nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2020‒10‒26
twenty-six papers chosen by
Georg Man

  1. Three essays in financial frictions By He, Sicheng
  2. Corporate Debt, Rentiers' Portfolio Dynamics, Instability and Growth: A neo-Kaleckian Perspective By Parui, Pintu
  3. Uncertainty, Intangible Capital, and Productivity Dynamics By Edoardo Palombo
  4. The Determinants of Economic Competitiveness By Kluge, Jan; Lappoehn, Sarah; Plank, Kerstin
  5. Institutions, Financial Development, and Small Business Survival: Evidence from European Emerging Markets By Ichiro Iwasaki; Evzen Kocenda; Yoshisada Shida
  6. Close Encounters of the European Kind: Economic Integration, Sectoral Heterogeneity and Structural Reforms By Nauro F. Campos; Vera Z. Eichenauer; Jan-Egbert Sturm
  7. Inter-industry FDI spillovers from foreign banks: Evidence in transition economies By Shusen Qi; Kent Hui; Steven Ongena
  8. Japan's FDI drivers in a time of financial uncertainty. New evidence based on Bayesian Model By Mariam Camarero; Sergi Moliner; Cecilio Tamarit
  9. Financing Sustainable Development in Africa: Taking Stock, and Looking Forward By Oluwabunmi Adejumo; Uchenna Efobi; Simplice A. Asongu
  10. China’s debt relief actions overseas and macroeconomic implications By Gatien Bon; Gong Cheng
  11. A Relative Answer to the Growth-Saving Puzzle By Gruber, Noam
  12. Factor Adjustments and Liquidity Management: Evidence from Japan's Two Lost Decades and Financial Crises By Hirokazu Mizobata; Hiroshi Teruyama
  13. Capital Allocation and Wealth Distribution in a Global Economy with Financial Frictions By Been-Lon Chen; Yunfang Hu; Kazuo Mino
  14. Unconventional Monetary Policy, Leverage & Default Dynamics By Edoardo Palombo
  15. Cross-Border Regulatory Spillovers and Macroprudential Policy Coordination By Pierre-Richard Agénor; Timothy P. Jackson; Luiz Pereira da Silva
  16. Macroprudential Policy in the Euro Area By Alvaro Fernandez-Gallardo; Ivan Paya
  17. Household Indebtedness and the Macroeconomic Effects of Tax Changes By Sangyup Choi; Junhyeok Shin
  18. Has the Stock Market Become Less Representative of the Economy? By Frederik P. Schlingemann; René M. Stulz
  19. Banking Concentration and Financial Crises By Ray Barrell; Dilruba Karim
  20. The economic impact of pandemics: real and financial transmission channels By Hiona Balfoussia; Heather D. Gibson; Dimitris Malliaropulos; Dimitris Papageorgiou
  21. Weathering the Storm: Who Can Access Credit in a Pandemic? By Gabriel Chodorow-Reich; Olivier M. Darmouni; Cooperman Harry; Stephan Luck; Matthew Plosser
  22. Bank Liquidity Provision Across the Firm Size Distribution By Gabriel Chodorow-Reich; Olivier Darmouni; Stephan Luck; Matthew C. Plosser
  23. Financial Constraints and Propagation of Shocks in Production Networks By Banu Demir Pakel; Beata Smarzynska Javorcik; Tomasz K. Michalski; Evren Ors
  24. The Role of Social Networks in Bank Lending By Oliver Rehbein; Simon Rother
  25. The Rise of Fintech: A Cross-Country Perspective By Oskar KOWALEWSKI; Paweł PISANY
  26. Improving digital financial services inclusion: A panel data analysis By Berdibayev, Yergali; Kwon, Youngsun

  1. By: He, Sicheng
    Abstract: My dissertation studies how financial frictions affect economy, especially macroeconomy.Chapter 2 studies the potential for rational bubbles in the innovation sector to affect long term economic growth. We show that stock market prices of R&D firms could include a bubble component when credit constraints are present. Bubbles are self-sustained in equilibrium by a "liquidity" premium that originates when credit constraints are relaxed. Bubbles expand borrowing and production capacity of R&D firms, stimulate innovation and increase the growth rate. Bubbles are magnified by tighter credit constraints and scarce investment opportunities. Finally, we show that bubbles can create permanent reallocation effects benefiting the innovation sector over other sectors.Chapter 3 uses a generalized Kiyotaki and Moore model (1997) with collateral and cash-in-advance constraints to study the effects of financial and non-financial crisis and the effects of monetary policy both in the short and the long run. We then characterize optimal monetary policy in the Ramsey sense. We find that in the long run, the optimal monetary policy drives the social, but not the individual, shadow price of the collateral constraint to zero. This translates into a generalized version of the Friedman's rule, one that takes into account the degree of credit tightening. In the short run, optimal monetary policy is counter-cyclical, significantly offsetting the effects of financial shocks and reducing the welfare loss of the shocks.Chapter 4 studies the dynamics of blockchain innovation, adoption and competition in the global payment industry in the presence of a traditional technology. We build a theoretical model with network effects to study the possible evolution path of the payments industry, how a particular technology can gain and lose its market share and whether there exist some technology which can maintain its dominant power. We also study the role of bubbles, and show that they have positive and negative effect on the social welfare.
    Date: 2019–01–01
  2. By: Parui, Pintu
    Abstract: Considering a stock-flow consistent neo-Kaleckian macro-model, along with firms' debt dynamics, in the long-run, we incorporate portfolio dynamics of rentiers and investigate the possibility of multiple equilibria and dynamic stability of the economy. Both the debt-led and the debt-burdened demand and growth regimes are possible. We find share buybacks, under certain conditions, not only may lead to the deterioration of the equilibrium rate of capital accumulation in the long-run but may potentially destabilize the entire economy. A strictly regulated financial market is desirable, as otherwise, the economy may lose its stability and produces the limit cycles.
    Keywords: Capital Accumulation, Kaleckian Model, Stock-flow Consistency, Instability, Limit Cycle
    JEL: C62 E12 E32 E44 O41
    Date: 2020–09–11
  3. By: Edoardo Palombo (Queen Mary University of London)
    Abstract: Following an unparalleled rise in uncertainty over the Great Recession, the US economy has been experiencing anaemic productivity growth. This paper offers a quantitative study on the link between uncertainty and low productivity growth. Firstly, using micro level data I show that uncertainty accounts for half of the drop in intangible capital stock during the Great Recession. Secondly, to investigate the effect of uncertainty on productivity growth dynamics, I present a novel general equilibrium endogenous growth model with heterogeneous firms that undertake intangible capital investment subject to non-convex costs and time-varying uncertainty. I show that uncertainty can generate slow recoveries and a persistent slowdown in productivity growth when accounting for the empirical discrepancy between the realised and expected changes to the second-moment of fundamentals.
    Keywords: Uncertainty, R&D, Innovation, Productivity, Great Recession, Intangible Capital, Slow Recoveries
    JEL: O40 O41 O51
    Date: 2020–06–25
  4. By: Kluge, Jan (Institute for Advanced Studies, Vienna, Austria); Lappoehn, Sarah (Institute for Advanced Studies, Vienna, Austria); Plank, Kerstin (Institute for Advanced Studies, Vienna, Austria)
    Abstract: This paper aims at identifying relevant indicators for TFP growth in EU countries during the recovery phase following the 2008/09 economic crisis. We proceed in three steps: First, we estimate TFP growth by means of Stochastic Frontier Analysis (SFA). Second, we perform a TFP growth decomposition in order to get measures for changes in technical progress (CTP), technical efficiency (CTE), scale efficiency (CSC) and allocative efficiency (CAE). And third, we use BART – a non-parametric Bayesian technique from the realm of statistical learning – in order to identify relevant predictors of TFP and its components from the Global Competitiveness Reports. We find that only a few indicators prove to be stable predictors. In particular, indicators that characterize technological readiness, such as broadband internet access, are outstandingly important in order to push technical progress while issues that describe innovation seem only to speed up CTP in higher-income economies. The results presented in this paper can be guidelines to policymakers as they identify areas in which further action could be taken in order to increase economic growth. Concerning the bigger picture, it becomes obvious that advanced machine learning techniques might not be able to replace sound economic theory but they help separating the wheat from the chaff when it comes to selecting the most relevant indicators of economic competitiveness.
    Keywords: Competitiveness, TFP growth, Stochastic Frontier Analysis, BART
    JEL: C23 E24 O47
    Date: 2020–10
  5. By: Ichiro Iwasaki (Institute of Economic Research, Hitotsubashi University, Tokyo, Japan); Evzen Kocenda (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Institute of Information Theory and Automation, Czech Academy of Sciences, Prague, Czech Republic; CESifo, Munich, IOS, Regensburg); Yoshisada Shida (Economic Research Institute for Northeast Asia (ERINA), Niigata, Japan)
    Abstract: In this paper, we traced the survival status of 94,401 small businesses in 17 European emerging markets from 2007–2017 and empirically examined the determinants of their survival, focusing on institutional quality and financial development. We found that institutional quality and the level of financial development exhibit statistically significant and economically meaningful impacts on the survival probability of the SMEs being researched. The evidence holds even when we control for a set of firm-level characteristics such as ownership structure, financial performance, firm size, and age. The findings are also uniform across industries and country groups and robust beyond the difference in assumption of hazard distribution, firm size, region, and time period.
    Keywords: small business; institutions; financial development; survival analysis; European emerging markets
    JEL: C14 D02 D22 G33 M21
    Date: 2020–10
  6. By: Nauro F. Campos; Vera Z. Eichenauer; Jan-Egbert Sturm
    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: European integration, structural reforms, single market, euro, sectoral heterogeneity
    JEL: F40 N10 N40 O40
    Date: 2020
  7. By: Shusen Qi (Xiamen University - School of Management); Kent Hui (Xiamen University); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))
    Abstract: Too little is known about the inter-industry spillovers from foreign direct investment (FDI) in services. We therefore study whether and how spillovers from FDI in the banking sector occurs. We access a sample of non-financial domestic firms in transition economies from Eastern Europe and Central Asia and find that the innovation pursued by domestic firms benefits from foreign bank penetration. This positive interindustry spillover surprisingly (and in contrast to conventional wisdom) does not seem to work through enhanced credit access, but rather through the improvement of the local market of fee-based banking services and through the transfer of knowledge to domestic firms in non-contractual interactions. These positive spillovers occur mainly for foreign banks that use relationship lending, domestic firms that do not export, and host countries that are less open to the global market.
    Keywords: FDI spillovers, knowledge transfer, foreign banks, services FDI, innovation
    Date: 2020–10
  8. By: Mariam Camarero (University Jaume I and INTECO, Department of Economics, Campus de Riu Sec, E-12080 Castellón (Spain).); Sergi Moliner (University Jaume I and INTECO, Department of Economics, Campus de Riu Sec, E-12080 Castellón (Spain)); Cecilio Tamarit (Corresponding author: University of València and INTECO, Department of Applied Economics II, Av. dels Tarongers, s/n Eastern Department Building E-46022 Valencia, Spain.)
    Abstract: In this paper we analyze the determinants of Japanese outward FDI stock for the period 1996-2017. This period is especially relevant as it covers a process of increasing economic globalization and two financial crises. To this aim, we consider a large set of candidate variables based on the theory as well as on previous empirical analysis. Our sample includes a total of 27 host countries. We select the covariates using a data- driven methodology, the Bayesian Model Averaging (BMA) analysis. Moreover, we also analyze whether these determinants change depending on the degree of development (emerging vs developed) or the geographical areas (EU vs East Asia) of the countries considered. We find that Japan's FDI can be explained by a wide variety of variables, that include not only the typical gravitational ones but also institutional and macroe- conomic variables, including those that measure financial development. Moreover, we can observe important differences among the samples analyzed. Whereas in developed, and more precisely, EU countries, horizontal FDI strategies are predominant, for East Asian and emerging countries, there is evidence in favour of vertical FDI.
    Keywords: Japan; foreign direct investment; Bayesian Model Averaging; gravity; financial develop- ment; institutional quality
    JEL: F21 F23 R39
    Date: 2020–09
  9. By: Oluwabunmi Adejumo (Obafemi Awolowo University, Ile-Ife, Nigeria); Uchenna Efobi (Covenant University, Ota, Ogun State, Nigeria); Simplice A. Asongu (Yaoundé, Cameroon)
    Abstract: Financing sustainable development in Africa requires financing options that is best for development in the region without further escalating other societal problems. This chapter takes stock of financing options previously advocated for financing development in the African region such as development assistance and foreign investment. By considering its implication on development outcomes like poverty, inequality, and aggregate human development, some drawbacks still exist. Therefore, the chapter identifies, reconfigures and reinvents other financial flows such as mutual support networks, agricultural cooperatives, crowd funding, fiscal responsibility, other forms of informal banking, and remittances, among others to African countries for efficient provision of structures that can aid in the sustenance of development. We conclude that these alternative means of financing development could be a viable policy option to bridge income and development gaps; thereby mainstreaming the process for financial inclusion and sustainability.
    Keywords: Finance; Sustainable Development
    JEL: G20 I00 O10
    Date: 2020–01
  10. By: Gatien Bon; Gong Cheng
    Abstract: This paper explores a novel database of 140 cases of debt restructurings that China conducted between 2000 and 2019 in 65 debtor countries. It uncovers a number of salient features of the restructuring terms that China has offered and the ways in which China has interacted with other creditors and the International Monetary Fund (IMF). The majority of debt relief operations have been executed through debt forgiveness rather than debt rescheduling through maturity extension or/and interest rate reduction. Interestingly, a large number of Chinese debt relief operations took place within a two-year timeframe of debt relief agreements with Paris Club or private sector creditors and in the context of financial assistance from the IMF. Using local projections, this paper sheds light on the negative impact of China’s debt relief operations on growth and development prospects in debtor countries, especially when China provides debt rescheduling and does not treat the stock of nominal debt. Subdued domestic fixed capital investment and fiscal policy tightening seem to be the main drag on economic growth in debtor countries after a restructuring.
    Keywords: China, Paris Club, Sovereign debt, Restructuring, Development, Africa
    JEL: F33 F34 H63
    Date: 2020
  11. By: Gruber, Noam
    Abstract: Prolonged rapid growth, i.e. a "catching-up" process, is known to be accompanied by high rates of household saving. This phenomenon is central in explaining the direction of international capital flows and trade imbalances in the past several decades, yet it is very much in contradiction to prevailing macroeconomic theory. This paper finds that a standard life-cycle model, even when integrated with uncertainty about future growth and credit constraints, is completely unable to replicate the relations between growth and saving as seen in the data. However, adding utility from relative consumption to the model allows for the full replication of these relations.
    Keywords: Life Cycle, Saving Growth, Open Economy Growth, Household Saving, Life Cycle Models and Saving, Relative Income Hypothesis
    JEL: D91 E21 F43 O11
    Date: 2020–10–06
  12. By: Hirokazu Mizobata (Faculty of Economics, Kansai University); Hiroshi Teruyama (Institute of Economic Research, Kyoto University)
    Abstract: To reveal the cause of Japan's recent weak physical investment, this study estimates and compares the Euler equations for physical investment, R&D investment, and employment. We construct an unbalanced panel from Japanese firms' microdata from 1994 to 2014. The estimation results suggest that firms face weak financial constraints in the sense that their borrowing amount is not restricted, but their internal funds are insufficient.To address such constraints, firms first allocate their cash flows and cash reserves to buffer their employment and then incur R&D investment rather than protect physical investment. We suggest the following reason for this result: employment and R&D investment are more productive and/or impose larger adjustment costs than physical investment, and thus, firms prioritize the stabilization of employment and R&D over funding physical investment. This study also shows that young, small-sized, and manufacturing firms are likely to suffer from weak financial constraints. Furthermore, even during financial crises, firms rely only on internal funding and are not restricted by external funding in the same way as they are during usual times.
    Keywords: physical investment, research and development investment, employment, adjustment cost, financial constraint, Euler equation
    JEL: G31 G32
    Date: 2020–10
  13. By: Been-Lon Chen (Institute of Economics, Academia Sinica); Yunfang Hu (Graduate School of Economics, Kobe University); Kazuo Mino (Institute of Economic Research, Kyoto University)
    Abstract: This paper constructs a two-country model in which fi rms with heterogeneous production efficiency are subject to fi nancial constraints. In our setting, the total factor productivity of the aggregate production function in each county depends on the cutoff level of production efficiency of firms. We fi rst show that in the presence of international capital mobility, the cutoff condition is affected by the wealth distribution between the two countries. We then examine the existence and stability of the steady-state equilibrium of the world economy as well as the long-run impacts of real and fi nancial shocks. It is shown that, compared to global fi nancial shocks, global real shocks have larger impact on income and wealth in each country, especially if heterogeneity of production efficiency among firms is sufficiently low. The tractability of the model made it possible to analytically derive the main results.
    Keywords: two-country model, fi nancial frictions, firm heterogeneity, wealth distribution, capital mobility
    JEL: F21 F32 F41
    Date: 2020–10
  14. By: Edoardo Palombo (Queen Mary University of London)
    Abstract: The objective of this paper is to investigate the effectiveness of credit easing policy in mitigating the economic fallout from a financial recession using a model that can account for the observed default and leverage dynamics during the financial crisis of 2007. A general equilibrium model is developed with a financial sector and endogenous asset defaults able to account for the observed default and leverage dynamics. Following an adverse aggregate shock, banks deleverage through two channels: (i) higher non-performing loans provisions, and (ii) lower the marginal return of assets. Credit policy is modelled as an expansion of the central bank’s balance sheet countering the disruption in private financial intermediation. Unconventional monetary policy, namely credit easing policy, is shown to be ineffective in mitigating the effects of a financial crisis due to its crowding out effect on the private asset market. Other non-monetary policy tools such as credit subsidies and their efficacy considered.
    Keywords: unconventional monetary policy, credit easing, credit subsidies, financial frictions, default, leverage, financial sector.
    JEL: E20 E32 E44 E52 E58
    Date: 2020–06–25
  15. By: Pierre-Richard Agénor; Timothy P. Jackson; Luiz Pereira da Silva
    Abstract: A two-region, core-periphery model with financial frictions, imperfect financial integration, and cross-border banking is used to assess the gains from international macroprudential policy coordination. A core global bank lends to its affiliates in the periphery and banks are subject to a risk-sensitive capital regulatory regime. An expansionary monetary policy in the core is used to illustrate how lending costs, countercyclical capital buffers (which respond to real credit growth), and regulatory arbitrage affect cross-border bank capital flows, under both economies and diseconomies of scope in domestic and foreign lending by the global bank. Welfare gains are calculated for three policy regimes: independent policies (Nash), coordination, and reciprocity–where capital ratios set in the core region are also imposed in the periphery. Coordination generates significant gains at the level of the world economy, and these gains increase with the degree of international financial integration. However, their distribution tends to be highly asymmetric. Under certain circumstances, reciprocity may generate higher gains than independent policies for the world economy, despite the reciprocating jurisdiction (the periphery) being invariably worse off.
    JEL: E58 F42 F62
    Date: 2020–09
  16. By: Alvaro Fernandez-Gallardo; Ivan Paya
    Abstract: It is now widely accepted that monetary authorities should have a mandate to safeguard financial stability and that macroprudential policies should be an integral part of such a mandate. However, our understanding of the effectiveness of macroprudential policies and their impact on monetary policy target variables and, more broadly, on macroeconomic outcomes, is still limited. This paper addresses that gap and examines the development and impact of macroprudential policies in the euro area. The contribution of the paper is twofold. First, we construct a novel index that captures the stance of the macroprudential policy and we highlight its main stylised facts since the inception of the euro in 1999. Second, we employ a combination of a narrative approach and a structural VAR method to identify both unanticipated and anticipated exogenous variations in macroprudential policies. Our results show that unanticipated or surprise shocks and anticipated or news macroprudential policy shocks exhibit differentiated effects on macroeconomic variables and that they both contribute over the medium term to safeguard financial stability. We also nd significant linkages between monetary and macroprudential policies over a sample period that includes events such as the great financial crisis and the sovereign debt crisis.
    Keywords: macroprudential policy, financial stability, euro area, monetary policy
    JEL: E58 E61
    Date: 2020
  17. By: Sangyup Choi (Yonsei Univ); Junhyeok Shin (Yonsei Univ)
    Abstract: This study is an attempt to investigate whether household indebtedness influences the macroeconomic effects of the U.S. tax policy. We apply a state-dependent local projection method to the exogenous tax shock series by Romer and Romer (2010) and find that a tax cut strongly stimulates the output when households are highly indebted. The expansionary effect of a tax cut in the period of high household debt is particularly significant for (i) consumption than investment; (ii) a personal income tax than a corporate income tax; (iii) during bad times than good times. These findings support household indebtedness as a measure of liquidity constraint for wealthy hand-to-mouth households at the macro-level. In response to a tax cut, households increase (decrease) labor supply when they are highly indebted (not indebted). This lack of a neoclassical wealth effect further contributes to an increase in the output. The state-dependent effects of tax policy, which influence the disposable income of the household directly, are more notable than those of the government spending policy, lending further support to the role of the household liquidity constraint channel of tax policy.
    Keywords: Tax policy; Household debt; Liquidity constraints; Nonlinearity; Local projections
    JEL: E32 E62 H30
    Date: 2020–10
  18. By: Frederik P. Schlingemann; René M. Stulz
    Abstract: The firms listed on the stock market in aggregate as well as the top market capitalization firm contribute less to total non-farm employment and GDP now than in the 1970s. A major reason for this development is the decline of manufacturing and the growth of the service economy as firms providing services are less likely to be listed on exchanges. We develop quantitative measures of representativeness showing how firms’ market capitalizations differ from their contribution to employment and GDP. Representativeness is worst when the market is most highly valued and worsens over time for employment, but not for value added.
    JEL: E44 G23 G32 K22 L16
    Date: 2020–10
  19. By: Ray Barrell; Dilruba Karim
    Abstract: Policy makers need to know if the structure of competition and the degree of banking market concentration change the incidence of financial crises. Previous studies have not always come to clear conclusions. We use a new dataset of 19 countries where we include capital adequacy and house price growth as factors affecting crisis incidence, and we find a positive role for bank concentration in reducing incidence. In addition, we look at New Industrial Economics indicators of market structure and find that increased market power also reduces crisis incidence. We conclude that attempts to increase competition in banking, although welcome for welfare reasons, should be accompanied by increases in capital standards.
    Keywords: Financial Stability, Bank Competition, Banking Crises, Macroprudential Policy
    JEL: E44 G01 G18
    Date: 2020–10
  20. By: Hiona Balfoussia (Bank of Greece); Heather D. Gibson (Bank of Greece); Dimitris Malliaropulos (Bank of Greece and University of Piraeus); Dimitris Papageorgiou
    Abstract: We explore the economic impact of the pandemic and the importance of real and financial sector linkages in this context. We explicitly model the financial sector and trace its role in propagating the pandemic shocks. We find that the pandemic-induced adverse labour supply shock can have sizable effects on the real economy, which are further propagated through the banking sector. Moreover, the contemporaneous pandemic-induced financial shock has financial, but also real effects, including high and protracted firm bankruptcies as well as a more fragile banking sector, thus hindering the financing of the real economy. The duration of the pandemic matters for its impact on the macroeconomy, as both business investment and bank balance sheets take disproportionately longer to recover. Our findings underline the need for well-targeted policy measures to support the real economy and, secondarily, the financial sector during the pandemic and provide justification for several of the policy initiatives recently taken by governments, central banks and regulatory institutions around the world.
    Keywords: COVID-19; pandemic; lockdown; social distancing; uncertainty; propagation
    JEL: E2 E3 E5 G1
    Date: 2020–09
  21. By: Gabriel Chodorow-Reich; Olivier M. Darmouni; Cooperman Harry; Stephan Luck; Matthew Plosser
    Abstract: Credit enables firms to weather temporary disruptions in their business that may impair their cash flow and limit their ability to meet commitments to suppliers and employees. The onset of the COVID recession sparked a massive increase in bank credit, largely driven by firms drawing on pre-committed credit lines. In this post, which is based on a recent Staff Report, we investigate which firms were able to tap into bank credit to help sustain their business over the ensuing downturn.
    Keywords: liquidity provision; macro-finance; credit; financial constraints; loan terms; banking; credit lines; COVID-19
    JEL: G2 G3
    Date: 2020–10–13
  22. By: Gabriel Chodorow-Reich; Olivier Darmouni; Stephan Luck; Matthew C. Plosser
    Abstract: Using loan-level data covering two-thirds of all corporate loans from U.S. banks, we document that SMEs (i) obtain much shorter maturity credit lines than large firms; (ii) have less active maturity management and therefore frequently have expiring credit; (iii) post more collateral on both credit lines and term loans; (iv) have higher utilization rates in normal times; and (v) pay higher spreads, even conditional on other firm characteristics. We present a theory of loan terms that rationalizes these facts as the equilibrium outcome of a trade-off between commitment and discretion. We test the model's prediction that small firms may be unable to access liquidity when large shocks arrive using data on drawdowns in the COVID recession. Consistent with the theory, the increase in bank credit in 2020Q1 and 2020Q2 came almost entirely from drawdowns by large firms on pre-committed lines of credit. Differences in demand for liquidity cannot fully explain the differences in drawdown rates by firm size, as we show that large firms also exhibited much higher sensitivity of drawdowns to industry-level measures of exposure to the COVID recession. Finally, we match the bank data to a list of participants in the Paycheck Protection Program (PPP) and show that SME recipients of PPP loans reduced their non-PPP bank borrowing in 2020Q2 by between 53 and 125 percent of the amount of their PPP funds, suggesting that government-sponsored liquidity can overcome private credit constraints.
    JEL: E51 G21 G32
    Date: 2020–10
  23. By: Banu Demir Pakel; Beata Smarzynska Javorcik; Tomasz K. Michalski; Evren Ors
    Abstract: This study finds that even small unexpected supply shocks propagate downstream through production networks and are amplified by firms with short-term financial constraints. The unexpected 2011 increase in the tax on imports purchased with foreign-sourced trade credit is examined using data capturing almost all Turkish supplier-customer links. The identification strategy exploits the heterogeneous impact of the shock on importers. The results indicate that this relatively minor, non-localized shock had a non-trivial economic impact on exposed firms and propagated downstream through affected suppliers. Additional empirical tests, motivated by a simple theory, demonstrate that low-liquidity firms amplified its transmission.
    Keywords: production networks, shock transmission, financing constraints, liquidity
    JEL: F14 F61 G23 L14 E23
    Date: 2020
  24. By: Oliver Rehbein; Simon Rother
    Abstract: This paper analyzes social connectedness as an information channel in bank lending. We move beyond the inefficient lending between peers in exclusive networks by exploiting Facebook data that reflect social ties within the U.S. population. After accounting for physical and cultural distances, social connectedness increases cross-county lending, especially when lending requires more information and screening incentives are intact. On average, a standard-deviation increase in social connectedness increases cross-county lending by 24.5%, which offsets the lending barrier posed by 600 miles between borrower and lender. While the ex-ante risk of a loan is unrelated to social connectedness, borrowers from well-connected counties cause smaller losses if they default. Borrowers' counties tend to profit from their social proximity to bank lending, as GDP growth and employment increase with social proximity. Our results reveal the important role of social connectedness in bank lending, partly explain the large effects of physical distance, and suggest implications for antitrust policies.
    Keywords: bank lending, social networks, information frictions, culture, distance
    JEL: D82 D83 G21 O16 L14 Z13
    Date: 2020–10
  25. By: Oskar KOWALEWSKI (IESEG School of Management & LEM-CNRS 9221); Paweł PISANY (Institute of Economics, Polish Academy of Sciences)
    Abstract: This study investigates the determinants of fintech company creation and activity using a cross-country sample that includes developed and developing countries. Using a random effect negative binomial model and explainable machine learning algorithms, we show the positive role of technology advancements in each economy, quality of research, and more importantly, the level of university-industry collaboration. Additionally, we find that demographic factors may play a role in fintech creation and activity. Some fintech companies may find the quality and stringency of regulation to be an obstacle. Our results also show the sophisticated interactions between the banking sector and fintech companies that we may describe as a mix of cooperation and competition.
    Keywords: fintech, innovation, start up, developed countries, developing countries
    JEL: G21 G23 L26 O30
    Date: 2020–07
  26. By: Berdibayev, Yergali; Kwon, Youngsun
    Abstract: The first goal of Sustainable Development Goals (SDGs) is the absence of poverty to be achieved by 2030. Thus, access to and usage of financial services play an important role in achieving this, where ICT and digital technologies are the main tools, that describe it as a digital financial service (DFS). It defines the provision of financial services and products through digital channels (mobile phone, cards, Internet etc.), and where DFS can be used remotely. DFS inclusion means to increase an access and usage of DFS through digital channels. We collected data for two years (Findex, 2014 & 2017) in 120 countries, overall 240 observation, and with depended variable as DFS inclusion, and independent 12 variables, such as GDP per capita, ATMs per adults, basic skills, Internet usage, mobile subscription, mobile 3G & 4G coverages (separately), mobile internet tariffs, handset prices, political stability, control of corruption and cybersecurity. In general, the regression yielded good results. Factors such as GDP per capita, political stability, control of corruption, mobile 4G coverage, ATMs per adults and mobile Internet tariffs are statistically significant factors for DFS inclusion. In addition, the r-squared value shows more than 0.8 in all models (running with 3G coverage, 4G coverage, both and also with dummy variable).
    Keywords: Digital financial service inclusion,Mobile money services,Financial services,Digital finance,Financial inclusion,Digital payments,Mobile money
    Date: 2020

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