nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2020‒11‒02
sixteen papers chosen by
Georg Man

  1. Financial Inclusion and Economic growth: An International Evidence By Vo, Duc; Vo, Anh
  2. Is the relationship between non-performing loans of banks and economic growth asymmetric ? Malaysia’s evidence based on linear and nonlinear ARDL approaches By Khalaf, Tasneem; Masih, Mansur
  3. The outlook for business bankruptcies By Ryan Niladri Banerjee; Giulio Cornelli; Egon Zakrajšek
  4. Money, Growth, and Welfare in a Schumpeterian Model with the Spirit of Capitalism By Qichun He; Yulei Luo; Jun Nie; Heng-fu Zou
  5. A Macroeconomic Theory of Banking Oligopoly By Dong, Mei; Huangfu, Stella; Sun, Hongfei
  6. Recapitalization, bailout, and long-run welfare in a dynamic model of banking By Modena, Andrea
  7. Synchronization, Concordance and Similarity between Business and Credit Cycles: Evidence from Turkish Banking Sector By Mehmet Selman Colak; Abdullah Kazdal; Muhammed Hasan Yilmaz
  8. Assessing the Scoreboard of the EU Macroeconomic Imbalances Procedure: (Machine) Learning from Decisions By João Amador; Tiago Alves; Francisco Gonçalves
  9. Putting the financial system to work for the poor and SMEs By Abdul Magid Osman; Djamila Pontes Osman
  10. Banking deregulation and household consumption of durables By Damar, H. Evren; Lange, Ian; McKennie, Caitlin; Moro, Mirko
  11. The Role of Social Networks in Bank Lending By Oliver Rehbein; Simon Rother
  12. Survival analysis of Indonesian banking companies By Farida Titik Kristanti
  13. Economic uncertainty and bank stability: Conventional vs. Islamic banking By Mehmet Huseyin Bilgin; Gamze Danisman; Ender Demir; Amine Tarazi
  14. Determinants of Financial Performance of Microfinance Banks in Kenya By King'ori S. Ngumo; Kioko W. Collins; Shikumo H. David
  15. What Explains the Rising Profit Share in Canada? By Andrew Sharpe; Cristina Blanco Iglesias; Myeongwan Kim
  16. The Direct and Indirect Effects of Financial Development on International Trade: Evidence from the CEEC-6 By Guglielmo Maria Caporale; Anamaria Sova; Robert Sova

  1. By: Vo, Duc; Vo, Anh
    Abstract: Policies on financial inclusion have attracted great attention from scholars, policymakers, and regulators, as financial inclu- sion has theoretically been acknowledged to have positive effect on economic growth. However, empirical evidence appears limited, especially for emerging markets. This article is conducted to provide a comprehensive insight between financial inclusion and economic growth in emerging markets. First, a multidimensional index is constructed so that a level of financial inclusion can be measured at the international level. Second, based on this newly developed index, the panel econometric technique is utilized to estimate the impact of financial inclusion on economic growth. Our finding supports a positive relationship between financial inclusion and economic growth. A stronger relationship is found for countries with low income and a lower degree of financial inclusion. Policy implications have been emerged that financial inclusion should be implemented for promoting economic growth and development in the emerging markets such as Vietnam
    Keywords: Financial inclusion; multidimensional index; panel data; economic growth
    JEL: C33 C43 G28 O47
    Date: 2019–12–06
  2. By: Khalaf, Tasneem; Masih, Mansur
    Abstract: Banks play an important role as intermediaries between the savers and the borrowers in an economy. One issue, however, that the banks face during the development process is the increase in the non-performing loans (NPL) in the developing economies. In particular, during the financial crisis, many loans become non-performing loans (NPL) and the banks face liquidity crises. It is the focus of this paper to investigate whether (a) the relationship between the non-performing loans of banks and economic growth (GDP) is cointegrated or not i.e., whether they are theoretically related or not in the long term and (b) if they are, whether the relationship is symmetric or asymmetric in the short and long term. We use ARDL and nonlinear ARDL for the analysis. Malaysia is used as a case study. The findings tend to indicate that the NPL and GDP are indeed cointegrated as evidenced in both ARDL and Nonlinear ARDL. As to whether the relationship between the NPL and GDP is symmetric or not, the findings tend to indicate that the relationship is asymmetric in the long run but symmetric in the short run. These findings have important policy implications for the developing countries like Malaysia.
    Keywords: Non-performing loans of banks, GDP, Linear ARDL, Nonlinear ARDL, Malaysia
    JEL: C22 C58 E44 G21
    Date: 2018–12–18
  3. By: Ryan Niladri Banerjee; Giulio Cornelli; Egon Zakrajšek
    Abstract: Economic growth and forward-looking indicators of default risk inferred from equity markets, two variables that together predict business bankruptcies in advanced economies, show bankruptcies rising significantly by the end of 2021. Projections of real GDP growth embedded in the consensus forecast account for the bulk of this projected increase. Unlike in previous downturns, the stock market-based default indicators contribute very little. As these findings underscore, the pandemic and unprecedented government support for the business sector have driven a sizeable wedge between financial market perceptions of default risk and projections for economic activity.
    Date: 2020–10–12
  4. By: Qichun He (China Economics and Management Academy, Central University of Finance and Economics); Yulei Luo (Faculty of Business and Economics, University of Hong Kong); Jun Nie (Research Department, Federal Reserve Bank of Kansas City); Heng-fu Zou (China Economics and Management Academy, Central University of Finance and Economics)
    Abstract: According to Schumpeter (1934), entrepreneurs are driven to innovate not for the fruits of success but for success itself. This description of entrepreneurship echoes Weber's (1958 ) description of the "spirit of capitalism," which states that people enjoy the accumulation of wealth irrespective of its effect on smoothing consumption. This paper explores the implica- tions of the spirit of capitalism on monetary policy, growth, and welfare in a Schumpeterian growth model. Different from the existing literature, we show that money is not superneutral in the long run and it could promote economic growth when the spirit of capitalism is strong. Furthermore, we show the optimal nominal interest rate decreases with the strength of the spirit of capitalism, potentially supporting a negative interest rate. Finally, our calibrated model suggests that the spirit of capitalism explains an important share (about one-third) of long-run growth in the United States.
    Date: 2020
  5. By: Dong, Mei; Huangfu, Stella; Sun, Hongfei
    Abstract: We study the behavior and macroeconomic impact of oligopolistic banks in a tractable environment with micro-foundations for money and banking. Our model features oligopolistic banks, which resembles the structure of the banking sector observed in most advanced economies. Banks interact strategically where they compete against each other in terms of the volume of loans to make. We find that it is welfare-maximizing to have the banking sector as oligopolistic, i.e., to have a small number of large banks. In addition, moderate inflation improves welfare because it helps to ease congestion in the banking sector.
    Keywords: banking; oligopoly; liquidity; market frictions
    Date: 2020–10
  6. By: Modena, Andrea
    Abstract: This paper studies the link between bank recapitalization and welfare in a dynamic production economy. The model features financial frictions because banks benefit of a cost advantage at monitoring firms and face costly equity issuance. The competitive equilibrium outcome is inecient because agents do not internalize the e↵ects banks' capitalization over the allocation of capital, its price and, in turn, firms investments. It follows, individual recapitalizations are sub-optimal and bailout policies may benefit social welfare in the long-run. Bailouts improve capital allocation in states where aggregate banks are poorly capitalized, therefore enhancing their market valuation, fostering investments, and stabilizing the economy recovery path.
    Keywords: banks,bailout,general equilibrium,financial frictions,recapitalization,welfare
    JEL: D51 G21
    Date: 2020
  7. By: Mehmet Selman Colak; Abdullah Kazdal; Muhammed Hasan Yilmaz
    Abstract: In this study, we provide a comprehensive quantification of the co-movement between credit and business cycles in the Turkish case for the period 2007-2020. To this end, we construct synchronization, concordance and similarity index, which aim to measure the time-varying degree of coherence between credit and output dynamics. In specific, these indices are designed to capture the location, momentum and size aspects of the cyclical correlation respectively. Our empirical analysis also covers the cyclical association of 13 different loan sub-categories with the course of the output gap by employing disaggregated data. Overall, index results show that credit-output nexus in the Turkish case present heterogeneities across loan types, sample episodes and cyclical characteristics (location, momentum, and size). We also examine the impact of local and global macroeconomic and financial factors on cyclical coherence by utilizing Tobit regressions. The empirical results indicate that movements in local financial conditions, fluctuations in macroeconomic volatilities, and the course of capital flows are influential determinants of cyclical co-movements.
    Keywords: Credit cycle, Business cycle, Synchronization, Filtering, Tobit regression
    JEL: G21 E32 C35 C38
    Date: 2020
  8. By: João Amador; Tiago Alves; Francisco Gonçalves
    Abstract: This paper uses machine learning methods to identify the macroeconomic variables that are most relevant for the classification of countries along the categories of the EU Macroeconomic Imbalances Procedure (MIP). The random forest algorithm considers the 14 headline indicators of the MIP scoreboard and the set of past decisions taken by the European Commission when classifying countries along the macroeconomic imbalances categories. The algorithm identifies the current account balance, the net international investment position and the unemployment rate as key variables, mostly to classify countries that need corrective action, notably through economic adjustment programmes.
    JEL: C40 F15
    Date: 2020
  9. By: Abdul Magid Osman; Djamila Pontes Osman
    Abstract: The financial inclusion effort achieved positive results, with the number of Mozambicans having access to banking services increasing considerably, particularly after 2011-12. However, the economic and social impact was limited, considering that farm productivity has remained low and poverty levels are still high. The neoliberal doctrine in the economic sphere, its expression in the restrictive monetary policies, and the weakness of the multi-party democracy system have been institutional factors restricting economic and social development.
    Keywords: Credit, guarantees, Financial inclusion, SME, smallholder farmers
    Date: 2020
  10. By: Damar, H. Evren; Lange, Ian; McKennie, Caitlin; Moro, Mirko
    Abstract: We exploit the spatial and temporal variation of the staggered introduction of interstate banking deregulation across the U.S. to study the relationship between credit constraints and consumption of durables. Using the American Housing Survey from 1981 to 1993, we link the timing of these reforms with evidence of a credit expansion and household responses on many margins. We find robust evidence that households are more likely to purchase new appliances and invest in home renovations and modifications after the deregulation. These durable goods allowed households to consume less electricity and spend less time in domestic activities after the reforms.
    Keywords: banking deregulation,credit constraints,energy consumption,durable goods
    JEL: D12 G2 Q41
    Date: 2020
  11. By: Oliver Rehbein (University of Bonn, Institute for Finance & Statistics); Simon Rother (University of Bonn, Institute for Finance & Statistics)
    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, distance, culture
    JEL: D82 D83 G21 O16 L14 Z13
    Date: 2020–10
  12. By: Farida Titik Kristanti (Department of Accounting, Faculty of Economics and Business, Telkom University Jl. Telekomunikasi, Terusan Buah Batu, Bandung, 40257, Indonesia Author-2-Name: Author-2-Workplace-Name: Author-3-Name: Author-3-Workplace-Name: Author-4-Name: Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:)
    Abstract: Objective - Financial distress is an undesirable condition for any company. To avoid financial distress, and improve the overall financial status of a company, an understanding of the factors affecting financial distress is necessary. This research aims to identify the determinants of banking financial distress. Methodology – In this study, 41 banks comprised the sample, selected using purposive sampling. The survival cox proportional hazard analysis method to identify the determinant factors of survival of Indonesian Banks. Findings – The results show that that macro indicators (inflation and economic growth) have a significant effect on the banks' financial distress. This implies that the government as a regulator must maintain the level of growth and inflation that stabilizes the economy so that banks can avoid financial distress. As for the banks' management, they have an obligation to support government policies in maintaining growth and inflation. Novelty – The study uses the cox proportional hazard model. Type of Paper - Empirical.
    Keywords: Bank; Cox Model; Financial distress; Survival analysis.
    JEL: G33
    Date: 2020–09–30
  13. By: Mehmet Huseyin Bilgin (Faculty of Political Science, Istanbul Medeniyet University, Istanbul, Turkey); Gamze Danisman (Faculty of Management, Kadir Has University, Istanbul, Turkey); Ender Demir (Faculty of Tourism, Istanbul Medeniyet University, Istanbul, Turkey); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)
    Abstract: In this paper, we explore whether economic uncertainty differently affects the default risk of Islamic and conventional banks. Using a sample of 568 banks from 20 countries between 2009 and 2018, we take advantage of the World Uncertainty Index (WUI) proposed by Ahir et al. (2018) to conduct a study based on a comparable measure across countries. Our findings indicate that, while economic uncertainty increases the default risk of conventional banks, Islamic banks' default risk is not affected. To shed light on why economic uncertainty differently influences the default risk of Islamic and conventional banks, we explore the influence of religiosity, institutional factors and bank-level heterogeneity. We observe that Islamic banks' default risk is immune to uncertainty in all types of countries but that such a difference with conventional banks mainly holds for banks with higher non-interest income and larger size, and for banks which are publicly traded. Moreover, our findings show that conventional banks suffer more from uncertainty in terms of stability in countries with higher religiosity. Our results are robust to alternative estimation techniques to deal with endogeneity and to alternative variable measurements.
    Keywords: Islamic Banks,Conventional Banks,Economic Uncertainty,Bank Stability,World Uncertainty Index
    Date: 2020–10–12
  14. By: King'ori S. Ngumo; Kioko W. Collins; Shikumo H. David
    Abstract: Microfinance provides strength to boost the economic activities of low-income earners and thus contributes to eradication of poverty. However, microfinance institutions face stringent competition from commercial banks; the growth of microloan activities of commercial banks may confront microfinance institutions with increased competition for borrowers. In Kenya, the micro finance sector has extremely high competition indicated by the shifting market share and profitability. This study sought to examine the determinants of financial performance of Microfinance banks in Kenya. The study adopted a descriptive research design and used secondary data from 7 Microfinance banks for a period of 5 years from 2011 to 2015. The data collected was analyzed using correlation and regression analysis. The study found a positive and statistically significant relationship between operational efficiency, capital adequacy, firm size and financial performance of microfinance banks in Kenya. However, the study found an insignificant negative relationship between liquidity risk, credit risk and financial performance of microfinance banks in Kenya. The study concluded that there is direct relationship between operational efficiency, capital adequacy, firm size and financial performance of microfinance banks in Kenya.
    Date: 2020–10
  15. By: Andrew Sharpe; Cristina Blanco Iglesias; Myeongwan Kim
    Abstract: The distribution of the gains of economic growth among workers and corporations has evolved over time. While an extensive body of literature has studied the fall in the share of labour income in the gross domestic product (GDP), less attention has been paid to the development of the components of its counterpart, the capital share. In the system of National Accounts, the capital share of income can be broken down into net operating surplus and net mixed income (which includes corporate profits before taxes, net interest paid, net other payments and inventory valuation adjustment, and net mixed income) and capital consumption allowances (CCA). This report contributes to the discussion on the rising capital share by studying the evolution of the Canadian corporate profit share in the past three decades using both financial and national accounts data. We analyze trends at the aggregate and sectoral level and compare the aggregate trends to those in the United States during the same period. We also provide an overview of the structural factors affecting the corporate profit share in Canada. According to national accounts data, the corporate profit share before tax in Canada rose 3.8 percentage points between the 1961-1999 and 2000-2017 periods, an increment that significantly enhanced the surge in the capital share of income. Similarly, the financial corporate profit share of income increased by 7.2 percentage points between 1997 and 2017. This development was widespread, with the profit share increasing in all sectors except mining, quarrying and oil, and gas extraction. It was also concentrated. We find that the financial sector, which accounts for less than one tenth of GDP, was responsible for 33 per cent of the increase in the corporate profit share. Complete time series of the profits data used in this report can be found in a profits database developed as part of this research project.
    Keywords: profit share, economic growth, canada, gross domestic product
    JEL: O4 G3 D24 E22
    Date: 2020–07
  16. By: Guglielmo Maria Caporale; Anamaria Sova; Robert Sova
    Abstract: Abstract
    Keywords: financial development, international trade, CEEC-6, system GMM estimator, PMG estimator
    JEL: E61 F13 F15 C25
    Date: 2020

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