nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2020‒10‒05
eighteen papers chosen by
Georg Man

  1. Financial conditions, business cycle fluctuations and growth at risk By Falconio, Andrea; Manganelli, Simone
  2. On the Importance of Household versus Firm Credit Frictions in the Great Recession By Patrick J. Kehoe; Pierlauro Lopez; Virgiliu Midrigan; Elena Pastorino
  3. The Corona Virus, the Stock MarketÕs Response, and Growth Expectations By Niels J. Gormsen; Ralph S.J. Koijen
  4. Forecasting the Covid-19 recession and recovery: lessons from the financial crisis By Foroni, Claudia; Marcellino, Massimiliano; Stevanović, Dalibor
  5. A Macro-Financial Perspective to Analyse Maturity Mismatch and Default By Xuan Wang
  6. Banking euro area stress test model By Budnik, Katarzyna; Balatti, Mirco; Dimitrov, Ivan; Groß, Johannes; Kleemann, Michael; Reichenbachas, Tomas; Sanna, Francesco; Sarychev, Andrei; Siņenko, Nadežda; Volk, Matjaz
  7. EU-US Trade Post-Trump Perspectives: TTIP Aspects Related to Foreign Direct Investment and Innovation By Andre Jungmittag; Paul J.J. Welfens
  8. Developing a Global Model for Trade, Finance and Income Distribution By Francis Cripps; Alex Izurieta; Terry McKinley
  9. Fiscal Expansion, Government Debt and Economic Growth: A Post-Keynesian Perspective By Parui, Pintu
  10. Inflation Threshold Levels and Economic Growth in the Franc Zone Countries By Sanga,Dimitri; Gui-Diby,Steve Loris
  11. Should the History of Macroeconomics Steer Cear of the Fray or be Partisan? A Critical Essay on Banks and Finance in Modern Macroeconomics by B. Ingrao and C. Sardoni By Michel De Vroey
  12. Capital Flows and the Stabilizing Role of Macroprudential Policies in CESEE By Markus Eller; Niko Hauzenberger; Florian Huber; Helene Schuberth; Lukas Vashold
  13. Cross-Border Banking in EMDEs : Trends, Scale, and Policy Implications By Feyen,Erik H.B.; Fiess,Norbert Matthias; Bertay,Ata Can; Zuccardi Huertas,Igor Esteban
  14. Bank Lending Rates and Spreads in EMDEs : Evolution, Drivers, and Policies By Feyen,Erik H.B.; Zuccardi Huertas,Igor Esteban
  15. The performance of microfinance institutions: An analysis of the local and legal constraints By Delaram Najmaei Lonbani; Bram De Rock
  16. The Social Return on Investment (SROI) of four microfinance projects By Grazioli, Riccardo; Pizzo, Giampietro; Poletti, Lucia; Tagliavini, Giulio; Timpano, Francesco
  17. Commitment or Concealment? Impacts and Use of a Portable Saving Device: Evidence from a Field Experiment in Urban India By Janina Isabel Steinert; Rucha Vasumati Satish; Felix Stips; Sebastian Vollmer
  18. Launching with a Parachute: The Gig Economy and Entrepreneurial Entry By John M. Barrios; Yael V. Hochberg; Hanyi Yi

  1. By: Falconio, Andrea; Manganelli, Simone
    Abstract: We study the macroeconomic consequences of financial shocks and increase in economic risk using a quantile vector autoregression. Financial shocks have a negative, but asymmetric impact on the real economy: they substantially increase growth at risk, but have limited impact on upside potential. The impact of financial shocks is explained away after controlling for economic risk (measured by the interquantile range). The effects are economically relevant. Bad economic environment, characterized by negative real and financial shocks, has a highly skewed impact on business cycle fluctuations, leading to a peak reduction of monthly industrial production by more than 2%. In comparison, positive real and financial shocks in a good economic environment have limited effect on upside potential of the economy. JEL Classification: C32, C53, E32, E44
    Keywords: financial conditions, quantile regression, risk, uncertainty
    Date: 2020–09
  2. By: Patrick J. Kehoe; Pierlauro Lopez; Virgiliu Midrigan; Elena Pastorino
    Abstract: Although a credit tightening is commonly recognized as a key determinant of the Great Recession, to date, it is unclear whether a worsening of credit conditions faced by households or by firms was most responsible for the downturn. Some studies have suggested that the household-side credit channel is quantitatively the most important one. Many others contend that the firm-side channel played a crucial role. We propose a model in which both channels are present and explicitly formalized. Our analysis indicates that the household-side credit channel is quantitatively more relevant than the firm-side credit channel. We then evaluate the relative benefits of a fixed-sized transfer to households and to firms that improves each group’s access to credit. We find that the effects of such a transfer on employment are substantially larger when the transfer targets households rather than firms. Hence, we provide theoretical and quantitative support to the view that the employment decline during the Great Recession would have been less severe if instead of focusing on easing firms’ access to credit, the government had expended an equal amount of resources to alleviate households’ credit constraints.
    Keywords: credit constraints; collateral constraints; Great Recession; financial recession; government transfers
    JEL: E3 E32 E62 J2 J6
    Date: 2020–09–25
  3. By: Niels J. Gormsen (University of Chicago - Booth School of Business); Ralph S.J. Koijen (University of Chicago Booth School of Business)
    Abstract: We use data from the aggregate equity market and dividend futures to quantify how investorsÕ expectations about economic growth across horizons evolve in response to the corona virus outbreak and subsequent policy responses. Dividend futures, which are claims to dividends on the aggregate stock market in a particular year, can be used to directly compute a lower bound on growth expectations across maturities or to estimate expected growth using a simple forecasting model. We show how the actual forecast and the bound evolve over time. As of March 16, expected growth over the next quarter declined by 2.5% in the US and 3.5% in Europe (both annualized) compared to the beginning of the year. The lower bound on expected GDP growth has been revised down by as much as 10% in the US and 12% in the EU. There are signs of catch-up growth from year 4 to year 10. News about economic relief programs on March13 appear to have increased stock prices by lowering risk aversion and lift long-term growth expectations, but did little to improve expectations about short-term growth.The events on March 16 reflect a deterioration of fundamentals in the US and predicta deepening of the economic downturn. We also show how data on dividend futures can be used to understand why stock markets fell so sharply, well beyond changes ingrowth expectations
    Date: 2020
  4. By: Foroni, Claudia; Marcellino, Massimiliano; Stevanović, Dalibor
    Abstract: We consider simple methods to improve the growth nowcasts and forecasts obtained by mixed frequency MIDAS and UMIDAS models with a variety of indicators during the Covid-19 crisis and recovery period, such as combining forecasts across various specifications for the same model and/or across different models, extending the model specification by adding MA terms, enhancing the estimation method by taking a similarity approach, and adjusting the forecasts to put them back on track by a specific form of intercept correction. Among all these methods, adjusting the original nowcasts and forecasts by an amount similar to the nowcast and forecast errors made during the financial crisis and following recovery seems to produce the best results for the US, notwithstanding the different source and characteristics of the financial crisis. In particular, the adjusted growth nowcasts for 2020Q1 get closer to the actual value, and the adjusted forecasts based on alternative indicators become much more similar, all unfortunately indicating a much slower recovery than without adjustment and very persistent negative effects on trend growth. Similar findings emerge also for the other G7 countries. JEL Classification: C53, E37
    Keywords: Covid-19, forecasting, GDP, mixed-frequency
    Date: 2020–09
  5. By: Xuan Wang (Vrije Universiteit Amsterdam)
    Abstract: The Basel Committee proposed the Net Stable Funding Ratio (NSFR) to curb excessive maturity mismatch of the banking sector. However, it remains to be ascertained as to what are the financial and real effects of the NSFR on banks' credit quality, investment, and the pass-through of monetary policy. This paper develops a nominal dynamic general equilibrium featuring banks' maturity mismatch and the moral hazard due to costly monitoring. First, I show that a tightening of the NSFR to move loan maturity towards the long-run capital investment cycle would only increase real investment if it sufficiently improves banks' credit quality. Then in the numerical example calibrated with the US data, I show that such tightening of the NSFR can indeed increase real investment and also reduce the aggregate fluctuation of the economy. In the steady states, a 10% tightening in the NSFR can decrease net charge-offs of non-performing loans by about 0.06 pp annually, despite squeezing banks' interest margin. Moreover, the moral hazard stemming from banks' unobserved monitoring effort impairs the pass-through of monetary policy. However, a 10% tightening in the NSFR improves the pass-through of a 20-bp policy rate reduction by around 17% annually. Finally, the model simulates the stochastic dynamic equilibrium path to study the propagation of shocks, demonstrating that the NSFR complements monetary policy in reducing financial frictions.
    Keywords: Maturity mismatch, Net Stable Funding Ratio, default, banking, monetary policy, macro-prudential policy
    JEL: E44 E51 G18 G21
    Date: 2020–09–22
  6. By: Budnik, Katarzyna; Balatti, Mirco; Dimitrov, Ivan; Groß, Johannes; Kleemann, Michael; Reichenbachas, Tomas; Sanna, Francesco; Sarychev, Andrei; Siņenko, Nadežda; Volk, Matjaz
    Abstract: The Banking Euro Area Stress Test (BEAST) is a large scale semi-structural model developed to assess the resilience of the euro area banking system from a macroprudential perspective. The model combines the dynamics of a high number of euro area banks with that of the euro area economies. It reflects banks’ heterogeneity by replicating the structure of their balance sheets and profit and loss accounts. In the model, banks adjust their assets, interest rates, and profit distribution in line with the economic conditions they face. Bank responses feed back to the macroeconomic environment affecting credit supply conditions. When applied to a stress test of the euro area banking system, the model reveals higher system-wide capital depletion than the analogous constant balance sheet exercise. JEL Classification: E37, E58, G21, G28
    Keywords: banking sector deleveraging, macroprudential policy, macro stress test, real economy-financial sector feedback loop
    Date: 2020–09
  7. By: Andre Jungmittag (Economics and Quantitative Methods at the Frankfurt University of Applied Sciences); Paul J.J. Welfens (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW))
    Abstract: The international economic debate on the Transatlantic Trade and Investment Partnership (TTIP) has focused mainly on trade induced real income gains while the FDI related and innovation induced benefits have been largely neglected, although the EU and the US are leading FDI host countries and FDI source countries. Moreover, from a theoretical perspective a knowledge production function has to be considered in order to analyze FDI and innovation dynamics – and this can then be linked to output and economic growth, respectively. It is argued that such a Schumpeterian approach for an open economy is needed to understand deep integration dynamics while the standard CGE model used by Francois et al (2013) leads to an underestimation of deep integration projects such as TTIP. The panel data estimation of knowledge production functions for 20 EU countries between 2002-2012 shows clear empirical evidence that a rise of the number of researchers and of the FDI stock-GDP ratio (or related variables) will raise patent applications. Additionally, a higher per capita income – that could reflect trade related real income gains in the context of TTIP – also contributes to new knowledge and a fortiori to higher GDP. Time series data analysis for Germany indicates additionally that FDI induced higher innovation dynamics will raise output - combining trade benefits and FDI/innovation related real income gains plus transatlantic macroeconomic interdependency effects a real income gain of nearly 2% should be expected for Germany (and the EU). As the Trump Administration is focusing on bilateralism, the US is essentially renouncing a considerable output increase and opportunities to improve its current account; instead the Trump Administration has adopted a policy of protectionism which is likely to undermine trade dynamics and economic growth. In the long run, transatlantic trade perspectives could improve.
    Keywords: Knowledge production function, Innovation, FDI, TTIP, Empirical Analysis, EU
    JEL: F14 F43 O30 O47 O52
    Date: 2019–11
  8. By: Francis Cripps (IPC-IG); Alex Izurieta (IPC-IG); Terry McKinley (IPC-IG)
  9. By: Parui, Pintu
    Abstract: Constructing a post-Keynesian growth model, we try to explore how the interaction between capital accumulation and government debt opens up the possibility of multiple equilibria and instability in the economy. We investigate the impact of various parameters such as different tax rates, savings propensities, interest rate etc. on the short run aggregate demand and long run equilibrium growth rate and fiscal debt-capital ratio. We explore the relationship between a progressive tax system and wage-led demand regime. We show that when there is fiscal deficit and government incurs debt, a sufficiently high government expenditure to GDP ratio is essential for achieving stability in the system. Moreover, in a certain case, a low speed of adjustment of the rate of capital accumulation is required, as otherwise, the economy may lose its stability and produces the limit cycles. In case of a moderate level of a fiscal expenditure to GDP ratio, when Keynesian stability condition is satisfied, a lower rate of interest and a higher autonomous investment demand are desirable as they enhance the stable region of the economy.
    Keywords: Government deficits and debt, Post-Keynesian, Instability, Limit cycle, Growth model
    JEL: C62 E12 E32 E62 O41
    Date: 2020–09–03
  10. By: Sanga,Dimitri; Gui-Diby,Steve Loris
    Abstract: This paper examines the growth-inflation nexus in Franc zone currency unions. It aims at estimating the inflation threshold above which additional inflationary pressures adversely affect economic expansion. It uses cointegration methods that are applied to data from 14 African countries from the Franc zone over 1970-2018. Based on country-level data, the results indicate that it is possible to increase the threshold levels used by regional central banks to 5.4-5.6 percent in the Central African Monetary Union and 4.3-4.5 percent in the West African Monetary Union. Homogeneous cointegration panel data analyses confirm the need to increase the threshold in Central African Monetary Union countries but do not in the West African Monetary Union countries.
    Keywords: Inflation,Economic Growth,Industrial Economics,Economic Theory&Research,International Trade and Trade Rules,Macroeconomic Management
    Date: 2020–09–21
  11. By: Michel De Vroey (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: My review of Ingrao and Sardoni’s book paper focuses on its Part II, entitled “From the Neoclassical Synthesis to New Keynesian Economics.” My criticisms amount to three. First, I disagree with Ingrao and Sardoni’s account of the twists and turns that have occurred in modern macroeconomics. Often, where they see continuity, I see cleavage; where they see cleavage, I see continuity. Second, I put forward that the result of the 2008 recession is that DSGE economists were led to zero in on the hitherto neglected issue of the workings of the financial sector and its integration in their models. Hence, Ingrao and Sardoni’s conclusion of failure must be revised. Third, I want to bring out that the internal history of economics can be written in two ways: the approach can be partisan or steer clear of the fray. As I am in favor of the latter, I regret that Ingrao and Sardoni have adopted the former.
    Keywords: History of macroeconomics, banking finance
    JEL: B10 B22 B26
    Date: 2020–07–07
  12. By: Markus Eller; Niko Hauzenberger; Florian Huber; Helene Schuberth; Lukas Vashold
    Abstract: In line with the recent policy discussion on the use of macroprudential measures to respond to cross-border risks arising from capital flows, this paper tries to quantify to what extent macroprudential policies (MPPs) have been able to stabilize capital flows in Central, Eastern and Southeastern Europe (CESEE) -- a region that experienced a substantial boom-bust cycle in capital flows amid the global financial crisis and where policymakers had been quite active in adopting MPPs already before that crisis. To study the dynamic responses of capital flows to MPP shocks, we propose a novel regime-switching factor-augmented vector autoregressive (FAVAR) model. It allows to capture potential structural breaks in the policy regime and to control -- besides domestic macroeconomic quantities -- for the impact of global factors such as the global financial cycle. Feeding into this model a novel intensity-adjusted macroprudential policy index, we find that tighter MPPs may be effective in containing domestic private sector credit growth and the volumes of gross capital inflows in a majority of the countries analyzed. However, they do not seem to generally shield CESEE countries from capital flow volatility.
    Date: 2020–09
  13. By: Feyen,Erik H.B.; Fiess,Norbert Matthias; Bertay,Ata Can; Zuccardi Huertas,Igor Esteban
    Abstract: Cross-border banking in emerging markets and developing economies has expanded across most World Bank regions and has become large relative to some home and host economies. This paper analyzes recent trends of bank activities of financial groups headquartered in 46 emerging markets and developing economies, as well as the ownership structure of 51 prominent financial groups from emerging markets and developing economies. The data suggest that cross-border groups in most regions have grown in size, geographical reach, range of activities, and group complexity. The increasing relevance and complexity of cross-border banking pose challenges for policy makers in home and host jurisdictions as well as for the groups themselves to maximize the benefits of international financial integration while mitigating the risks. This balance calls for stronger consolidated supervision, more regional coordination and harmonization, and better group-wide corporate governance and controls. However, key challenges include institutional capacity constraints and political factors.
    Keywords: Financial Sector Policy,International Trade and Trade Rules,Macroeconomic Management,Capital Markets and Capital Flows,Multinational&Corporate Governance,Corporate Governance,Civic Participation and Corporate Governance,Capital Flows
    Date: 2020–09–09
  14. By: Feyen,Erik H.B.; Zuccardi Huertas,Igor Esteban
    Abstract: This paper analyzes the main trends and patterns of nominal lending interest rates and lending-deposit interest rate spreads in emerging markets and developing economies. Using data from 140 emerging markets and developing economies, analysis shows that nominal lending rates and spreads declined between 2003 and 2017, with regional heterogeneity. In addition, it finds that less economically and financially developed countries tend to exhibit higher lending rates and spreads. These higher rates tend to be driven by higher spreads, not deposit interest rates. Also, illustrative regressions suggest that relevant correlates of nominal lending rates include inflation, public debt, and policy interest rate (macro-fiscal conditions); overhead costs, nonperforming loans, and non-interest income (banking characteristics); and credit bureau coverage and time to resolve insolvency (business environment). Finally, illustrative decompositions of the level and 10-year change between 2007 and 2017 of nominal lending rates find relative differences across regions. On the decline of nominal interest rates in that decade, rising public debt and nonperforming loans have pushed rates up, which was counterbalanced by a reduction in inflation, the policy interest rate, and overhead costs and a better business environment. Since the global financial crisis, a common global factor has increased in importance and has contributed to the downward trend in nominal lending rates.
    Keywords: Inflation,Business Environment,Financial Sector Policy,Bankruptcy and Resolution of Financial Distress,Macroeconomic Management
    Date: 2020–09–09
  15. By: Delaram Najmaei Lonbani; Bram De Rock
    Keywords: Microfinance; Performance; Location and Legal status; Heterogeneity; DEA; Meta-frontier
    JEL: O16
    Date: 2020–09–17
  16. By: Grazioli, Riccardo; Pizzo, Giampietro; Poletti, Lucia; Tagliavini, Giulio; Timpano, Francesco
    Abstract: The paper develops an SROI (Social Return on Investment) analysis of four microfinance institutions (MFIs) located in Spain, Italy and Bosnia-Herzegovina. This work is part of the MeMI Project ("Measuring Microfinance Impact in the EU. Policy recommendations for Financial and Social Inclusion") funded by the EIBURS. It is an attemptto translate microcredit outcome indicators into a social return, quantified in monetary terms. After preliminary focus group analyses and staff interviews, data on outcomes of selected microcredit lines have been collected through a questionnaire administered to the borrowers. By comparing the monetary value of these outcomes (translated into an estimated impact) with the amount of related investment, we find that SROI is greater than 2 for all the credit lines analysed, meaning that every euro invested in microcredit generates at least 2 euros of social return. We also find SROI ranging between 2.33 and 6.97, mirroring the differences between MFIs in terms of target, operating model and country-level financial environment. Although the analysis is conducted on a limited number of cases and SROI calculation can be sharpened, it shows how different factors and outcomes drive the social return generated by microcredit.
    Date: 2020
  17. By: Janina Isabel Steinert (Technical University of Munich, TUM School of Governance; Department of Social Policy and Intervention, University of Oxford); Rucha Vasumati Satish (Chair of Development Economics, University of Goettingen); Felix Stips (Centre for Evaluation (CEval)); Sebastian Vollmer (Chair of Development Economics, University of Goettingen)
    Abstract: We study the impact of a portable "soft" commitment device on the financial behavior of low-income slum dwellers in Maharashtra, India. 1525 individuals were randomly allocated to receiving either a zip purse and a lockbox (treatment arm) or a lockbox only (control arm). Based on self-reported measures and hand counts of money held in the distributed saving devices, we document an 81% increase in total savings in the treatment group. We do not find significant reductions in temptation spending, thus suggesting that increases in savings were not primarily realized through improvements in self-control. Instead, we suggest that reduced sharing obligations are driving the effect. In additional analyses, we document a 35% decrease in past-month transfers of cash to other household members. Hence, our findings suggest that saving can be more effectively promoted by alleviating access-related rather than behavior-related constraints, and particularly by giving women access to a saving device of their own.
    Keywords: Saving, Temptation Spending, Commitment Device, RCT
    JEL: D14 D91 I31 O12 O16
    Date: 2020–09
  18. By: John M. Barrios (Washington University); Yael V. Hochberg (Rice University and NBER); Hanyi Yi (Rice University)
    Abstract: The introduction of the gig economy creates opportunities for would-be entrepreneurs to supplement their income indownside states of the world, and provides insurance in the form of an income fallback in the event of failure. We present a conceptual framework supporting the notion that the gig economy may serve as an income supplement and as insurance against entrepreneurial-related income volatility, and utilize the arrival of the on-demand, platform-enabled gig economy in the form of the staggered rollout of ride hailing in U.S. cities to examine the effect of the arrival of the gig economy on entrepreneurial entry. The introduction of gig opportunities is associated with an increase of ~5% in the number of new business registrations in the local area, and correspondingly-sized increase in small business lending to newly registered businesses. Internet searches for entrepreneurship-related keywords increase ~7%, lending further credence to the predictions of our conceptual framework. Both the income supplement and insurance channels are empirically supported: the increase in entry is larger in regions with lower average income and higher credit constraints, as well as in locations with higher ex ante economic uncertainty regarding future wage levels and wage growth.
    JEL: L26 G39 O3
    Date: 2020

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