constant between 1870 and 1980, tripled with a historically unprecedented "big bang" in the 1980s and 1990s, and remains high to this day. We use data on equity returns, yields and cashflows to explore the underlying forces behind this structural shift. We show that the big bang is driven by two factors: a secular decline in the equity discount rate from 1980 onwards, and an upward shift in cashflows paid by listed firms. Equity issuance and new listings make next to no contribution to the structural increase in market cap. We also show that high market capitalization forecasts low equity returns, low dividend growth and a high risk of a stock market crash. This suggests that the currently high valuations and capitalization are a sign of high, rather than low risk in equity markets.
    Keywords: equity valuations; return predictability; risk premiums; stock market capitalization; wealth-to-income ratios
    JEL: E44 G10 N20 O16
    Date: 2020–03
  13. By: Davidson A. Omole; Gabriel O. Falokun (Economic Development Department Nigerian Institute of Social and Economic Research (NISER), Ibadan, Nigeria)
  14. By: Harris, Milton; Opp, Christian; Opp, Marcus M.
    Abstract: We propose a novel conceptual approach to transparently characterizing credit market outcomes in economies with multi-dimensional borrower heterogeneity. Based on characterizations of securities' implicit demand for bank equity capital, we obtain closed-form expressions for the composition of credit, including a sufficient statistic for the provision of bank loans, and a novel cross-sectional asset pricing relation for securities held by regulated levered institutions. Our framework sheds light on the compositional shifts in credit prior to the 07/08 financial crisis and the European debt crisis, and can provide guidance on the allocative effects of shocks affecting both banks and the cross-sectional distribution of borrowers.
    Keywords: Bailouts; bank capital; Composition of credit; Credit rationing; Crowding out; Institutional asset pricing; Non-bank competition; Overinvestment
    JEL: G12 G21 G23 G28
    Date: 2020–03

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