nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2020‒10‒19
27 papers chosen by
Georg Man

  1. Financial Intermediation, Human Capital Development and Economic Growth By Emerson Erik Schmitz; Thiago Christiano Silva
  2. What is the Importance of a Country's Banking Market for Financial Development? By Cláudio Oliveira de Moraes; José Américo Pereira Antunes; Márcio Silva Coutinho
  3. On the Simultaneous Openness Hypothesis: FDI, Trade and TFP Dynamics in Sub-Saharan Africa By Asongu, Simplice; Nnanna, Joseph; Acha-Anyi, Paul
  4. A relação entre os investimentos diretos estrangeiros Greenfield e Brownfield e o crescimento econômico : uma análise a partir do modelo Var em painel By Danielle Evelyn de Carvalho; Rafael S. M. Ribeiro
  5. The role of foreign direct investment in growth: Spain, 1964-2013 By Bajo-Rubio, Oscar
  6. Growth divergence and income inequality in OECD countries: the role of trade and financial openness By Enrico D'Elia; Roberta De Santis
  7. Thirty Years After: Economic Growth in Transition Countries By Josip Tica; Viktor Viljevac
  8. Close Encounters of the European Kind: Economic Integration, Sectoral Heterogeneity and Structural Reforms By Campos, Nauro F.; Eichenauer, Vera Z.; Sturm, Jan-Egbert
  9. The Role of EU Integration in Accelerating Structural Reforms in the Western Balkans: Evidence, Theory and Policy By Fatmir Besimi; Vassilis Monastiriotis
  10. Bubbles in history By Quinn, William; Turner, John D.
  11. Intertemporal Government Budget Constraint: Debts and Economic Growth in Ethiopia, 1990–2018 By Alani, Jimmy
  12. Financialisation and stagnation: A macroeconomic regime perspective By Hein, Eckhard
  13. The Islamic macroeconomic model: How to Apply it By ALJARHI, Mabid
  14. Insurance and Inequality in Sub-Saharan Africa: Policy Thresholds By Asongu, Simplice; Odhiambo, Nicholas
  15. Access to Finance among Small and Medium-Sized Enterprises and Job Creation in Africa By Brixiová, Zuzana; Kangoye; Thierry; Yogo, Thierry Urbain
  16. Labor and finance: the effect of bank relationships By Patrick Behr; Lars Norden; Raquel Oliveira
  17. Financial drivers of the euro area business cycle: a DSGE-based approach By Hirschbühl, Dominik; Krustev, Georgi; Stoevsky, Grigor
  18. Forecasting US recessions: the role of economic uncertainty By Valerio Ercolani; Filippo Natoli
  19. Revising the Impact of Financial and Non-Financial Global Stock Market Volatility Shocks By Kang, Wensheng; Ratti, Ronald A.; Vespignani, Joaquin L.
  20. Revising the impact of global commodity prices and global stock market volatility shocks: effects across countries By Kang, Wensheng; Ratti, Ronald A.; Vespignani, Joaquin
  21. Lending Cycles and Real Outcomes: Costs of Political Misalignment By Çağatay Bircan; Saka Orkun
  22. How does international capital flow? By Michael Kumhof; Phurichai Rungcharoenkitkul; Andrej Sokol
  23. European Small Business Finance Outlook 2020: The impact of COVID-19 on SME financing markets By Kraemer-Eis, Helmut; Botsari, Antonia; Gvetadze, Salome; Lang, Frank; Torfs, Wouter
  24. Bank competition and credit risk in the Euro area, 2005-2017: Is there evidence of convergence? By Maria Karadima; Helen Louri
  25. Asymmetric information in corporate lending: evidence from SME bond markets By Alessandra Iannamorelli; Stefano Nobili; Antonio Scalia; Luana Zaccaria
  26. The Aggregate Demand for Bank Capital By Milton Harris; Christian Opp; Marcus Opp
  27. Current developments in green finance By Liebich, Lena; Nöh, Lukas; Rutkowski, Felix; Schwarz, Milena

  1. By: Emerson Erik Schmitz; Thiago Christiano Silva
    Abstract: This paper investigates a potential non-homogeneous relation between financial intermediation and economic growth by levels of human capital development. We focus on a period of exceptional growth of the credit market in Brazil, from 2004 to 2016, and investigate the overall correlation between credit and economic growth. In addition, we examine whether this association is different according to the following factors: bank ownership, type of credit, credit purpose, and type of borrower. We find that credit has positive and relevant connection with economic growth, which is noticeable in regions with intermediate levels of human capital development. This pattern is also observed in the credit provided by private banks, non-earmarked credit lines, credit to specific purposes, and personal credit. These findings may have important implications for policymakers who intend to promote economic growth with the support of financial intermediation.
    Date: 2020–09
  2. By: Cláudio Oliveira de Moraes; José Américo Pereira Antunes; Márcio Silva Coutinho
    Abstract: This paper analyzes the effect of the banking market on countries' financial development. For this purpose, we use a dynamic panel with annual data, from 2006 to 2015, comprising 89 countries – 28 developed and 61 emerging. The banking market is measured with concentration (total assets of the largest banks in relation to total assets) and competition (Lerner and Boone indexes) metrics. As proxies for measuring the financial development, we use the index developed by Sahay et al. (2015) and Svirydzenka (2016), which covers depth, access, and efficiency, aspects of the financial intermediation provided by banks. The main results suggest that an increase in bank concentration may inhibit the country's financial development and that an increase in competition may increase financial development. In short, an improvement in the banking market (a decrease in concentration or an increase in competition) is relevant to financial development. This result is also verified for emerging countries.
    Date: 2020–09
  3. By: Asongu, Simplice; Nnanna, Joseph; Acha-Anyi, Paul
    Abstract: This study assesses the simultaneous openness hypothesis that trade modulates foreign direct investment (FDI) to induce positive net effects on total factor productivity (TFP) dynamics. Twenty-five countries in Sub-Saharan Africa and data for the period 1980 to 2014 are used. The empirical evidence is based on the Generalised Method of Moments. First, trade imports modulate FDI to overwhelmingly induce positive net effects on TFP, real TFP growth, welfare TFP and real welfare TFP. Second, with exceptions on TFP and welfare TFP where net effects are both positive and negative, trade exports modulate FDI to overwhelmingly induce positive net effects on real TFP growth and welfare real TFP. In summary, the tested hypothesis is valid for the most part. Policy implications are discussed.
    Keywords: Productivity; Foreign Investment; Sub-Saharan Africa
    JEL: E23 F21 F30 L96 O55
    Date: 2020–01
  4. By: Danielle Evelyn de Carvalho (Cedeplar/UFMG); Rafael S. M. Ribeiro (Cedeplar/UFMG)
    Abstract: The aim of this work is to analyze the simultaneous relationship between greenfield and brownfield foreign direct investments (FDI) and the GDP per capita for a sample of 119 countries over the 2003 – 2018 period. By employing a Panel VAR model, we calculate the impulse response functions in order to compare the effect of an exogenous shock in both types of investment on the dynamics of GDP per capita over time. In addition, we also conducted Granger causality tests and forecast error variance decomposition analyses. Our results suggest that faster economic growth successfully attracts greenfield FDI at the expense of the brownfield type across all levels of economic development. On the other hand, the return of both greenfield and brownfield FDI in terms of economic growth appears to be negligible for all levels of development.
    Keywords: investments; greenfield; brownfield; economic growth; panel VAR
    JEL: F21 O16 O23 R11
    Date: 2020–10
  5. By: Bajo-Rubio, Oscar
    Abstract: Foreign direct investment (FDI) has played a major role in the deep process of transformation experienced by the Spanish economy since the first 1960s, which even intensified following the integration with the now European Union (EU) in 1986. In this paper, we analyse the long-run effects of FDI in Spain, by estimating a production function including the foreign capital stock over the period 1964-2013. We find a significant contribution of foreign capital on the accumulated growth of GDP over the period of analysis, which seems however to have been greater during the first years of the period analysed.
    Keywords: Economic growth,Foreign direct investment
    JEL: F21 F43 O40
    Date: 2020
  6. By: Enrico D'Elia; Roberta De Santis
    Abstract: This paper analyses trade and financial openness effects on growth and income inequality in 35 OECD countries. Our model takes into account both short run and long run effects of factors explaining income divergence between and within the countries. We estimate, for the period 1995-2016, an error correction model in which per capita GDP and inequality are driven by changes over time of selected factors and by the deviation from a long run relationship. Stylised facts suggest that trade and financial openness reduce the growth gaps across the countries but not income inequality, and the effects of finance are stronger in high income countries. Nevertheless, low and middle income countries benefit more from international trade. Our contribution to the existing literature is threefold: i) we study the short and long run effects of trade and financial openness on income level and distribution, ii) we focus on developed countries (OECD) rather than on developing and iii) we provide a sensitivity analysis including in our baseline equation an institutional indicator, a trade agreement proxy and a dummy of global financial crisis. Estimates results indicate that trade openness significantly improved the conditions of OECD low income countries both in short and long run mostly, consistently with the catching up theory. It also decreased inequality, but only in low and middle income countries. Differently financial openness had a positive and significant impact only in the short run on middle income countries and increased income disparities within countries in the short term in low income countries and in the long term in high income countries.
    Keywords: Trade openness, income inequality, panel data analysis
    Date: 2019–10
  7. By: Josip Tica (Faculty of Economics & Business, University of Zagreb); Viktor Viljevac (Faculty of Economics & Business, University of Zagreb)
    Abstract: In this paper, we use a dynamic threshold panel model to investigate the impact of classical and transition specific growth factors on the economic growth of transition countries during 1989-2019. Following Durlauf, Johnson and Temple (2004) we use more than 40 potential ”mainstream” growth factors and we augment the list of factors with transition specific indicators such as privatization methods and various indicators of institutional quality. Given the difficulty in quantifying the economic policies employed in various countries, we explore a wide list of potential threshold variables that can exogenously split the sample into fast and slow-growing countries. We use a range of model specifications and both fixed effects and system GMM estimators as well as Bayesian averaging in order to investigate the robustness of the results. In total more than 16 million estimates are analysed. Preliminary results suggest that the most robust results are for the initial level of development, long term effects of labor market reforms (employment rate), the share of investment, and the importance of the natural resources.
    Keywords: transition, socialist systems, Solow model, institutions, economic growth, threshold model
    JEL: P30 O43 E60
    Date: 2020–10–06
  8. By: Campos, Nauro F. (University College London); Eichenauer, Vera Z. (ETH Zurich); Sturm, Jan-Egbert (ETH Zurich)
    Abstract: This paper addresses two main questions: (a) Has European integration hindered the implementation of labour, financial and product market structural reforms? (b) Do the effects of these reforms vary more across sectors than across countries? Using more granular reform measures, longer time windows and a larger sample of countries than previous studies, we confirm that the euro triggered product but neither labour nor financial market reforms. Differently from previous studies, we find that: (a) the Single Market has similar effects to the euro, and (b) sectoral heterogeneity appears less important in explaining the economic impacts of reforms than country heterogeneity.
    Keywords: Euro, Single Market, structural reforms, european integration, sectoral heterogeneity
    JEL: F4 N1 N4 O4
    Date: 2020–09
  9. By: Fatmir Besimi; Vassilis Monastiriotis
    Abstract: Integration with the European Union has been an important driver of economic, political and social transformation in the Western Balkans. In recent years, however, the pace of structural reforms in the region has decelerated and the trend of economic catch-up seen in the 2000s has not resumed after the slowdown of the global economic crisis. This has coincided – at least temporally, if not causally – with a ‘temporary freeze’ in the EU’s enlargement towards the region. Against this backdrop, this paper seeks to investigate the role of EU conditionality on economic reforms and convergence in the Western Balkans. To do so, it provides original, albeit descriptive, empirical evidence showing a strong link between EU-related structural reforms (towards the Copenhagen Criteria) and economic growth; and subsequently presents an analytical model demonstrating the mechanisms of policy decisions for reforms under EU conditionality. The model assumes away sectoral interests, policy uncertainty and coordination problems, allowing the analysis to focus specifically on the tension between two objectives: the pursuit of EU accession, through the implementation of jointly agreed reforms, and the accommodation of domestic policy concerns (maintaining policy stability and public support). Our results unveil a policy dilemma for the EU, having to choose between maximising the reform effort and minimising non-compliance. Drawing on this model, we discuss extensively the policy options that the EU faces in trying to enhance the reform performance, growth trajectories and, ultimately, European perspective of the countries in the region.
    Keywords: Structural reforms, European integration, Political Economy, Economic convergence
    Date: 2019–01
  10. By: Quinn, William; Turner, John D.
    Abstract: Bubbles have become ubiquitous. This ubiquity has stimulated research over the past three decades into bubbles in history. In this article, we provide a systematic overview of research into historical bubbles. Our analysis reveals that there is no coherent approach to the study of bubbles and much of the debate has unhelpfully focussed on the rationality/irrationality dichotomy. We then suggest a new framework for the study of historical bubbles, which helps us understand the causes of bubbles and their economic consequences. We conclude by suggesting ways in which business history can contribute to the study of historical bubbles.
    Keywords: Bubbles,Business History,Speculation
    JEL: G01 G10 N10 N20 N80
    Date: 2020
  11. By: Alani, Jimmy
    Abstract: This paper uses the intertemporal government budget constraint model, linear logarithmic functions (for better regression results), annual time series data and the generalized least squares technique to examine the effects of external debt and external debt servicing on economic growth in Ethiopia between 1990 and 2018. Alemayahu and Zerfu (1998) confirm that the level of debt in Ethiopia is beyond the capacity of the country to service it. This problem then begs the following major research questions: Does external debt or its servicing crowd out investment in Ethiopia? What have been the effects and estimates of (i) external debt and (ii) external debt servicing on economic growth in Ethiopia? The major hypotheses are: (a): External debt does not enhance economic growth. (b) External debt servicing depresses economic growth. Data were collected from the World Bank and United Nations. The major findings of the paper are: (1) That increases in external debt enhanced economic growth in Ethiopia within the sample period, ceteris paribus; and (2) That external debt servicing had negative effect on economic growth in Ethiopia. The paper also suggests maintaining reasonable levels of external debt by the government of Ethiopia to enhance economic growth, and avoiding excessive borrowing that might create difficulties in debt servicing (i.e. debt overhang). As a result of its findings, one future research topic this paper would proposes is: “Determination of the Sustainable Debt Levels for Enhancing Rapid Economic Growth in Ethiopia.”
    Keywords: Intertemporal government budget constraint, external debt, debt servicing, and economic growth.
    JEL: C10 H6 H62 H63 H68
    Date: 2020–07–07
  12. By: Hein, Eckhard
    Abstract: In this contribution we link the recently re-discovered tendencies towards stagnation with the features of financialisation, which have started to dominate developed capitalist economies in the early 1980s. We review the main macroeconomic channels of transmission of financialisation-namely, the effects on distribution, investment in the capital stock, consumption and on the current and capital accounts. We distinguish three regimes, the debt-led private demand boom, the export-led mercantilist and the domestic demand-led regime and apply this to six countries, Germany, France, Spain, Sweden, the UK and the USA, as well as to the Eurozone, both for the period before (1999-2008) and after (2009-2018) the financial and economic crisis. We show that the dominance of the debt-led private demand boom regime, on the one hand, and the export-led mercantilist regime, on the other hand, has contributed to global current account imbalances before the financial and economic crisis 2007-9, which has demonstrated that these two regimes were unsustainable. For the period after the crisis we find a shift towards export-led mercantilist regimes and a move towards domestic demand-led regimes stabilized by government debt with global current account imbalances persisting. Finally, we elaborate on the challenges of these developments, a highly fragile global constellation with severe problems of aggregate demand generation and a tendency towards stagnation caused by high inequality and weak capital stock growth.
    JEL: E02 E60 E61 F62 G38
    Date: 2020
  13. By: ALJARHI, Mabid
    Abstract: Islamic macro models are two categories. The first was inspired by Mannan (1970), Siddiqui (1981, 2006) and Chapra (1985, 1996). It is elaborated by Khan and Mirakhor (1994), Iqbal and Mirakhor (2011), in addition to Mirakhor and Zaidi (2007). It uses a pure equity-based system, keeping the concept of a stable equilibrium, to draw conclusions about efficiency, equilibrium and stability. It ignores the institutional details of the monetary and financial structure. The second proposes an institutional structure of the monetary of financial sector of an Islamic economic system, with distinctive features of money creation and finance allocation, with the necessary instruments for the anchor and conduct of monetary policy. Shari'ah behavioral rules have been translated into an institutional structure. It uses an updated Al-Jarhi (1981, 1983) with several consequent modifications and improvements to do away with the neoclassical IS-LM, and prepare to switch to a more realistic disequilibrium structure . Based on Al-Jarhi’s updated and modified model, is proposed for economic development and stabilization. Implementation highlights gradualism and institutional competition as driving forces. The legal and regulatory environment is modified to provide both conventional and Islamic institutions working side-by-side to have an equal opportunity, leaving competition to have the final say.
    Keywords: Islamic economics, Islamic finance, Islamic macroeconomics, monetary policy, fiscal policy, development policy, policy anchor, interest rate, lending based, debt money, investment based, investment money.
    JEL: E19 E42 E44 E51 E58 E61 E62 E63 Z12
    Date: 2018–12–21
  14. By: Asongu, Simplice; Odhiambo, Nicholas
    Abstract: In this study, we examine how insurance affects income inequality in sub-Saharan Africa, using data from 42 countries during the period 2004-2014. Three inequality variables are used, namely: the Gini coefficient, the Atkinson index and the Palma ratio. Two insurance premiums are employed, namely: life insurance and non-life insurance. The empirical evidence is based on the Generalized Method of Moments (GMM). Life insurance increases the Gini coefficient and increasing life insurance has a net positive effect on the Gini coefficient and the Atkinson index. Non-life insurance reduces the Gini coefficient and increasing non-life insurance has a net positive effect on the Palma ratio. The analysis is extended to establish policy thresholds at which increasing insurance premiums completely dampen the net positive effects. From the extended analysis, 7.500 of life insurance premiums (% of GDP) is the critical mass required for life insurance to negatively affect inequality, while 0.855 of non-life insurance premiums (% of GDP) is the threshold required for non-life insurance to negatively affect inequality. Policy thresholds are provided at which insurance penetration decreases income inequality in sub-Saharan Africa.
    Keywords: Insurance; Inclusive development; Africa; Sustainable Development
    JEL: I28 I30 I32 O40 O55
    Date: 2020–01
  15. By: Brixiová, Zuzana; Kangoye; Thierry; Yogo, Thierry Urbain
    Abstract: In the past decade inclusive growth, that is job-rich growth, has topped the policy agenda in developing countries. This paper investigates how the access to finance affects employment in small and medium-sized enterprises (SMEs) in Sub-Saharan Africa. It first presents a model where firm creation requires entrepreneurial search and paying the start-up costs, while the firm’s size in terms of employment depends on the access to credit. Under the financial market imperfections, access to credit can be a binding constraint on firm entry and employment even when the banks have sufficient liquidity. Using an impact evaluation-based approach on firm-level data from 42 African countries, we show that SMEs with access to formal financing create more jobs than firms without access, with employment in firms having access to more affordable and larger loans growing the fastest. The impact of access to finance is stronger for firms in manufacturing than in services, pointing to sectoral targeting of finance as a possible policy supporting industrialization.
    Keywords: entrepreneurship,financial inclusion,employment,propensity score matching
    JEL: L2 G2 D22 C1
    Date: 2020
  16. By: Patrick Behr; Lars Norden; Raquel Oliveira
    Abstract: We investigate whether and how firms’ number of bank relationships affects labor market outcomes. We base our analysis on more than 5 million observations on matched credit and labor data from Brazilian firms during 2005-2014. We find that firms with more bank relationships employ significantly more workers and pay significantly higher wages. Moreover, increases (decreases) in the number of bank relationships result in positive (negative) effects on employment and wages. These results are robust for strictly exogenous changes in the number of bank relationships due to nationwide bank M&A activity, when using instrumental variable regressions, and are independent of firm size. The effects are due (but not limited) to higher credit availability, lower cost of credit and higher heterogeneity in firms’ bank relationships. Importantly, the firm-level results consistently translate into positive macroeconomic effects at the municipality and state levels. The evidence is novel and suggests positive effects of multiple bank relationships on labor market outcomes in an emerging economy.
    Date: 2020–09
  17. By: Hirschbühl, Dominik; Krustev, Georgi; Stoevsky, Grigor
    Abstract: We estimate a modified version of the “Financial Business Cycles” model originally developed by Iacoviello (2015) in order to investigate the role played by financial factors in driving the business cycle in the euro area. In the model, financial shocks such as borrower defaults, collateral shocks and credit supply effects amplify economic downturns by reducing the flow of credit from banks to the real sector. In this novel application to the euro area, we introduce capital reallocation inefficiency, an innovation to the original set-up which allows for more realistic effects of entrepreneur defaults on economic activity. Our results suggest that financial factors, as captured by this model, played a smaller role in the euro area throughout the double-dip recession than in the United States during the 2008-09 global financial crisis. In a scenario on second-round effects implied by potential NFC loan losses due to the COVID-19 pandemic, we find large financial amplification risks to real economic activity. JEL Classification: E32, E44, E47
    Keywords: Bayesian estimation, DSGE, financial frictions, housing
    Date: 2020–10
  18. By: Valerio Ercolani (Bank of Italy); Filippo Natoli (Bank of Italy)
    Abstract: This paper highlights the role of macroeconomic and financial uncertainty in predicting US recessions. In-sample forecasts using probit models indicate that these two variables are the best predictors of recessions at short horizons. Macroeconomic uncertainty has the highest predictive power up to 7 months ahead and becomes the second best predictor --- after the yield curve slope --- at longer horizons. Using data up to end-2018, out-of-sample forecasts show that uncertainty contributed significantly to lowering the probability of a recession in 2019, which indeed did not occur.
    Keywords: macroeconomic and financial uncertainty, yield curve slope, recession, probit forecasting model.
    JEL: D81 E32 E37 E44
    Date: 2020–09
  19. By: Kang, Wensheng; Ratti, Ronald A.; Vespignani, Joaquin L.
    Abstract: We decompose global stock market volatility shocks into financial originated shocks and nonfinancial originated shocks. Global stock market volatility shocks arising from financial sources reduce substantially more global outputs and inflation than non-financial sources shocks. Financial stock market volatility shocks forecasts 16.85% and 16.88% of the variation in global growth and inflation, respectively. In contrast, the on-financial stock market volatility shocks forecasts only 8.0% and 2.19% of the variation in global growth and inflation. Beside this markable difference global interest/policy rate responds similarly to both shocks.
    Keywords: Global, Stock market volatility Shocks, Monetary Policy, FAVAR
    JEL: E00 E02 E3 E40
    Date: 2020
  20. By: Kang, Wensheng (Department of Economics at Kent State University, Ohio, USA); Ratti, Ronald A. (University of Missouri, Department of Economics, USA and Centre for Applied Macroeconomics Analysis, ANU, Australia); Vespignani, Joaquin (Tasmanian School of Business & Economics, University of Tasmania)
    Abstract: We investigate the time-varying dynamics of global stock market volatility, commodity prices, domestic output and consumer prices. We find (i) stock market volatility and commodity price shocks impact each other and the economy in a gradual and endogenous adjustment process, (ii) impact of commodity price shock on global stock market volatility is significant during global financial crises, (iii) effects of global stock market volatility on the US output are amplified by endogenous commodity price responses, (iv) effects of global stock market volatility shocks on the economy are heterogeneous across nations and relatively larger in twelve developed countries, (v) four developing/small economies are more vulnerable to commodity price shocks.
    Keywords: global commodity prices, global stock market volatility, output, heterogeneity
    JEL: D80 E44 E66 F62 G10
    Date: 2020
  21. By: Çağatay Bircan; Saka Orkun
    Abstract: We document a strong political cycle in bank credit and industry outcomes in Turkey. In line with theories of tactical redistribution, state-owned banks systematically adjust their lending around local elections compared with private banks in the same province based on electoral competition and political alignment of incumbent mayors. This effect only exists in corporate lending as opposed to consumer loans. It creates credit constraints for firms in opposition areas, which suffer drops in employment and sales but not firm entry. There is substantial misallocation of financial resources as provinces and industries with high initial efficiency suffer the greatest constraints.
    Keywords: Bank credit; Electoral cycle; State-owned banks; Credit misallocation
    Date: 2018–12
  22. By: Michael Kumhof; Phurichai Rungcharoenkitkul; Andrej Sokol
    Abstract: Understanding gross capital flows is increasingly viewed as crucial for both macroeconomic and financial stability policies, but theory is lagging behind many key policy debates. We fill this gap by developing a two-country DSGE model that tracks domestic and cross-border gross positions between banks and households, with explicit settlement of all transactions through banks. We formalise the conceptual distinction between cross-border saving and financing, which often move in opposite directions in response to shocks. This matters for at least four policy debates. First, current accounts are poor indicators of financial vulnerability, because in a crisis, creditors stop financing debt rather than current accounts, and because following a crisis, current accounts are not the primary channel through which balance sheets adjust. Second, we reinterpret the global saving glut hypothesis by arguing that US households do not finance current account deficits with foreigners' physical saving, but with digital purchasing power, created by banks that are more likely to be domestic than foreign. Third, Triffin's current account dilemma is not in fact a dilemma, because the creation of additional US dollars requires dollar credit creation by US and non-US banks rather than US current account deficits. Finally, we demonstrate that the observed high correlation of gross capital inflows and outflows is overwhelmingly an automatic consequence of double entry bookkeeping, rather than the result of two separate sets of economic decisions.
    JEL: E44 E51 F41 F44
    Date: 2020–10
  23. By: Kraemer-Eis, Helmut; Botsari, Antonia; Gvetadze, Salome; Lang, Frank; Torfs, Wouter
    Abstract: This working paper provides an overview of the main markets relevant to the EIF, with a particular focus on the impact of COVID-19. It starts by discussing the general market environment, then looks at the main aspects of equity finance and the markets for SME debt products and, finally, it highlights important aspects of microfinance in Europe. A chapter on Fintech complements the analysis.
    Date: 2020
  24. By: Maria Karadima; Helen Louri
    Abstract: Consolidation in euro area banking has been the major trend post-crisis. Has it been accompanied by more or less competition? Has it led to more or less credit risk? In all or some countries? In this study, we examine the evolution of competition (through market power and concentration) and credit risk (through non-performing loans) in 2005-2017 across all euro area countries (EA-19), as well as core (EA-Co) and periphery (EA-Pe) countries separately. Using Theil inequality and convergence analysis, our results support the continued existence of fragmentation as well as of divergence within and/or between core and periphery with respect to competition and credit risk, especially post-crisis, in spite of some partial reintegration trends. Policy measures supporting faster convergence of our variables would be helpful in establishing a real banking union.
    Keywords: Banking competition, credit risk, NPLs, Theil index, convergence analysis
    Date: 2020–04
  25. By: Alessandra Iannamorelli (Bank of Italy); Stefano Nobili (Bank of Italy); Antonio Scalia (Bank of Italy); Luana Zaccaria (EIEF)
    Abstract: Using a comprehensive dataset of Italian SMEs, we find that differences between private and public information on creditworthiness affect firms’ decisions to issue debt securities. Surprisingly, our evidence supports positive (rather than adverse) selection. Holding public information constant, firms with better private fundamentals are more likely to access bond markets. Additionally, credit conditions improve for issuers following the bond placement, compared with a matched sample of non-issuers. These results are consistent with a model where banks offer more flexibility than markets during financial distress and firms may use market lending to signal credit quality to outside stakeholders.
    Keywords: asymmetric information, bank credit, bond markets, SME finance
    JEL: G10 G21 G23 G32
    Date: 2020–09
  26. By: Milton Harris; Christian Opp; Marcus Opp
    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.
    JEL: G12 G21 G23 G28
    Date: 2020–09
  27. By: Liebich, Lena; Nöh, Lukas; Rutkowski, Felix; Schwarz, Milena
    Abstract: The transformation of economies towards significantly reduced CO2 consumption raises high investment and capital requirements. Financial and capital markets can help to mobilize the necessary funds for global investment needs and to steer capital towards sustainable investments. Moreover, potential disruptive impacts of climate change on the financial system have started to become more apparent recently and require central banks, regulators and supervisors to take a conscious look at the risks and opportunities of climate change for financial intermediaries and markets. This article offers a comprehensive discussion on how green finance has been evolving thus far and explores the opportunities and key developments ahead with particular emphasis on four selected highly topical issues: 1) the introduction of German green government bonds, 2) obstacles to the correct pricing of climate-related risks, 3) the EU taxonomy that has recently been put forward to develop a uniform classification of sustainable economic activities as well as 4) the role of central banks in fostering the transition to a low-carbon economy.
    Date: 2020

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