nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2021‒03‒15
twenty-one papers chosen by
Georg Man

  1. Bank-based financial development and foreign direct investment in Sub-Saharan African countries: A dynamic causal linkage By Odhiambo, Nicholas M
  2. Growing like Germany: local public debt, local banks, low private investment By Mathias Hoffmann; Iryna Stewen; Michael Stiefel
  3. Towards a new growth model in CESEE: Convergence and competitiveness through smart, green and inclusive investment By Gereben, Áron; Wruuck, Patricia
  4. Les Transferts de Fonds Monétaires et les marchés boursiers dans les pays en développement By ZAAROUR, Fatma; AJIMI, Adnene
  5. City commercial banks and credit allocation : Firm-level evidence By Kang, Shulong; Dong, Jianfeng; Yu, Haiyue; Cao, Jin; Dinger, Valeriya
  6. Investing like conglomerates: is diversification a blessing or curse for China's local governments? By Jianchao Fan; Jing Liu; Yinggang Zhou
  7. Imperfect Banking Competition and Macroeconomic Volatility: A DSGE Framework By Jiaqi Li
  8. Understanding bank and non-bank credit cycles: a structural exploration By C Bora Durdu; Molin Zhong
  9. Quantitative Easing in the US and Financial Cycles in Emerging Markets By Marcin Kolasa; Grzegorz Wesołowski
  10. Will Capital Flows through Global Banks Support Economic Recovery? By Claudia M. Buch; Matthieu Bussiere; Linda S. Goldberg
  11. Regional income disparities, monopoly & finance By Maryann Feldman; Frederick Guy; Simona Iammarino
  12. Global realignment in financial market dynamics: Evidence from ETF networks By Billio, Monica; Lo, Andrew W.; Pelizzon, Loriana; Getmansky, Mila; Zareei, Abalfazl
  13. Financial Regulation in a Quantitative Model of the Modern Banking System By Juliane Begenau; Tim Landvoigt
  14. Do macroprudential policies affect non-bank financial intermediation? By Stijn Claessens; Giulio Cornelli; Leonardo Gambacorta; Francesco Manaresi; Yasushi Shiina
  15. Self-inflicted Debt Crises By Theodosios Dimopoulos; Norman Schürhoff
  16. Answering the Queen: Machine learning and financial crises By Jérémy Fouliard; Michael Howell; Hélène Rey
  17. Productivity, managers' social connections and the Great Recession By Iftekhar Hasan; Stefano Manfredonia
  18. Productivity, Financial Performance, and Corporate Governance: Evidence from Romanian R&D Firms By Claudiu ALBULESCU; Camélia TURCU
  19. Sensitivity analysis of an integrated climate-economic model By Benjamin M. Bolker; Matheus R. Grasselli; Emma Holmes
  20. Climate Policy, Financial Frictions, and Transition Risk By Stefano Carattini; Garth Heutel; Givi Melkadze
  21. Are Two Sources of Credit better than One?: Credit Access and Debt among Microfinance Clients in Bangladesh By Nudrat Faria Shreya

  1. By: Odhiambo, Nicholas M
    Abstract: In this paper, the causal relationship between financial development and foreign direct investment in sub-Saharan African (SSA) countries is examined. Three proxies of financial development, namely bank deposits, deposit money bank assets, and liquid liabilities have been used to examine this linkage. Using a multivariate panel Granger-causality model, the study found that the causal relationship between financial development and foreign direct investment is dependent on the variable used to measure the level of financial development. The relationship also varies over time. Overall, the study found a causal flow from FDI to financial development to predominate, at least in the short run. The study, therefore, recommends that policies aimed at attracting foreign direct investment inflows should be prioritised in SSA countries in the short run, in order to foster the development of the financial sector in the region.
    Date: 2021–01
  2. By: Mathias Hoffmann; Iryna Stewen; Michael Stiefel
    Abstract: Using a firm-bank panel of more than 1m German firms over 2010-2016, we document that local public bank lending to municipalities crowds out private investment. Our results show how crowding-out can happen in a developed economy characterized by low interest rates and fiscal austerity. Our mechanism relies on two structural features of Germany’s banking landscape: First, the geographical segmentation of credit markets for small and medium firms (SME) which are dominated by local banks. Secondly, a special statutory mandate requiring local public banks to lend to municipalities. With yields on local government debt declining to all-time lows, local public banks tried to alleviate stress on their balance sheets by using their local market power to charge higher rates on their SME customers. This crowded out firm investment. Perversely, fiscal consolidation at the state and federal levels contributed to this effect by putting pressure on the budgets of municipal governments which increasingly borrowed from local public banks. Crowding-out lowered aggregate private investment by around 30-40 bio euros per year (or 1 percent of GDP). Thus, we identify a novel channel through which low interest rates can adversely affect bank lending and firm performance. Our results also illustrate how segmented credit markets can amplify negative multiplier effects from fiscal austerity.
    Keywords: Local public finance, firm-level investment, crowding-out, fiscal austerity, global and intra-European imbalances
    JEL: E62 F21 F32 H32
    Date: 2021–03
  3. By: Gereben, Áron; Wruuck, Patricia
    Abstract: This paper focuses on the growth and convergence of Central, Eastern and South-Eastern European EU countries (CESEE). We argue that the factors behind the pre-crisis growth model of the region - skilled yet affordable labour force, foreign direct investment, imports of productivity-enhancing technology - are petering out, and are yet to be substituted. We propose a new growth model centred around a shift towards more home-grown innovation, digitalisation, climate change mitigation and a strong focus on skills, labour and social inclusion to leave the middle income trap behind for good and to boost economies' growth prospects in a post-COVID world. Based on analysis of firm-level data, we highlight the prerequisites of making this transition happen.
    Keywords: climate change,convergence,economic policy,digitalisation,innovation,labourmarket,long-term growth,productivity,skills
    JEL: J24 O14 O33 O40 P27 P28
    Date: 2021
  4. By: ZAAROUR, Fatma; AJIMI, Adnene
    Abstract: Migrant remittances tend to be more stable, unlike other sources of external financing, making remittances a reliable source for developing countries. Thus, despite the upward trend in remittances, stock markets in developing countries are generally characterized by high volatility. This study seeks to determine the relationship between remittances and stock markets in developing countries. This paper covers the period 1996-2018 using the Panel-Var model. This estimate shows the existence of a positive and significant relation between remittances and stock markets as well as a bi-causal relationship. Also, remittances have been found to be counter-cyclical and follow the theory of pure altruism.
    Keywords: Shock, Panel-Var, remittances, migration, stock market.
    JEL: F21 F22 F24 F32 G01 G15 G19 J61
    Date: 2021–02–05
  5. By: Kang, Shulong; Dong, Jianfeng; Yu, Haiyue; Cao, Jin; Dinger, Valeriya
    Abstract: This paper investigates how government-led banking liberalization affects credit allocation by banks using as a quasi-natural experiment the establishment of city commercial banks (CCBs) in China. Based on more than three million corporate financial statements spanning over 16 years, we find that the establishment of CCBs led to a 6–14 % drop in debt funding for private firms, as well as a 1–2 % rise in their funding costs. At the same time, private infrastructure firms enjoyed a nearly 6 % increase in debt funding and more than 100-basis-point drop in interest costs despite their inferior credit quality. The debt financing of private firm appears most severely affected in municipalities where officials face high promotional pressures or fiscal constraints.
    JEL: D7 G21 G32 G38 P2
    Date: 2021–03–09
  6. By: Jianchao Fan; Jing Liu; Yinggang Zhou
    Abstract: This paper examines how China's local governments make investment via financing vehicles (LGFVs) and provides new insights on often-criticised LGFVs from a different perspective. Using data for 4,432 LGFVs from 1,225 counties across China between 2005 and 2018, we show that since 2014, the function of LGFVs has changed from financing conduits to conglomerate platforms with more diversified investments. While a certain level of diversification can be a blessing for local economic growth, over-diversification is a curse. Such an inverted U-shaped relationship depends on the condition of the local economy. Over-diversification may lead to rising local debt and crowding-out effects on private investment.
    Keywords: local government financing vehicle, diversified investment, government debt, conglomerate
    JEL: E61 G21 H72 O17
    Date: 2021–01
  7. By: Jiaqi Li
    Abstract: This paper studies the impact of imperfect banking competition on aggregate fluctuations using a DSGE framework that features a Cournot banking sector. The paper highlights a new propagation mechanism of imperfect banking competition that operates via the dynamics of the expected marginal product of capital. Since capital is partly financed by bank loans, a higher expected return on capital implies that firms are more willing to borrow to invest in capital, making their capital and thus loan demand more inelastic. Market power enables banks to take advantage of the lower loan demand elasticity by charging a higher loan rate markup. Given that different shocks affect the dynamics of the expected return on capital differently, this paper finds that while the loan rate markup after a contractionary monetary policy shock increases and thus amplifies aggregate fluctuations, the impact of imperfect banking competition after a productivity shock is less clear and depends on the persistence of the shock.
    Keywords: Business fluctuations and cycles; Financial institutions; Interest rates
    JEL: E44 G21 L13
    Date: 2021–03
  8. By: C Bora Durdu; Molin Zhong
    Abstract: We explore the structural drivers of bank and nonbank credit cycles using a medium-scale DSGE model with two types of financial intermediation. We posit economy-wide and sectoral disturbances in both macro and financial sectors. We estimate that sectoral shocks to the balance sheets of entrepreneurs are important for fluctuations in bank and nonbank credit growth at the business cycle frequency. Economy-wide entrepreneurial risk shocks gain predominance for explaining the lower frequency co-movement between the two series. Macro shocks play very little role in explaining financial cycles.
    Keywords: emerging bond markets, credit risk, currency risk, Twin Ds, affine model
    JEL: E3 E44 G01 G21
    Date: 2021–01
  9. By: Marcin Kolasa; Grzegorz Wesołowski
    Abstract: Large international capital movements tend to be associated with strong fluctuations in asset prices and credit, contributing to domestic financial cycles and posing challenges for stabilization policies, especially in emerging market economies. In this paper we argue that these challenges are particularly severe if the global financial cycle is driven by quantitative easing (QE) in the US, and when the local banking sector has large holdings of government bonds, like in many Latin American countries. We first show empirically that a typical round of QE by the US Fed leads to a persistent expansion in credit to households and a significant loss of price competitiveness in this group of economies. We next develop a quantitative macroeconomic model of a small open economy with segmented asset markets and banks, which accounts for these observations. In this framework, foreign QE creates tensions between macroeconomic and financial stability as a contractionary impact of exchange rate appreciation is accompanied by booming credit and house prices. As a consequence, conventional monetary policy accommodation aimed at stabilizing output and inflation would further exacerbate domestic financial cycle. We show that an effective way of resolving this trade-off is to impose a time-varying tax on capital inflows. Combining foreign exchange interventions with tightening of local credit policies can also restore macroeconomic and financial stability, but at the expense of a large redistribution of wealth between borrowers and savers.
    Keywords: quantitative easing, global financial cycle, domestic credit, exchange rate interventions, capital controls, macroprudential policy
    JEL: E44 E58 F41 F42 F44
    Date: 2021–03
  10. By: Claudia M. Buch; Matthieu Bussiere; Linda S. Goldberg
    Abstract: While policymakers around the world have aggressively and swiftly reacted to the common negative economic shock from COVID-19, the timing and forms of policy responses in the economic recovery stage may be more geographically differentiated. The range in policy responses, along with variations in the financial health of banks, likely will affect the flow of international credit through global banks. In this post, we ask whether, based on historical precedent, global banks are likely to provide additional support to the economic recovery in the locations they serve.
    Keywords: global bank; international capital flow; COVID-19; recovery; spillovers
    JEL: G21 I1 E51 I15 F3
    Date: 2021–03–01
  11. By: Maryann Feldman (University of North Carolina at Chapel Hill, USA); Frederick Guy (Department of Management, Birkbeck College, University of London); Simona Iammarino (London School of Economics & Political Science, UK)
    Date: 2019–10
  12. By: Billio, Monica; Lo, Andrew W.; Pelizzon, Loriana; Getmansky, Mila; Zareei, Abalfazl
    Abstract: The centrality of the United States in the global financial system is taken for granted, but its response to recent political and epidemiological events has suggested that China now holds a comparable position. Using minute-by-minute data from 2012 to 2020 on the financial performance of twelve country-specific exchange-traded funds, we construct daily snapshots of the global financial network and analyze them for the centrality and connectedness of each country in our sample. We find evidence that the U.S. was central to the global financial system into 2018, but that the U.S.-China trade war of 2018-2019 diminished its centrality, and the Covid-19 outbreak of 2019-2020 increased the centrality of China. These indicators may be the first signals that the global financial system is moving from a unipolar to a bipolar world.
    Keywords: Network theory,Centrality,High Frequency Data,ETFs,Financial Crises,Covid-19,International Finance
    Date: 2021
  13. By: Juliane Begenau; Tim Landvoigt
    Abstract: How does the shadow banking system respond to changes in capital regulation of commercial banks? We propose a quantitative general equilibrium model with regulated and unregulated banks to study the unintended consequences of regulation. Tighter capital requirements for regulated banks cause higher convenience yield on debt of all banks, leading to higher shadow bank leverage and a larger shadow banking sector. At the same time, tighter regulation eliminates the subsidies to commercial banks from deposit insurance, reducing the competitive pressures on shadow banks to take risks. The net effect is a safer financial system with more shadow banking. Calibrating the model to data on financial institutions in the U.S., the optimal capital requirement is around 16%.
    JEL: E41 E44 G21 G23 G28
    Date: 2021–02
  14. By: Stijn Claessens; Giulio Cornelli; Leonardo Gambacorta; Francesco Manaresi; Yasushi Shiina
    Abstract: We analyse how macroprudential policies (MaPs), largely applied to banks and to a lesser extent borrowers, affect non-bank financial intermediation (NBFI). Using data for 24 of the jurisdictions participating in the Financial Stability Board's monitoring exercise over the period 2002–17, we study the effects of MaP episodes on bank assets and on those NBFI activities that may involve bank-like financial stability risks (the narrow measure of NBFI). We find that a net tightening of domestic MaPs increases these NBFI activities and decreases bank assets, raising the NBFI share in total financial assets. By contrast, a net tightening of MaPs in foreign jurisdictions leads to a reduction of the NBFI share – the effect of a drop in NBFI activities and an increase in domestic banking assets. Tightening and easing MaPs have largely symmetric effects on NBFI. We find that the effect of MaPs (both domestic and foreign) is economically and statistically significant for all those NBFI economic functions that may pose risks to financial stability.
    Keywords: macroprudential policy, non-bank financial intermediation, shadow banking, international spillovers
    JEL: G10 G21 O16 O40
    Date: 2021–02
  15. By: Theodosios Dimopoulos (University of Lausanne - School of Economics and Business Administration (HEC-Lausanne); Swiss Finance Institute); Norman Schürhoff (University of Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR))
    Abstract: In a dynamic model of optimal bailouts, we show how borrower myopia affects the severity of debt crises. Myopic borrowers misprice the option to default with a U-shaped negative pricing error. The myopia discount changes the optimal bailout policy. Myopia gets punished when the distortions from default mispricing outweigh the future bailout costs, resulting in procrastinated default and protracted crises. The model shows that (i) myopia is an important determinant for bailout policy, (ii) myopic default can be cheaper to resolve than rational default, (iii) rational agents can benefit from a myopic sovereign borrower, and (iv) credit spread dynamics are more asymmetric under myopia than rationality, consistent with empirical evidence.
    Date: 2021–02
  16. By: Jérémy Fouliard; Michael Howell; Hélène Rey
    Abstract: Financial crises cause economic, social and political havoc. Macroprudential policies are gaining traction but are still severely under-researched compared to monetary policy and fiscal policy. We use the general framework of sequential predictions also called online machine learning to forecast crises out-of-sample. Our methodology is based on model averaging and is "meta-statistic" since we can incorporate any predictive model of crises in our set of experts and test its ability to add information. We are able to predict systemic financial crises twelve quarters ahead out-of-sample with high signal-to-noise ratio in most cases. We analyse which experts provide the most information for our predictions at each point in time and for each country, allowing us to gain some insights into economic mechanisms underlying the building of risk in economies.
    JEL: E37 E44 G01
    Date: 2021–02
  17. By: Iftekhar Hasan (Fordham University, University of Sydney and Bank of Finland); Stefano Manfredonia (Università di Roma "Tor Vergata")
    Abstract: This paper investigates whether managers' personal connections help corporations to escape the productivity trap. Leveraging the heterogeneity in the severity of the Great Recession across different sectors, the paper reports that (i) the Great Recession had a negative effect on corporate productivity, (ii) the effect was long-lasting and persistent, supporting a productivity-hysteresis hypothesis, (iii) managers' personal connections are counter-cyclical and indeed allowed corporations to escape the productivity trap primarily via favorable credit conditions, in periods of high information asymmetries and tight credit constraints.
    Keywords: Social networks, Great Recession, Productivity.
    JEL: D85 G30 D24
    Date: 2021–03–10
  18. By: Claudiu ALBULESCU; Camélia TURCU
    Keywords: , productivity, R&D firms, corporate finance and governance, panel quantile regression, Romania
    Date: 2020
  19. By: Benjamin M. Bolker; Matheus R. Grasselli; Emma Holmes
    Abstract: We conduct a sensitivity analysis of a new type of integrated climate-economic model recently proposed in the literature, where the core economic component is based on the Goodwin-Keen dynamics instead of a neoclassical growth model. Because these models can exhibit much richer behaviour, including multiple equilibria, runaway trajectories and unbounded oscillations, it is crucial to determine how sensitive they are to changes in underlying parameters. We focus on four economic parameters (markup rate, speed of price adjustments, coefficient of money illusion, growth rate of productivity) and two climate parameters (size of upper ocean reservoir, equilibrium climate sensitivity) and show how their relative effects on the outcomes of the model can be quantified by methods that can be applied to an arbitrary number of parameters.
    Date: 2021–03
  20. By: Stefano Carattini; Garth Heutel; Givi Melkadze
    Abstract: We study climate and macroprudential policies in an economy with financial frictions. Using a dynamic stochastic general equilibrium model featuring both a pollution market failure and a market failure in the financial sector, we explore transition risk – whether ambitious climate policy can lead to macroeconomic instability. It can, but the risk can be alleviated through macroprudential policies – taxes or subsidies on banks’ assets. Then, we explore efficient climate and macroprudential policy in the long run and over business cycles. The presence of financial frictions affects the steady-state value and dynamic properties of the efficient carbon tax. Macroprudential policy alone, without a carbon tax, is not very effective at addressing the pollution externality.
    JEL: E32 G18 Q58
    Date: 2021–03
  21. By: Nudrat Faria Shreya
    Abstract: The recent collapse of several microfinance sectors as well as the current COVID-19 pandemic has given rise to a growing concern about the risk of multiple borrowing among microcredit clients in developing countries. Researchers argue that availability of multiple sources of credit has tempted clients to take multiple loans simultaneously, and subsequently default on loans. However, there is little empirical evidence on the impact of multiple borrowing on welfare. Using a spatial fuzzy regression discontinuity design, in this paper I empirically study the impact of an additional source of credit on outstanding and delinquent debt and monthly income by comparing individuals with access to two sources of credit with individuals with access to a single source of credit. In addition, I find that access to an additional source of credit leads to a reduction in a borrower’s outstanding debt by USD 44.75 and a decline in number of outstanding loans by 0.07. However, an additional source of credit has no effect on delinquent debt or monthly income of borrowers. In addition, I provide evidence of no effect of outstanding debt on psychosocial wellbeing of borrowers in terms of their happiness, life satisfaction, financial satisfaction and health satisfaction.
    Keywords: microfinance; multiple borrowing; indebtedness; outstanding debt; psychosocial wellbeing; regression discontinuity design
    JEL: G21 G51 I31
    Date: 2021–02

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