nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2020‒08‒31
twenty papers chosen by
Georg Man

  1. Financial Shocks to Banks, R&D Investment, and Recessions By Ohdoi, Ryoji
  2. Patent Puzzle, Inflation, and Internal Financial Constraint By Suzuki, Keishun
  3. Worker Household Debt, Functional Income Distribution and Growth: a neo-Kaleckian Perspective By Parui, Pintu
  4. UK’s net-zero carbon emissions target: Investigating the potential role of economic growth, financial development, and R&D expenditures based on historical data (1870 - 2017) By Shahbaz, Muhammad; Nasir, Muhammad Ali; Hille, Erik; Kumar, Mantu
  5. The impact of financial risks on economic growth in EU-15 By Ionut Jianu; Laura-Madalina Pirscoveanu; Maria-Daniela Tudorache
  6. Determinants of Inclusive Growth in ASEAN By Victoriia Alekhina; Giovanni Ganelli
  7. Financial Development and Labor Markets: evidence from Brazil By Julia Fonseca; Bernardus Van Doornik
  8. Government Banks, Household Debt, and Economic Downturns: The Case of Brazil By Gabriel Garber; Atif Mian; Jacopo Ponticelli; Amir Sufi
  9. What Drives Financial Development? A Meta-Regression Analysis By Chris Doucouliagos; Jakob de Haan; Jan-Egbert Sturm
  10. Towards a new index of mobile money inclusion and the role of the regulatory environment By Tetteh, Godsway Korku; Goedhuys, Micheline; Konte, Maty; Mohnen, Pierre
  11. Which credit gap is better at predicting financial crises? A comparison of univariate filters By Mathias Drehmann; James Yetman
  12. The intertwining of credit and banking fragility By Jérôme Creel; Paul Hubert; Fabien Labondance
  13. How does Fintech Innovation Matter for Bank Fragility in SSA? By Nguena, Christian-Lambert
  14. Banking Sector Performance During the COVID-19 Crisis By Demirguc-Kunt,Asli; Pedraza Morales,Alvaro Enrique; Ruiz Ortega,Claudia
  15. Non-Financial Corporate Debt in Advanced Economies, 2010–17 By Luiza Antoun de Almeida; Thierry Tressel
  16. Leverage Cycles, Growth Shocks, and Sudden Stops in Capital Inflows By Emter, Lorenz
  17. Reexamining the National Savings-Investment Nexus Across Time and Countries By Antonio David; Carlos Eduardo Gonçalves; Alejandro M. Werner
  18. The Comparative African Regional Economics of Globalization in Financial Allocation Efficiency: Pre-Crisis Era Revisited By Asongu, Simplice; Nnanna, Joseph; Tchamyou, Vanessa
  19. Factors Affecting the Competitive Capacity of Commercial Banks: A Critical Analysis in an Emerging Economy By Dao, Kieu Oanh; Kieu, Le; Tu, Pham Thuy; Nguyen, V.C.
  20. Credit cooperatives: Market structure, competition, and conduct. Exploring the case of Paraguay By Schneider, Andreas

  1. By: Ohdoi, Ryoji
    Abstract: In some classes of macroeconomic models with financial frictions, an adverse financial shock successfully explains a drop in GDP, but simultaneously induces a stock price boom. The latter theoretical result is not consistent with data from actual financial crises. This study develops a simple macroeconomic model featuring a banking sector, financial frictions, and R&D-led endogenous growth to examine the impacts of an adverse financial shock to banks on firms' R&D investments and equity prices. Both the analytical and numerical investigations show that a shock that hinders the banks' financial intermediary function can be a key to generating both a prolonged recession and a drop in the firms' equity prices.
    Keywords: Banks; Endogenous growth; Financial frictions; Financial shocks; Quality-ladder growth model
    JEL: E32 E44 G01 O31 O41
    Date: 2020–07–22
  2. By: Suzuki, Keishun
    Abstract: Although Schumpeterian growth models typically predict that stronger patent protection enhances innovation-driven economic growth, the empirical evidence does not support this idea. We explore the unclear relationship at work by shedding light on the financing of R&D investment. Empirically, R&D-intensive firms preferentially rely on their internal cash flows rather than external funds. We develop a simple monetary Schumpeterian growth model in which R&D firms face an endogenous financing choice that is consistent with this evidence. In our model, the scale of R&D investment may be financially constrained by internal cash because external financing is costly. Our model shows that the relationship between patent protection and growth can be either N-shaped, inverted-U shaped, or positive depending on the inflation rate. Specifically, we find that the growth effect of the pro-patent policy is likely to be negative under a high inflation rate, while the growth effect is always positive under the Friedman rule.
    Keywords: Innovation, Patent Protection, Inflation, Financing of R&D
    JEL: E44 O31 O34
    Date: 2020–07
  3. By: Parui, Pintu
    Abstract: In a stock-flow consistent neo-Kaleckian macro-model, along with worker households' debt dynamics, in the long-run, we incorporate distributional dynamics and demonstrate the possibility of multiple equilibria. Dynamic stability of the economy is also examined. Both debt-led and debt-burdened demand and growth regimes are possible in short-run as well as in the long-run. We find that mergers, acquisitions and hostile takeovers play a crucial role for (de)stabilizing the economy. In some instances, the speed of the adjustment parameter of the distributional dynamics becomes crucial for stabilizing the economy. Otherwise, the economy may lose its stability and gives birth to limit cycles.
    Keywords: Capital Accumulation, Income Distribution, Worker Household Debt, Kaleckian Model, Limit Cycle, Stock-flow Consistency
    JEL: C62 E12 E25 G34 O41
    Date: 2020–08–12
  4. By: Shahbaz, Muhammad; Nasir, Muhammad Ali; Hille, Erik; Kumar, Mantu
    Abstract: The 4th industrial revolution and global decarbonisation are frequently referred to as two, interrelated megatrends. In particular, the former, technological revolution is expected to fundamentally change the economy, society, and financial systems, and may also create opportunities towards a zero-carbon future. Therefore, in the presence of the UK’s legally binding commitment to achieve a net-zero emissions target by 2050, we analyse the role of economic growth, R&D expenditures, financial development, and energy consumption in causing carbon dioxide (CO2) emissions. Our analysis is based on historical annual data from 1870 to 2017, thereby employing the bootstrapping bounds testing approach to examine short- and long-run relationships. The results suggest the existence of cointegration between CO2 emissions and its determinants. Financial development and energy consumption lead to environmental degradation, but R&D expenditures help reducing CO2 emissions. The estimated environmental effects of economic growth support the EKC hypothesis. While a U-shaped relationship is depicted between financial development and CO2 emissions, the nexus between R&D expenditures and CO2 emissions is analogues to the EKC. In the context of the efforts to tackle climate change, our findings suggest policy prescriptions by using financial development and R&D expenditures as key tools to meet the emissions target.
    Keywords: CO2 Emissions, Economic Growth, Financial Development, R&D Expenditures, Net-zero Emissions
    JEL: Q5
    Date: 2020–07–10
  5. By: Ionut Jianu; Laura-Madalina Pirscoveanu; Maria-Daniela Tudorache
    Abstract: This paper examines the impact of financial risks on economic growth in the first 15 Member States of the European Union, considering 1995-2014 period and aims to lay down a new explanatory model of economic growth, based mainly on the behavioral reactivity of the financial disruptions mentioned above. The model was estimated through the panel estimated generalized least squares method and included additional control variables in order to strengthen the research conducted. Our goal consists in the examination of the financial risks in the European Union and in the estimation of their impact on economic growth.
    Date: 2020–07
  6. By: Victoriia Alekhina; Giovanni Ganelli
    Abstract: Over the past decades ASEAN countries have experienced rapid economic growth accompanied by a dramatic fall in poverty rates, but income inequality has not retreated. This research aims at identifying factors which could contribute to more equally distributed growth in ASEAN. To measure inclusive growth, we use a variable integrating per capita income growth and an equity index. A cross-country panel analysis of the impact of macro-structural factors on inclusive growth and its two components suggests that fiscal redistribution, female labor force participation, productivity growth, FDI inflows, digitalization, and savings significantly drive inclusive growth. A scenario analysis based on our econometric results suggests that the implementation of fiscal redistribution and labor market-oriented structural reforms could help significantly accelerate inclusive growth in ASEAN.
    Date: 2020–07–03
  7. By: Julia Fonseca; Bernardus Van Doornik
    Abstract: We estimate the effect of an increase in the availability of bank credit on the employment and the earnings of high- and low-skilled workers. To do so, we consider a bankruptcy reform that increased the legal protections of secured creditors, which led to an expansion of bank credit to Brazilian firms. We use detailed administrative data and an empirical strategy that compares changes in outcomes for financially constrained firms, which were affected by the bankruptcy reform, with unconstrained firms, which were largely unaffected by the reform. Following the bankruptcy reform and subsequent expansion in credit, constrained firms increased employment, especially of high-skilled workers. We also observe an increase in wages, with gains concentrated on skilled workers and on workers who were employed at constrained firms prior to the reform. To rationalize these findings, we design a model in which heterogeneous producers face constraints in their ability to borrow and have production functions featuring capital-skill complementarity. Using this framework, we estimate that the reallocation of resources induced by the bankruptcy reform accounts for 36 percent of the observed increase in aggregate productivity in Brazil during the 2000s.
    Date: 2020–08
  8. By: Gabriel Garber; Atif Mian; Jacopo Ponticelli; Amir Sufi
    Abstract: After the global financial crisis, government banks in Brazil boosted credit provision to households, generating a sharp increase in household debt which was followed by the most severe recession in recent Brazilian history in 2015-2016. Using a novel individual-level data set including matched credit registry and employer-employee information, we show that individuals with higher debt-to-income growth during the boom experienced lower subsequent credit card expenditure during the recession. To identify the credit-supply effect, we exploit individuals borrowing from both government-controlled and private banks. We show that, during the late stages of the boom period, government banks increased their lending more than private banks to the same individual. To study the effect of this credit supply shock on individual consumption, we exploit variation in the sector of employment of each borrower. Individuals employed by the public sector were disproportionately targeted by payroll loans offered by government banks and experienced larger decline in credit card spending during the subsequent recession.
    Keywords: credit booms, household credit, payroll loans, credit card expenditure
    JEL: D14 E21 G21 G28
    Date: 2020–08
  9. By: Chris Doucouliagos; Jakob de Haan; Jan-Egbert Sturm
    Abstract: This paper offers a meta-regression analysis of the literature on the drivers of financial development. Our results based on 1900 estimates suggest that institutional quality is positively correlated to both private sector credit and stock market capitalization (both as share of GDP). Domestic financial openness has a positive effect on both proxies for financial development, while trade openness seems only important for stock market capitalization. Inflation has an adverse effect on financial development, which is larger for stock market capitalization. Finally, we conclude that the literature has not yet robustly established that remittances and trust matter for financial development.
    Keywords: financial development, meta-regression analysis, law and finance, institutional quality, trade openness, financial openness, remittances, trust
    JEL: G21 N20 O16 O43 P48
    Date: 2020
  10. By: Tetteh, Godsway Korku (Maastricht University, UNU-MERIT); Goedhuys, Micheline (Maastricht University, UNU-MERIT); Konte, Maty (Barnard College, Columbia University, and UNU-MERIT); Mohnen, Pierre (Maastricht University, UNU-MERIT)
    Abstract: It is an undeniable fact that financial inclusion has become a global policy priority. Despite its popularity in the policy sphere, the concept of financial inclusion lacks a comprehensive measure to monitor and evaluate inclusive financial systems across the globe. To fill this gap, we combine macro-level data from the Financial Access Survey of the International Monetary Fund and the World Bank’s Global Findex database to construct novel indices of financial inclusion. First, we compute new financial inclusion indices that incorporate access to financial services by groups prone to exclusion. Second, we account for the recent upsurge in mobile money adoption in the developing world by computing a novel mobile money inclusion index. We further relate the financial inclusion indices with legal origin to ascertain the role of initial conditions of the regulatory environment in countries’ financial inclusion achievements. We find that whereas developed countries continue to lead in banking inclusion, developing countries in sub-Saharan Africa are at the frontiers of mobile money inclusion. Also, we find evidence suggesting that the regulatory environment matters for financial inclusion.
    Keywords: Financial Inclusion, Banking Inclusion, Financial Innovation, Mobile Money Inclusion
    JEL: G21 O16 O35 O57
    Date: 2020–08–24
  11. By: Mathias Drehmann; James Yetman
    Abstract: The credit gap, defined as the deviation of the credit-to-GDP ratio from a one-sided HP-filtered trend, is a useful indicator for predicting financial crises. Basel III therefore suggests that policymakers use it as part of their countercyclical capital buffer frameworks. Hamilton (2018), however, argues that you should never use an HP filter as it results in spurious dynamics, has end-point problems and its typical implementation is at odds with its statistical foundations. Instead he proposes the use of linear projections. Some have also criticised the normalisation by GDP, since gaps will be negatively correlated with output. We agree with these criticisms. Yet, in the absence of clear theoretical foundations, all proposed gaps are but indicators. It is therefore an empirical question which measure performs best as an early warning indicator for crises. We run a horse race using expanding samples on quarterly data from 1970 to 2017 for 41 economies. We find that credit gaps based on linear projections in real time perform poorly when based on country-by-country estimation, and are subject to their own end-point problem. But when we estimate as a panel, and impose the same coefficients on all economies, linear projections perform marginally better than the baseline credit-to-GDP gap, with somewhat larger improvements concentrated in the post-2000 period and for emerging market economies. The practical relevance of the improvement is limited, though. Over a ten year horizon policy makers could expect one less wrong call on average.
    Keywords: early warning indicators, credit gaps, HP filter, linear projection
    JEL: E44 G01
    Date: 2020–08
  12. By: Jérôme Creel (OFCE - Observatoire français des conjonctures économiques - Sciences Po - Sciences Po); Paul Hubert (OFCE - Observatoire français des conjonctures économiques - Sciences Po - Sciences Po); Fabien Labondance (OFCE - Observatoire français des conjonctures économiques - Sciences Po - Sciences Po, CRESE - Centre de REcherches sur les Stratégies Economiques (EA 3190) - UBFC - Université Bourgogne Franche-Comté [COMUE] - UFC - Université de Franche-Comté)
    Abstract: Although the literature has provided evidence of the predictive power of credit for financial and banking crises, this article aims to investigate the grounds of this link by assessing the interrelationships between credit and banking fragility. The main identification assumption represents credit and banking fragility as a system of simultaneous joint data generating processes whose error terms are correlated. We test the null hypotheses that credit positively affects banking fragility—a vulnerability effect—and that banking fragility has a negative effect on credit—a trauma effect. We use seemingly unrelated regressions and 3SLS on a panel of European Union (EU) countries from 1998 to 2012 and control for the financial and macroeconomic environment. We find a positive effect of credit on banking fragility in the EU as a whole, in the Eurozone, in the core of the EU but not at its periphery, and a negative effect of banking fragility on credit in all samples.
    Keywords: Banking fragility,Credit growth,Nonperforming loans,SUR model
    Date: 2019–12
  13. By: Nguena, Christian-Lambert
    Abstract: There is a momentous debate on the role played by financial technology (fintech) innovation in the fragility of the banking sector. Considering the importance of financial solidness, contradictory theoretical predictions and empirical evidence, the in-depth re-investigation of this relation is needed. Using data of 690 banks across 34 Sub Saharan African countries for the period 1999-2015 along with FGLS, GMM, Panel Threshold regression and PCA econometric method, this paper empirically examines the influence of fintech innovation on bank fragility. Mainly the destabilizing impact of fintech innovation is confirmed for our baseline investigation but later relativized with a stabilizing impact after a certain threshold. Moreover, the results highlight also that the macroeconomic environment is important in explaining bank fragility and suggested that public policy should take into account some specific destabilizing consequences on the banking system. Besides, the simultaneous hypothesis test of the innovationfragility nexus conditional to some relevant variables reveals that financial openness does matter while investment, commercial openness and monetary policy do not. Lastly, the comparative analysis validates our heterogeneity hypothesis; countries with the high size banking sector, colonialized by France and members of monetary union performs better than the others in terms of bank solidness. These results indicate that suitable fintech innovation policy even between the same regions could be rather different. Financial instability appeared also to increase bank fragility. This paper contributes to the limited literature on fintech innovation at both the macro and micro levels in sub-Saharan Africa.
    Keywords: Fintech innovation,Bank fragility,Threshold regression,Technology transformation,FGLS,GMM,PCA
    JEL: G21 G28 G15 O31 O33
    Date: 2020
  14. By: Demirguc-Kunt,Asli; Pedraza Morales,Alvaro Enrique; Ruiz Ortega,Claudia
    Abstract: This paper analyzes bank stock prices around the world to assess the impact of the COVID-19 pandemic on the banking sector. Using a global database of policy responses during the crisis, the paper also examines the role of financial sector policy announcements on the performance of bank stocks. Overall, the results suggest that the crisis and the countercyclical lending role that banks are expected to play have put banking systems under significant stress, with bank stocks underperforming their domestic markets and other non-bank financial firms. The effectiveness of policy interventions has been mixed. Measures of liquidity support, borrower assistance, and monetary easing moderated the adverse impact of the crisis, but this is not true for all banks or in all circumstances. For example, borrower assistance and prudential measures exacerbated the stress for banks that are already undercapitalized and/or operate in countries with little fiscal space. These vulnerabilities will need to be carefully monitored as the pandemic continues to take a toll on the world?s economies.
    Keywords: Financial Sector Policy,Macroeconomic Management,International Trade and Trade Rules,Finance and Development,Banks&Banking Reform
    Date: 2020–08–14
  15. By: Luiza Antoun de Almeida; Thierry Tressel
    Abstract: This paper studies the evolution of non-financial corporate debt among publicly listed companies in major advanced economies between 2010 and 2017. Since 2010, firms have started to rely more on corporate bond markets and have used part of their debt to increase their holdings of cash. In our sample of some 5,000 firms, we find substantial differences across countries, industries, firms, and years in leverage and debt maturity, and we also identify time factors that are common drivers of capital structures. Within countries, loosening an index of financial conditions seems to be associated with lengthening debt maturity after controlling for firms’ characteristics. Across firms and countries, leveraging and lengthening debt maturity have been greater where economic growth was stronger. Tighter financial conditions are positively associated with an increase in short-term debt financing. Quantile regressions suggest that there is substantial heterogeneity among firms on how they react to macro-financial conditions: large increases in long-term debt financing and large declines in short-term debt financing tend to be driven more by better macroeconomic performance, while large increases in short-term debt financing are more strongly impacted by tighter financial conditions. Since the paper uses data up to 2017, it does not reflect developments that occurred during the coronavirus pandemic. Nonetheless, sensitivity analysis shows that a significant amount of corporate debt, representing more than 5 percent of GDP, could be at risk in some countries, with an adverse spillover to the financial system if financial conditions tighten or economic growth slows down. This suggests that vulnerabilities should be closely monitored and policy action taken if warranted.
    Date: 2020–07–03
  16. By: Emter, Lorenz (Central Bank of Ireland and Trinity College Dublin)
    Abstract: Using a quarterly panel of 98 advanced as well as emerging and developing countries from 1990 to 2017, this paper shows that domestic variables are significantly related to the probability of incurring sharp reversals in capital inflows controlling for global push factors. In particular, negative growth shocks combined with high levels of leverage in the domestic private sector are a significant determinant of sudden stops. This is in line with real business cycle models including an occasionally binding credit constraint and income trend shocks.
    Keywords: international capital flows, sudden stops, financial stability.
    JEL: E32 F30 F32 F34 G15
    Date: 2020–07
  17. By: Antonio David; Carlos Eduardo Gonçalves; Alejandro M. Werner
    Abstract: Domestic savings and investment are positively correlated across countries and through time, as Feldstein-Horioka (FH) unveiled 40 years ago. We argue that an interpretation of this correlation based on market failures is more consistent with data patterns than alternative hypotheses. Moreover, resorting to instrumental variables techniques, we conclude that the relationship is causal: an exogenous rise in savings increases investment. This result holds in the full sample of countries and for emerging and developing economies, but there is evidence that the positive association in advanced economies is due to endogeneity bias. The core of our identification strategy relies on the idea that population age structure influences savings, but not total investment directly. Specifically, we use the share of adults in the [35-49] years of age bracket as an instrument for savings. Our estimates pass weak-instruments robust inference.
    Date: 2020–07–10
  18. By: Asongu, Simplice; Nnanna, Joseph; Tchamyou, Vanessa
    Abstract: The study assesses the role of globalization-fuelled regionalization policies on financial allocation efficiency in four economic and monetary regions in Africa for the period 1980 to 2008. Banking system and financial system efficiency proxies are used as dependent variables whereas seven bundled and unbundled globalization variables are employed as independent indicators. The bundling exercise is achieved by means of principal component analysis while the empirical evidence is based on interactive Fixed Effects regressions. The following findings are established. First, financial allocation efficiency is more sensitive to financial openness compared to trade openness and most sensitive to globalization. The relationship between allocation efficiency and globalization-fuelled regionalization policies is: (i) Kuznets or inverted U-shape in the UEMOA and CEMAC zones (evidence of decreasing returns to allocation efficiency from globalization-fuelled regionalization) and (ii) U-shape overwhelmingly in the COMESA and scantily in the EAC (increasing returns to allocation efficiency from globalization-fuelled regionalization). Established shapes are relevant to specific globalization dynamics within regions. Economic and monetary regions are more prone to surplus liquidity than purely economic regions. Policy implications and measures of fighting surplus liquidity are discussed.
    Keywords: Globalization; Financial Development; Regional Integration; Panel; Africa
    JEL: A10 D60 E40 O10 P50
    Date: 2019–01
  19. By: Dao, Kieu Oanh; Kieu, Le; Tu, Pham Thuy; Nguyen, V.C.
    Abstract: This research was conducted to investigate the factors influencing the commercial bank’s competitive capacity in an emerging country. Data were collected from the domestic-owned commercial banks and foreign-owned commercial banks listed on Vietnam’s Stock Exchange over the period of nine years from 2010 to 2018. Three statistic approaches were employed to address econometrics issues and to improve the accuracy of the regression coefficients: Pooled Ordinary Least Square (Pooled OLS), Random Effects Model (REM), and Fixed Effects Model (FEM). To correct the diagnostics and endogeneity in the model, the study uses Generalized Least Square (GLS) and Generalized Method of Moments (GMM). In order to account for the degree of competitive capacity we use Lerner index. Results demonstrate that the impact of bank-specific characteristics on market power in banks is statistically significant, and there are substantial distinguishments of economic consideration among these factors. In addition, a bank with a higher level of competitive capacity in the previous year will outstandingly generate competitive capacity in the current year. Another possibility, a greater level foreign investment into the banks in the host country could further encourage competitive capacity in the banking system. Finally, economic growth rate has no impact on competitive capacity at a significant level of 5% while a positive effect from inflation on bank’s market power could be found.
    Date: 2020–07–06
  20. By: Schneider, Andreas
    Abstract: Measures of concentration and competition in the financial sector are important to determine public policies. However, cooperatives, and in particular in the context of small developing countries are largely ignored in economic literature. The empirical analysis is descriptive due to data availability and analysis the loan market of large credit cooperatives. However, findings are indicative and tentative. Results show that, in general, a) the cooperative system is highly concentrated, b) the loan market of large financial cooperatives is not concentrated, c) however, most loan modalities are highly concentrated, some are competitive and some are not, d) there is no indicative evidence of market abuse of the three largest credit cooperatives.
    Keywords: Credit cooperatives, Paraguay, Market structure, Competition, HHI, dual HHI
    JEL: L1 L10 L11
    Date: 2020–08–07

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