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on Financial Development and Growth |
| By: | Goutham Gopalakrishna (Swiss Finance Institute (EPFL); Ecole Polytechnique Fédérale de Lausanne) |
| Abstract: | What causes deep recessions and slow recovery? I revisit this question and develop a macro-finance asset pricing model that quantitatively matches the salient empirical features of financial crises such as a large drop in the output, a high risk premium, reduced financial intermediation, and a long duration of economic distress. The model features leveraged intermediaries who are subjected to both capital and productivity shocks, and face a regime-dependent exit rate. I show that the model without time varying intermediary productivity and exit, which reduces to Brunnermeier and Sannikov (2016), suffers from a tension between the amplification and the persistence of financial crises. In particular, there is a trade-off between the unconditional risk premium, the conditional risk premium, and the probability and duration of crisis. Features that generate high financial amplification also induce faster recovery, at odds with the data. I show that my model resolves this tension and generates realistic crises dynamics. The model is solved using a novel numerical method with active machine learning that is scalable and alleviates the curse of dimensionality. |
| Keywords: | Financial Intermediation, Intermediary Asset Pricing, Machine Learning |
| JEL: | E44 G12 C63 |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2096&r=all |
| By: | Bogle, David A.; Coyle, Christopher; Turner, John D. |
| Abstract: | What shapes and drives capital market development over the long run? In this paper, using the asset portfolios of UK life assurers, we examine the role of regulation, historical contingency and political reactions to events on the long-run development of the UK capital market. Government response to events such as war, hegemonysecured peace, and the wider macroeconomic environment was the ultimate determinant of major changes in asset allocation since 1800. Furthermore, when we compare the UK with the United States, we find that regulation played a limited role in shaping the asset portfolios of the UK life assurance industry. |
| Keywords: | Capital markets,asset management,life assurance,mutuals,mergers,regulation,United Kingdom,United States |
| JEL: | G11 G22 N20 N40 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:qucehw:202009&r=all |
| By: | Agasisti, Tommaso; Barra,Cristian; Zotti, Roberto (University of Turin) |
| Abstract: | This paper contributes to the empirical literature on the linkages between decentralized government spending, public finances, and economic growth at the local level. The impact of local government spending on output growth is estimated using a panel of Italian Labor Market Areas - a group of municipalities adjacent to each other, geographically and statistically comparable, characterized by common commuting ows of the working population - during the 2002-2012 period. The attention is focused both on current and capital expenditures as well as on several spending categories. To handle endogeneity problems between public spending and economic development, a system generalized method of moments has been used. The findings indicate a fairly robust negative relationship between local current government expenditure and economic growth. Investment in capital budget turns out to be not statistically significant when the public spending composition is taken into account. Municipalities located in central-southern regions show, instead, negative growth e ect of capital spending, underlining the importance of measuring the efficiency of public spending rather than just being concerned with the absolute level of output. Only few of the expenditure categories (Justice, Tourism and Culture) exhibit positive effects on growth, while Administration & Management and Roads & Transportation have negative growth effect in southern regions. |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:uto:dipeco:202022&r=all |
| By: | Augusto Cerqua (Department of Social Sciences and Economics, Sapienza University of Rome); Guido Pellegrini (Department of Social Sciences and Economics, Sapienza University of Rome) |
| Abstract: | Are place-based policies capable of taking lagging areas to a higher growth trajectory permanently? We answer this key question by investigating what happens when strongly subsidised regions suddenly experience a substantial reduction in external funding. We analyse an extensive database and estimate the average causal impact of exiting the convergence region status of the EU regional policy via the mean balancing approach, an econometric technique created appositely to fully exploit time-series cross-sectional data. Such an approach also allows us to investigate the heterogeneity of the impact concerning relevant covariates. We find that regions which experienced a considerable reduction in funding in a period of economic expansion did not suffer from the loss of such funding. On the other hand, we find that the sharp reduction in funding during the crisis led to a negative, but not statistically significant, impact on economic growth. However, the impact varies with the features of the regions and the local economic context. These findings differ from previous literature and signal a long-term positive effect of the EU funds on growth and employment. |
| Keywords: | Place-based policy, European Union, mean balancing, regional growth |
| JEL: | C23 O47 R11 |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:saq:wpaper:20/20&r=all |
| By: | Qinchun He; Yulei Luo; Jun Nie; Heng-fu Zou |
| Abstract: | According to Schumpeter (1934), entrepreneurs are driven to innovate not only 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 implications 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 could promote economic growth when the spirit of capitalism is strong. Furthermore, we show that 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. |
| Keywords: | Spirit of capitalism; Cash-in-advance; Schumpeterian model; Monetary policy; Growth and welfare |
| JEL: | E52 O42 O47 |
| Date: | 2020–11–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:89065&r=all |
| By: | Rodríguez-Pose, Andrés; Ganau, Roberto; Maslauskaite, Kristina; Brezzi, Monica |
| Abstract: | This paper examines the relationship between credit constraints - proxied by the investment-to-cash flow sensitivity – and firm-level economic performance - defined in terms of labor productivity – during the period 2009-2016, using a sample of 22,380 manufacturing firms from 11 European countries. It also assesses how regional institutional quality affects productivity at the level of the firm both directly and indirectly. The empirical results highlight that credit rationing is rife and represents a serious barrier for improvements in firm-level productivity and that this effect is far greater for micro and small than for larger firms. Moreover, high-quality regional institutions foster productivity and help mitigate the negative credit constraints-labor productivity relationship that limits the economic performance of European firms. Dealing with the European productivity conundrum thus requires greater attention to existing credit constraints for micro and small firms, although in many areas of Europe access to credit will become more effective if institutional quality is improved. |
| Keywords: | credit constraints; labor productivity; manufacturing firms; regional institutions; cross-country analysis; Europe |
| JEL: | C23 D24 G32 H41 R12 |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:107500&r=all |
| By: | Yassin Sabha; Mouna Hamden; Armando Heilbron |
| Keywords: | International Economics and Trade - Foreign Direct Investment Macroeconomics and Economic Growth - Investment and Investment Climate Private Sector Development - Business Environment |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wboper:34443&r=all |
| By: | Azqueta-Gavaldon, Andres; Hirschbühl, Dominik; Onorante, Luca; Saiz, Lorena |
| Abstract: | We propose a granular framework that makes use of advanced statistical methods to approximate developments in economy-wide expected corporate earnings. In particular, we evaluate the dynamic network structure of stock returns in the United States as a proxy for the transmission of shocks through the economy and identify node positions (firms) whose connectedness provides a signal for economic growth. The nowcasting exercise, with both the in-sample and the out-of-sample consistent feature selection, highlights which firms are contemporaneously exposed to aggregate downturns and provides a more complete narrative than is usually provided by more aggregate data. The two-state model for predicting periods of negative growth can remarkably well predict future states by using information derived from the node-positions of manufacturing, transportation and financial (particularly insurance) firms. The three-states model, which identifies high, low and negative growth, successfully predicts economic regimes by making use of information from the financial, insurance, and retail sectors. JEL Classification: C45, C51, D85, E32, N1 |
| Keywords: | early warning signal, Granger-causality networks, real-time, turning point prediction |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202494&r=all |
| By: | Megaritis, Anastasios; Vlastakis, Nikolaos; Triantafyllou, Athanasios |
| Abstract: | In this paper we examine the predictive power of latent macroeconomic uncertainty on US stock market volatility and jump tail risk. We find that increasing macroeconomic uncertainty predicts a subsequent rise in volatility and price jumps in the US equity market. Our analysis shows that the latent macroeconomic uncertainty measure of Jurado et al. (2015) has the most significant and long-lasting impact on US stock market volatility and jumps in the equity market when compared to the respective impact of the VIX and other popular observable uncertainty proxies. Our study is the first to show that the latent macroeconomic uncertainty factor outperforms the VIX when forecasting volatility and jumps after the 2007 US Great Recession. We additionally find that latent macroeconomic uncertainty is a common forecasting factor of volatility and jumps of the intraday returns of S&P 500 constituents and has higher predictive power on the volatility and jumps of the equities which belong to the financial sector. Overall, our empirical analysis shows that stock market volatility is significantly affected by the rising degree of unpredictability in the macroeconomy, while it is relatively immune to shocks in observable uncertainty proxies. |
| Keywords: | Jumps, Bipower variation, Realized volatility, Macroeconomic Uncertainty |
| Date: | 2020–11–26 |
| URL: | http://d.repec.org/n?u=RePEc:esy:uefcwp:29200&r=all |
| By: | Banu Demir; Beata 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 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:not:notgep:2020-23&r=all |
| By: | Gurgone, Andrea; Iori, Giulia |
| Abstract: | To date, macroprudential policy inspired by the Basel III package is applied irrespective of the network characteristics of the banking system. We study how the implementation of macroprudential policy in the form of additional capital requirements conditional to systemic-risk measures of banks should regard the degree of heterogeneity of financial networks. We adopt a multi-agent approach describing an artificial economy with households, firms, and banks in which occasional liquidity crises emerge. We shape the configuration of the financial network to generate two polar worlds: one is characterized by few banks who lend most of the credit to the real sector while borrowing interbank liquidity. The other shows a higher degree of homogeneity. We focus on a capital buffer for SII and two buffers built on measures of systemic impact and vulnerability. The research suggests that the criteria for the identification of systemic-important banks may change with the network heterogeneity. Thus, capital buffers should be calibrated on the heterogeneity of the financial networks to stabilize the system, otherwise they may be ineffective. Therefore, we argue that prudential regulation should account for the characteristics of the banking networks and tune macroprudential tools accordingly. |
| Keywords: | agent-based model,capital requirements,capital buffers,,financial networks,macroprudential policy,systemic-risk |
| JEL: | C63 D85 E44 G01 G21 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bamber:164&r=all |
| By: | Kaiji Chen (Emory University); Patrick Higgins (Federal Reserve Bank of Atlanta); Tao Zha (Federal Reserve Bank of Atlanta) |
| Abstract: | Online appendix for the Review of Economic Dynamics article |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:red:append:18-201&r=all |
| By: | Moritz Drechsel-Grau; Fabian Greimel |
| Abstract: | We evaluate the hypothesis that rising inequality was a causal source of the US household debt boom since 1980. The mechanism builds on the observation that households care about their social status. To keep up with the ever richer Joneses, the middle class substitutes status-enhancing houses for status-neutral consumption. These houses are mortgage-financed, creating a debt boom across the income distri- bution. Using a stylized model we show analytically that aggregate debt increases as top incomes rise. In a quantitative general equilibrium model we show that Keeping up with the Joneses and rising income inequality generate 60% of the observed boom in mortgage debt and 50% of the house price boom. We compare this channel to two competing mechanisms. The Global Saving Glut hypothesis gives rise to a similar debt boom, but does not generate a house prices boom. Loosening collateral constraints does not generate booms in either debt or house prices. |
| Keywords: | mortgages, housing boom, social comparisons, consumption networks, keeping up with the Joneses |
| JEL: | D14 D31 E21 E44 E70 R21 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2020_159v1&r=all |
| By: | Riccardo De Bonis (Bank of Italy); Danilo Liberati (Bank of Italy); John Muellbauer (University of Oxford); Concetta Rondinelli (Bank of Italy) |
| Abstract: | This paper estimates a consumption function for Italy. In addition to permanent income, housing wealth, the interest rate on household loans and an index of credit conditions, our model introduces household net worth split into liquid and illiquid assets. The consumption dynamics are examined by using financial accounts and real national accounts in a Vector Error Correction Model (VECM), estimated from 1975 to 2017. The results show that the marginal propensity to consume out of liquid financial assets – mainly deposits and bonds – is positive and statistically significant, and greater than that for illiquid assets (mainly unquoted shares and insurance and pension assets); we also find that housing wealth has a smaller and significant impact on consumption. As expected, permanent income accounts for a large fraction of consumption, while the effect of the interest rate is negative. |
| Keywords: | liquid and illiquid assets, permanent income, credit conditions |
| JEL: | E21 E32 E44 E51 |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1304_20&r=all |
| By: | Tabi Atemnkeng Johannes; Ndam Romanus Adze (University of Buea, Cameroon) |
| Abstract: | This paper revisits the empirical literature on gender and access to formal finance by enterprises and examines the effect of financial constraints on firm performance in Cameroon. Existing literature on the importance of gender of the firm’s owner as a determinant of the firm’s access to finance is clouded with mixed findings. Based on the objective measure of access to finance variable where firms are constrained if they applied and were refused, including those that did not apply because they expected to be refused. The analysis finds evidence that female-owned firms are less likely to be credit-constrained once sample selection bias is accounted for. Furthermore, unobservable heterogeneity does not explain gender difference in access to finance while using a two stage least squares regression, no significant gender gap in firm performance between male- and female-owned companies was found, though financial constraint render firms to be less efficient. |
| URL: | http://d.repec.org/n?u=RePEc:aer:wpaper:380&r=all |
| By: | Gang, Ira N.; Natarajan, Rajesh Raj; Sen, Kunal |
| Abstract: | How does informal economic activity respond to increased financial inclusion? Does it become more entrepreneurial? Does access to new financing options change the gender configuration of informal economic activity and, if so, in what ways and what directions? We take advantage of nationwide data collected in 2010/11 and 2015/16 by India's National Sample Survey Office on unorganized (informal) enterprises. This period was one of rapid expansion of banking availability aimed particularly at the unbanked, under-banked, and women. We find strong empirical evidence supporting the crucial role of financial access in promoting entrepreneurship among informal sector firms in India. Our results are robust to alternative specifications and alternative measures of financial constraints using an approach combining propensity score matching and difference-in-differences. However, we do not find conclusive evidence that increased financial inclusion leads to a higher likelihood of women becoming entrepreneurs than men in the informal sector. |
| Keywords: | entrepreneurship,financial constraints,gender,informal sector,difference-indifferences,India |
| JEL: | O12 G28 L26 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:glodps:708&r=all |
| By: | Melvyn Weeks; Tobias Gabel Christiansen |
| Abstract: | Various poverty reduction strategies are being implemented in the pursuit of eliminating extreme poverty. One such strategy is increased access to microcredit in poor areas around the world. Microcredit, typically defined as the supply of small loans to underserved entrepreneurs that originally aimed at displacing expensive local money-lenders, has been both praised and criticized as a development tool (Banerjee et al., 2015b). This paper presents an analysis of heterogeneous impacts from increased access to microcredit using data from three randomised trials. In the spirit of recognising that in general the impact of a policy intervention varies conditional on an unknown set of factors, particular, we investigate whether heterogeneity presents itself as groups of winners and losers, and whether such subgroups share characteristics across RCTs. We find no evidence of impacts, neither average nor distributional, from increased access to microcredit on consumption levels. In contrast, the lack of average effects on profits seems to mask heterogeneous impacts. The findings are, however, not robust to the specific machine learning algorithm applied. Switching from the better performing Elastic Net to the worse performing Random Forest leads to a sharp increase in the variance of the estimates. In this context, methods to evaluate the relative performing machine learning algorithm developed by Chernozhukov et al. (2019) provide a disciplined way for the analyst to counter the uncertainty as to which algorithm to deploy. |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2011.10509&r=all |
| By: | Freddy CASTRO; Daniela LONDOÑO; Álvaro José PARGA CRUZ; Camilo PEÑA GÓMEZ |
| Abstract: | La alta informalidad de la economía ha dificultado medir la inclusión financiera empresarial, especialmente en el segmento de los micronegocios. Para avanzar en este frente, se utilizó el módulo de inclusión financiera de la encuesta de micronegocios del DANE, el cual permitió identificar los factores que inciden en la demanda de crédito de los microempresarios colombianos. Se encontró que variables como la formalidad, la educación financiera empresarial y la utilización de internet para realizar transacciones inciden positiva y significativamente en la probabilidad de que este tipo de firmas solicite un crédito formal. A su vez, factores como el sexo del dueño del negocio, la ubicación geográfica de la firma, el número de trabajadores, el monto de las ventas mensuales, la antigüedad y la actividad económica a la que pertenece la empresa contribuyen a explicar las preferencias por acceder a préstamos formales o informales. |
| Keywords: | demanda de crédito empresarial, inclusión financiera, educaciónfinanciera, formalidad. |
| JEL: | G32 G38 R51 |
| Date: | 2020–11–25 |
| URL: | http://d.repec.org/n?u=RePEc:col:000118:018521&r=all |
| By: | Lassana Cissokho (Faculté des Sciences Economiques et de Gestion,Université Cheikh Anta Diop, Senegal) |
| Abstract: | This paper investigates the productivity effects of power outages on manufacturing SMEs in Senegal, using a panel data on manufacturing firms. Productivity is estimated using stochastic frontier models, and power outages measured by their frequency or their duration. We controlled for firms owning a generator as well. The main results are drawn from random effects in a linear panel model. Nonetheless, the results remain consistent to the robustness checks using different models: a double-sided truncated data model and a generalized linear model, and different productivity measures: data envelopment analysis. We find that power outages have negative significant effects on the productivity of SMEs. For example, the manufacturing sector lost up to around 11.6% of the actual productivity due to power outages in 2011, and small firms appear to be affected more than medium ones, 5% against 4.3%. Further, firms with a generator were successful in countering the adverse effect of power outages on productivity. Besides, another outstanding result is the significant positive effect of access to credit on productivity. At last, it appears that productivity increases with firms’ size. |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:aer:wpaper:397&r=all |
| By: | Antonia Grohmann; Lukas Menkhoff |
| Abstract: | About two billion people in the world do not own a financial account and there are many more who use financial services only occasionally. In the past, initiatives which address these problems of financial exclusion focused on the supply side of financial markets, in particular by increasing the branch network of banks and by offering cheap bank products. While this had the desired effect, recent evidence shows that improving the demand side of financial markets is also helpful. There are numerous initiatives and public policies to enhance financial education and to improve financial literacy. Microeconometric studies, often randomized controlled trials, show that financial literacy has a causal effect on financial inclusion; educated individuals understand the advantages of financial services better but also feel more confident about contacting providers. Cross-country evidence indicates that in poorer countries improved financial supply and demand are substitutes, i.e., they work independently of each other. In higher-income economies, however, these instruments are complements, i.e., it is useful to improve financial literacy in order to make better use of available financial services. |
| Keywords: | Financial inclusion, financial literacy, financial development |
| JEL: | G53 O16 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1914&r=all |
| By: | World Bank |
| Keywords: | Public Sector Development - Regulatory Regimes Finance and Financial Sector Development - Banks & Banking Reform Finance and Financial Sector Development - Financial Regulation & Supervision Private Sector Development - Competitiveness and Competition Policy |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wboper:34444&r=all |