nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2021‒03‒01
twenty-six papers chosen by
Georg Man

  1. Analysis of the relationship between financial development and economic growth in the EU countries By Edmunds Čižo; Olga Lavrinenko; Svetlana Ignatjeva
  2. FInance, Endogenous TFP, and Misallocation By Chaoran Chen; Ashique Habib; Xiaodong Zhu
  3. Fencing Off Silicon Valley: Cross-Border Venture Capital and Technology Spillovers By Ufuk Akcigit; Sina T. Ates; Josh Lerner; Richard R. Townsend; Yulia Zhestkova
  4. Tapping into Talent: Coupling Education and Innovation Policies for Economic Growth By Ufuk Akcigit; Jeremy Pearce; Marta Prato
  5. Information versus Investment By Stephen J. Terry; Toni M. Whited; Anastasia A. Zakolyukina
  6. Are Bigger Banks Better? Firm-Level Evidence from Germany By Kilian Huber
  7. When Does Foreign Direct Investment Lead to Inclusive Growth? By Hyojung Kang; Jorge Martinez-Vazquez
  8. Foreign Direct Investment and poverty in Sub-Saharan African countries: the role of host absorptive capacity By Sodiq Arogundade; Mduduzi Biyase; Hinaunye Eita
  9. Foreign Direct Investment and Inclusive Human Development in Sub-Saharan African Countries:Does local Economic Conditions Matter? By Sodiq Arogundade; Mduduzi Biyase; Hinaunye Eita
  10. Inclusive Value Chains to Accelerate Poverty Reduction in Africa By Swinnen, Johan; Kuijpers, Rob
  11. Entrepreneurship, growth and productivity with bubbles By Lise Clain-Chamosset-Yvrard; Xavier Raurich; Thomas Seegmuller
  12. Growth Uncertainty, Rational Learning, and Option Prices By Mykola Babiak; Roman Kozhan
  13. Financial Destabilization By Ken-ichi Hashimoto; Ryonghun Im; Takuma Kunieda; Akihisa Shibata
  14. A bad turn deserves another: linkages between terrorism, capital flight and industrialisation By Simplice A. Asongu; Joseph Nnanna; Rexon T. Nting
  15. Optimal Bailouts in Banking and Sovereign Crises By Sewon Hur; César Sosa-Padilla; Zeynep Yom
  16. Liquidity, Pledgeability, and the Nature of Lending By Douglas W. Diamond; Yunzhi Hu; Raghuram G. Rajan
  17. Doubling Down on Debt: Limited Liability as a Financial Friction By Jesse Perla; Carolin Pflueger; Michal Szkup
  18. Gender Inclusive Intermediary Education, Financial Stability and Female Employment in the Industry in Sub-Saharan Africa By Simplice A. Asongu; Yann Nounamo; Henri Njangang; Sosson Tadadjeu
  19. Does the quality of land records affect credit access of households in India? By Susan Thomas; Diya Uday
  20. What can credit vintages tell us about non-performing loans? By Santiago Gamba-Santamaria; Luis Fernando Melo-Velandia; Camilo Orozco-Vanegas
  21. World interest rates and macroeconomic adjustments in developing commodity producing countries By Vincent Bodart; François Courtoy; Erica Perego
  22. Financial crisis of 2008 and outward foreign investments from China and India By Suma Athreye; Abubakr Saeed; Muhammad Saad Baloch
  23. Is there a right time for fiscal decentralization in a developing country: a case study of Cameroon By Mimboe, Bernard
  24. Book Review of 'Banks and Finance in Modern Macroeconomics' by Claudio Sardoni and Bruna Ingrao By Acosta, Juan; Assistant, JHET
  25. The Effectiveness of Asset Purchases in Small Open Economies By Eliezer Borenstein; Alex Ilek
  26. Data-driven analysis of central bank digital currency (CBDC) projects drivers By Toshiko Matsui; Daniel Perez

  1. By: Edmunds Čižo (Daugavpils University); Olga Lavrinenko (Daugavpils University); Svetlana Ignatjeva (Daugavpils University)
    Abstract: To what extent does financial development determine economic growth? Despite the obvious relationship between the level of financial development and economic growth rates, there is still no consensus on the significance and focus of this relation. Is there a directed impact of the level of financial development on economic growth, or does the development of a financial sector follow economic growth? Or is the relation between financial development and economic growth bidirectional? The aim of the research is to analyze the causal relationship between quantitative and dynamic differences in financial development and economic growth in the EU countries in the period 1995-2017. The period of the research from 1995 to 2017 is determined by the availability of financial development indicators for the EU countries. In order to prove the directed impact of the level of financial development on economic growth in the EU countries in the period 1995-2017, the average values of growth in the financial development index with the lag forwarding by one year, with the lag falling behind by one year, without the lag, and average values of the GDP growth per capita were analyzed.
    Keywords: financial development,economic growth
    Date: 2020
  2. By: Chaoran Chen; Ashique Habib; Xiaodong Zhu
    Abstract: In the standard macro-finance model, financial constraints affect small or young firms but not large or old ones, and the implied dispersion in the marginal revenue product of capital (MRPK) of a firm cohort is less persistent compared to the data. We extend the model by allowing firm productivity to be endogenous to firms' financial constraints. With endogenous productivity, a firm's optimal demand for capital increases with collateral, financial constraints and dispersion of MRPK persist, and even large firms are likely to be constrained. Our model with endogenous productivity also amplifies productivity loss arising from financial frictions by two-fold.
    Keywords: Collateral Constraint, Endogenous Firm Productivity, Firm Dynamics, Misallo- cation, Aggregate Productivity, China
    JEL: E13 G31 L16 L26 O41
    Date: 2021–02–19
  3. By: Ufuk Akcigit (University of Chicago - Department of Economics; NBER; CEPR); Sina T. Ates (Federal Reserve Board of Governors); Josh Lerner (Harvard University - Harvard Business School; NBER); Richard R. Townsend (University of California at San Diego - Rady School of Management); Yulia Zhestkova (University of Chicago - Department of Economics)
    Abstract: The treatment of foreign investors has been a contentious topic in U.S. entrepreneurship policy in recent years. This paper examines foreign corporate investments in Silicon Valley from a theoretical and empirical perspective. We model a setting where such funding may allow U.S. entrepreneurs to pursue technologies that they could not otherwise, but may also lead to spillovers to the overseas firm providing the financing and the nation where it is based. We show that despite the benefits from such inbound investments for U.S. firms, it may be optimal for the U.S. government to raise their costs to deter investments. Using as comprehensive as possible a sample of investments by non-U.S. corporate investors in U.S. start-ups between 1976 and 2015, we find evidence consistent with the presence of knowledge spill-overs to foreign investors.
    Keywords: Innovation, foreign direct investment, corporate venture capital
    JEL: G24 O33 O34
    Date: 2020
  4. By: Ufuk Akcigit (University of Chicago - Department of Economics; NBER; CEPR); Jeremy Pearce (University of Chicago - Department of Economics); Marta Prato (University of Chicago - Department of Economics)
    Abstract: How do innovation and education policy affect individual career choice and aggregate productivity? This paper analyzes the various layers that connect R&D subsidies and higher education policy to productivity growth. We put the development of scarce talent and career choice at the center of a new endogenous growth framework with individual-level heterogeneity in talent, frictions, and preferences. We link the model to micro-level data from Denmark and uncover a host of facts about the links between talent, higher education, and innovation. We use these facts to calibrate the model and study counter-factual policy exercises. We find that R&D subsidies, while less effective than standard models, can be strengthened when combined with higher education policy that alleviates financial frictions for talented youth. Education and innovation policies not only alleviate different frictions, but also impact innovation at different time horizons. Education policy is also more effective in societies with high income inequality.
    Keywords: R&D policy, education policy, inequality, innovation, iq, endogenous growth
    JEL: O31 O38 O47 J24
    Date: 2020
  5. By: Stephen J. Terry (Boston University - Department of Economics); Toni M. Whited (University of Michigan - Stephen M. Ross School of Business; NBER); Anastasia A. Zakolyukina (University of Chicago - Booth School of Business)
    Abstract: The accuracy of firm information disclosures and the efficiency of long-term investment both play crucial roles in the economy and capital markets. We estimate a dynamic model that captures a trade-off between these two goals that arises when managers confront realistic incentives to misreport financial statements and distort their real investment choices. Managers in our model distort reported profits by 6.7% of sales on average. Counterfactual analysis reveals that while eliminating this misreporting through disclosure regulation is possible, it incentivizes managers to distort real investment, which results in a 1% drop in average firm value, reflecting a quantitatively meaningfully tradeoff.
    Keywords: Information, disclosure, r&d, growth
    JEL: E22 G31 G34 M41 K22 K42
    Date: 2020
  6. By: Kilian Huber (University of Chicago - Booth School of Business)
    Abstract: The effects of large banks on the real economy are theoretically ambiguous and politically controversial. I identify quasi-exogenous increases in bank size in postwar Germany. I show that firms did not grow faster after their relationship banks became bigger. In fact, opaque borrowers grew more slowly. The enlarged banks did not increase profits or efficiency, but worked with riskier borrowers. Bank managers benefited through higher salaries and media attention. The paper presents newly digitized microdata on German firms and their banks. Overall, the findings reveal that bigger banks do not always raise real growth and can actually harm some borrowers.
    JEL: E24 E44 G21 G28
    Date: 2020
  7. By: Hyojung Kang (Economics Department and International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University); Jorge Martinez-Vazquez (International Center for Public Policy, Georgia State University, USA)
    Abstract: Foreign Direct Investment (FDI) is widely considered among the most effective instruments for the promotion of economic development. However, not all FDI leads to inclusive economic growth, lifting the welfare of the poorest groups in developing countries. This paper examines the conditions under which FDI can effectively lead to inclusive growth. By using a fixed effects regression with annual data for 68 countries from 1990 to 2015, we find that FDI has the most positive effect on inclusive growth when there is a sufficiently large manufacturing sector and a developed enough infrastructure base in the host country. These not very optimistic results emphasize the critical importance of the host country’s absorptive capacity. A smaller technological or knowledge gap with the foreign firms is required for FDI to lead to more linkages and spillovers, and ultimately job creation for the poor. The results cast doubt on development strategies that rely on FDI as a sufficient policy for inclusive growth.
    Date: 2021–02
  8. By: Sodiq Arogundade (College of Business and Economics, University of Johannesburg); Mduduzi Biyase (College of Business and Economics, University of Johannesburg); Hinaunye Eita (College of Business and Economics, University of Johannesburg)
    Abstract: Emerging literatures on foreign direct investment (FDI) now suggest FDI’s positive spillovers in alleviating poverty depend on the absorptive capacities of host economies. Prime to these capacities includes the level of human capital development and institutional quality. This study examines how host absorptive capacity can facilitate the benefit FDI can offer. In achieving this, a panel of 28 Sub-Saharan African (SSA) countries from 1996-2018 was explored using instrumental regression. Findings from this study suggest that FDI has a positive and significant relationship with all the poverty indicators in SSA. This suggests that the impact of FDI is contingent on the conditions of the local economy. The study further reveals that FDI will alleviate poverty conditions if interacted with human capital and institutional quality at a given threshold. This implies that the more host nations improve their institutional quality and human capital, the more they reap the benefit of FDI in terms of job creation, technological spillovers, and poverty alleviation. Conclusion emanating from this paper is that policies aimed at attracting FDI without improving conditions of the local economy is effort in futility. Furthermore, SSA countries need to further liberalize, privatize, and securitize critical sectors in their economies in order to provide needed liquidity for investment in human capital as well as institutional reform
    Keywords: Poverty, Foreign Direct Investment, Absorptive capacity, Instrumental regression and Sub-Saharan African countries
    JEL: F23 I30 E24 E02
  9. By: Sodiq Arogundade (College of Business and Economics, University of Johannesburg); Mduduzi Biyase (College of Business and Economics, University of Johannesburg); Hinaunye Eita (College of Business and Economics, University of Johannesburg)
    Abstract: The controversies that trails whether FDI’s impact is conditional on certain intermediating variables or not, has become a recurring discourse in the FDI-welfare literature. While the quality of institution has prominently featured as playing a vital role on the one hand, infrastructure level and economic growth have also been highlighted as good candidates on the other hand. This study examines the necessary local economic conditions required for the existence of positive spillovers from multinationals’ investment in improving inclusive human development. In achieving this, a panel 28 SSA countries from 1996-2018 was explored using panel smooth transition regression model (PSTR). The results support the view that institutional quality and infrastructure are germane in enhancing the impact of FDI on welfare distribution. The study further suggest that higher economic growth is a necessary but not sufficient condition in facilitating the impact of FDI, as economic growth must be combined with either infrastructure or quality institution before generating the anticipated impact. This implies that the more host nations improve the conditions of their economies, the more they reap the benefit of FDI in terms of job creation, technological spillovers, and distribution of welfare. Conclusion emanating from this study is that beyond putting in place FDI’s promotional policies to improve the appetite of multinational corporations, SSA countries need to further privatize and liberalize critical sectors in their economies in order to provide needed liquidity for investment in infrastructure, growing the economy as well as public sector reform.
    Keywords: Inclusive Human Development, Foreign Direct Investment, Local Economic conditions, Panel Smoothening Transition Regression Model and Sub-Saharan African Countries
    JEL: F23 I30 H54 O43
  10. By: Swinnen, Johan; Kuijpers, Rob
    Abstract: The rapid transformation of agri-food value chains in Africa and other developing countries hasimportant implications for economic growth and poverty reduction. Policy makers increasinglyrecognize this but there is a need for a better understanding of what value chain transformationentails and what the main policy options are. This paper provides an overview and analysis ofdifferent value chain models that have emerged in the past decades and reviews the literatureon the main development implications. We discuss and categorize existing policy initiativesthat aim to stimulate inclusive value chain development. Based on this review we identifylessons and implications for policy makers.
    Keywords: value chain; farmer; fresh fruit and vegetable; access to bank loan; Political Economy; change in consumer demand; private sector development programs; reduction of transaction costs; effects of policy changes; impact on poverty reduction; Fruit and Vegetable Export; supply of raw material; limited access to capital; investment in transition country; access to finance; vertical coordination
    Date: 2020–02–01
  11. By: Lise Clain-Chamosset-Yvrard (University of Lyon, Université Lumière Lyon 2, GATE); Xavier Raurich (University of Barcelona); Thomas Seegmuller (Aix-Marseille University,CNRS, EHESS, Centrale Marseille, AMSE)
    Abstract: Entrepreneurship, growth and total factor productivity are larger when there is a financial bubble. We explain these facts using a growth model with financial bubbles in which individuals face heterogeneous wages and returns on productive investment. The heterogeneity in the return of investment separates individuals between savers and entrepreneurs. Savers buy financial assets, which are deposits or a financial bubble. Entrepreneurs incur in a start-up cost and borrow to invest in productive capital. The bubble provides liquidities to credit-constrained entrepreneurs. These liquidities increase investment and entrepreneurship when the start-up cost is large enough, which explains that growth and entrepreneurship can be larger with bubbles. Finally, productivity can be larger when the bubble further increases the investment of more productive entrepreneurs. This can occur when the return of investment is correlated with wages.
    Keywords: Bubble, entrepreneurship, growth, productivity.
    JEL: E22 E44 G12
    Date: 2021
  12. By: Mykola Babiak; Roman Kozhan
    Abstract: We demonstrate that incorporating parameter learning into a production economy can capture salient properties of the variance premium and index option prices with empirically consistent equity returns, the risk-free rate, and macroeconomic quantities. In a model estimated on post-WWII U.S. data, the investor learns about the true parameters governing the persistence, mean, and volatility of productivity growth. Rational belief updating amplifies the impact of shocks on prices and conditional moments. The agent, in turn, pays a large premium for variance swaps and options because they hedge his concerns about future revisions, particularly concerning the mean and volatility of productivity growth.
    Keywords: uncertainty; rational learning; business cycles; variance premium; implied volatilities;
    JEL: D83 E13 E32 G12
    Date: 2021–01
  13. By: Ken-ichi Hashimoto (Kobe University); Ryonghun Im (Kyoto University); Takuma Kunieda (Kwansei Gakuin University); Akihisa Shibata (Kyoto University)
    Abstract: This paper uses a dynamic general equilibrium model to examine whether financial innovations destabilize an economy. Applying a neoclassical production function, we demonstrate that as financial frictions are mitigated, the economy loses stability and a flip bifurcation occurs at a certain level of financial frictions under an empirically plausible elasticity of substitution between capital and labor. Furthermore, the amplitude of fluctuations increases as financial frictions are mitigated and is maximized when the financial market approaches perfection. These outcomes imply that financial innovations are likely to destabilize an economy.
    Keywords: Financial innovations, endogenous business cycles, financial destabilization, heterogeneous agents.
    JEL: E13 E32 E44
    Date: 2021–02
  14. By: Simplice A. Asongu (Yaounde, Cameroon); Joseph Nnanna (The Development Bank of Nigeria, Abuja, Nigeria); Rexon T. Nting (London, UK)
    Abstract: This study examines how the association between terrorism and capital flight affects the process of industrialization in 36 African countries. The empirical evidence is based on Generalised Method of Moments (GMM) and Quantile Regressions (QR). GMM-oriented findings show that capital flight interacts with terrorism to negatively affect industrialisation in ‘domestic terrorism’- and ‘total terrorism’-oriented regressions. With QR approach, the GMM results are confirmed exclusively in the 25th and 50th quantiles, in regressions pertaining to domestic terrorism, unclear terrorism and total terrorism. It follows that the negative effect from the investigated interaction is driven by bottom quantiles of the industrialisation distribution. This confirms existing literature that developed countries are more likely to limit the negative externalities from terrorism compared to their developing counterparts. Hence, the negative consequence of the association between terrorism and capital flight on industrialisation is a decreasing function of industrialisation.
    Keywords: Capital flight, terrorism, industrialisation, Africa
    JEL: C50 D74 F23 N40 O55
    Date: 2021–01
  15. By: Sewon Hur; César Sosa-Padilla; Zeynep Yom
    Abstract: We study optimal bailout policies in the presence of banking and sovereign crises. First, we use European data to document that asset guarantees are the most prevalent way in which sovereigns intervene during banking crises. Then, we build a model of sovereign borrowing with limited commitment, where domestic banks hold government debt and also provide credit to the private sector. Shocks to bank capital can trigger banking crises, with government sometimes finding it optimal to extend guarantees over bank assets. This leads to a trade-off: Larger bailouts relax domestic financial frictions and increase output, but also imply increasing government fiscal needs and possible heightened default risk (i.e., they create a ‘diabolic loop’). We find that the optimal bailouts exhibit clear properties. Other things equal, the fraction of banking losses that the bailouts would cover is: (i) decreasing in the level of government debt; (ii) increasing in aggregate productivity; and (iii) increasing in the severity of the banking crisis. Even though bailouts mitigate the adverse effects of banking crises, we find that the economy is ex ante better off without bailouts: the ‘diabolic loop’ they create is too costly.
    Keywords: Bailouts; Sovereign Defaults; Banking Crises; Conditional Transfers; Sovereign-bank diabolic loop
    JEL: E32 E62 F34 F41 G01 G15 H63
    Date: 2021–01–29
  16. By: Douglas W. Diamond (University of Chicago - Booth School of Business; NBER); Yunzhi Hu (University of North Carolina at Chapel Hill - Kenan-Flagler School of Business); Raghuram G. Rajan (University of Chicago - Booth School of Business; NBER)
    Abstract: We develop a theory of how corporate lending and financial intermediation change based on the fundamentals of the firm and its environment. We focus on the interaction between the prospective net worth or liquidity of an industry and the firm’s internal governance or pledgeability. Variations in prospective liquidity can induce changes in the nature, covenants, and quantity of loans that are made, the identity of the lender, and the extent to which the lender is leveraged. We offer predictions on how these might vary over the financial cycle.
    Keywords: liquidity, pledgeability, financial cycle, monitoring, loans, performance-pricing debt, intermediary capital
    Date: 2020
  17. By: Jesse Perla (University of British Columbia - Vancouver School of Economics); Carolin Pflueger (University of Chicago - Harris School of Public Policy; NBER); Michal Szkup (University of British Columbia - Vancouver School of Economics)
    Abstract: We investigate how a combination of limited liability and preexisting debt distort firms’ investment and equity payout decisions. We show that equity holders have incentives to “double-sell†cash flows in default, leading to overinvestment, provided that the firm has preexisting debt and the ability to issue new claims to the bankruptcy value of the firm. In a repeated version of the model, we show that the inability to commit to not double-sell cash flows leads to heterogeneous investment distortions, where high leverage firms tend to overinvest but low leverage firms tend to underinvest. Permitting equity payouts financed by new debt mitigates overinvestment for high leverage firms, but raises bankruptcy rates and exacerbates low leverage firms’ tendency to underinvest—as the anticipation of equity payouts from future debt raises their cost of debt issuance. Finally, we provide empirical evidence consistent with the model.
    JEL: E20 E22 E44
    Date: 2020
  18. By: Simplice A. Asongu (Yaounde, Cameroon); Yann Nounamo (University of Douala, Cameroon); Henri Njangang (University of Dschang , Cameroon); Sosson Tadadjeu (University of Dschang , Cameroon)
    Abstract: The study examines how financial stability modulates the effect of inclusive intermediary education on female employment in the industry for the period 2008-2018 in Sub-Saharan Africa. The empirical evidence is based on Tobit, Ordinary Least Squares (OLS) and Quantile regressions. There are positive interactive or conditional effects between inclusive intermediary education and financial stability in the Tobit, OLS and bottom quantiles estimations. A net positive (negative) effect is apparent in the 10th quantitle (median) of female employment in the industry distribution. Implications are discussed.
    Keywords: inclusive education; financial sustainability, gender economic inclusion
    JEL: E23 F21 F30 L96 O55
    Date: 2021–02
  19. By: Susan Thomas (xKDR); Diya Uday (xKDR)
    Abstract: Under-utilisation of land as collateral for loans is often attributed to the poor quality of the land records infrastructure, which is seen to both increase the cost of closing credit transactions and the risk in collection if a loan fails. In this paper, we examine the link between the heterogeneity of the quality of the land records infrastructure across states and the access to credit by households in these states using two new data-sets for the analysis. The state-level variation in land record quality is measured using the NCAER Land Records Services Index score while the Consumer Pyramids household data is used to capture household borrowing. Our findings are that there is a weak link between the borrowing patterns of households and quality of land records infrastructure, particularly the availability of spatial records. However, it does not appear that this is sufficient to capture the extent to which households are able to access credit from formal financial sources.
    JEL: E2 G2 R1 R5 O4
    Date: 2021–02
  20. By: Santiago Gamba-Santamaria; Luis Fernando Melo-Velandia; Camilo Orozco-Vanegas
    Abstract: Using Colombian credit vintage data, we decompose the non-performing loans into one component that captures the evolution of the payment capacity of borrowers, and other component that captures changes in the credit risk taken by the financial system at the time of loan disbursement. We use intrinsic estimators and penalized regression techniques to overcome the perfect multicollinearity problem that the model entails. We find that these two type of components have evolved differently over time, and that good economic conditions and loose financial conditions improve the payment capacity of borrowers to meet their obligations, and in turn, they tend to coincide with the financial system engaging in riskier loans. Finally, we advocate the use of this methodology as a policy tool that is easy to apply by financial and economic authorities that dispose of a constant flow of credit vintage information. Through it, they will be able to identify the origin of the credit risk materialization and curb the risk taken by the financial system. **** RESUMEN: Usando información de cosechas de crédito, en este documento descomponemos la cartera en mora en un componente que captura la evolución de la capacidad de pago de los deudores y otro componente que captura los cambios en la toma de riesgo de crédito del sistema financiero al momento del desembolso. Utilizamos estimadores intrínsecos y técnicas de regresión penalizadas para solucionar el problema de multicolinealidad perfecta asociado a la estimación de los parámetros de los modelos. Encontramos que estos dos tipos de componentes han evolucionado de manera diferente a lo largo del tiempo y que buenas condiciones económicas y condiciones financieras laxas mejoran la capacidad de pago de los deudores para cumplir con sus obligaciones y, a su vez, tienden a coincidir con el otorgamiento de préstamos de mayor riesgo por parte del sistema financiero. Finalmente, recomendamos el uso de esta metodología como herramienta de política de fácil aplicación por parte de las autoridades financieras y económicas que disponen de un flujo constante de información de cosechas de crédito. A través de ella las autoridades podrían identificar el origen de la materialización del riesgo crediticio y contener la toma de riesgo del sistema financiero.
    Keywords: Cosechas de crédito, cartera en mora, regresiones penalizadas, estimadores intrínsecos, credit vintages, non-performing loans, elastic net regressions, intrinsic estimators.
    JEL: C13 C20 G21
    Date: 2021–02
  21. By: Vincent Bodart (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); François Courtoy (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Erica Perego (CEPII, Paris, France)
    Abstract: With commodities becoming international financial securities, commodity prices are affected by the international financial cycle. With this evidence in mind, this paper reconsiders the macroeconomic adjustment of developing commodity-exporting countries to changes in world interest rates. We proceed by building a model of a small open economy that produces a non-tradable good and a storable tradable commodity. The difference with standard models of small open economies lies in the endogenous response of commodity prices which -due to commodity storage- adjust to variations in international interest rates. We find that the endogenous response of commodity prices amplifies the reaction of commodity exporting countries to international monetary shocks. This suggests that commodity exporting countries are more vulnerable to unfavourable international monetary disturbances than other small open economies. In particular, through the commodity price channel, even those small open commodity-exporting economies that are disconnected from international financial markets can be affected by the international financial cycle.
    Keywords: Storable commodity, International financial shock, Developing economies
    JEL: E32 F41 G15 Q02
    Date: 2021–01–23
  22. By: Suma Athreye (Essex Business School, University of Essex, UK); Abubakr Saeed (Department of Management Sciences, COMSATS University, Islamabad, Pakistan); Muhammad Saad Baloch (Department of Management Sciences, COMSATS University, Islamabad, Pakistan)
    Date: 2021–01
  23. By: Mimboe, Bernard
    Abstract: This article aims at identifying the preconditions for the implementation of fiscal decentralization in a developing country by studying the case of Cameroon. The observation of the graphical elements made for this purpose shows that there is a positive correlation between the evolution of the decentralization process and that of two key economic indicators, namely the economic growth rate and the level of public debt. A set of other indicators such as population size, literacy rate and socio-political stability are also important in deciding on the implementation of the fiscal decentralization process in a developing country. The quality of the indicators mentioned above can either accelerate or limit the implementation of the decentralization process in a developing country.
    Keywords: fiscal decentralization, developing country, socioeconomic indicators
    JEL: H7 H75 H77
    Date: 2021–02–20
  24. By: Acosta, Juan; Assistant, JHET
    Abstract: Book Review of 'Banks and Finance in Modern Macroeconomics' by Claudio Sardoni and Bruna Ingrao, Northampton, MA, Edward Elgar, 2019, 288 pp.
    Date: 2021–02–12
  25. By: Eliezer Borenstein (Bank of Israel); Alex Ilek (Bank of Israel)
    Abstract: We examine the potential effectiveness of asset purchases (AP) in small open economies. To that end we extend the model of Gertler and Karadi (2011) to a small open economy, in which households and firms can borrow and lend in the global. financial market. Our results confirm a previous finding of the literature: In a small open economy, the response of the main variables to AP is weaker than in a closed economy. However, this weaker response does not necessarily imply a weaker benefit of AP: We show that even in a small open economy AP can improve welfare, and that the improvement could potentially be larger than in a closed economy. The reason is that conducting AP allows the economy to restore a more efficient financing structure, in the sense that it reduces intermediation costs paid to foreign lenders.
    Date: 2021–01
  26. By: Toshiko Matsui; Daniel Perez
    Abstract: In this paper, we use a variety of machine learning methods to quantify the extent to which economic and technological factors are predictive of the progression of Central Bank Digital Currencies (CBDC) within a country, using as our measure of this progression the CBDC project index (CBDCPI). We find that a financial development index is the most important feature for our model, followed by the GDP per capita and an index of the voice and accountability of the country's population. Our results are consistent with previous qualitative research which finds that countries with a high degree of financial development or digital infrastructure have more developed CBDC projects. Further, we obtain robust results when predicting the CBDCPI at different points in time.
    Date: 2021–02

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