nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2021‒04‒12
nineteen papers chosen by
Georg Man

  1. Inflation, endogenous quality increment, and economic growth By Zheng, Zhijie; Hu, Ruiyang; Yang, Yibai
  2. Dispersion in Financing Costs and Development By Tiago V. Cavalcanti; Joseph P. Kaboski; Bruno S. Martins; Cezar Santos
  3. Debt-led growth and its financial fragility: an investigation into the dynamics of a supermultiplier model By Joana David Avritzer
  4. Household debt, aggregate demand, and instability in a Stock-Flow model By Francesco Ruggeri
  5. Procyclical Leverage and Crisis Probability in a Macroeconomic Model of Bank Runs By Daisuke Ikeda; Hidehiko Matsumoto
  6. Measuring Systemic Risk in South African Banks By Somnath Chatterjee; Marea Sing
  7. Has financial inclusion made the financial sector riskier? By Ozili, Peterson K
  8. Peripherical Financialization and Premature Deindustrialization: A Theory and the Case of Brazil (2003-2015) By José Luis Oreiro; Carmem Aparecida Feijó; Lionelo Franco Punzo; João Pedro Heringer Machado
  9. The role of ICT and financial development in CO2 emissions and economic growth By Raheem, Ibrahim; Tiwari, Aviral; Balsalobre-Lorente, Daniel
  10. How can green differentiated capital requirements affect climate risks? A dynamic macrofinancial analysis By Yannis Dafermos; Maria Nikolaidi
  11. How do credit market frictions affect carbon cycles? an estimated DSGE model approach By Chan, Ying Tung; Zhao, Hong
  12. The Non-Linear Impact of Digitization on Remittances Inflow: Evidence From the BRICS By Emara, Noha; Zhang, Yuanhao
  13. The Development of Digital Economy in Indonesia By Cumala, Putri
  14. Impact of Rural Credit on Household Welfare: Evidence from a Long-Term Panel in Bangladesh By MD. Alamgir Hossain; Abdul Malek Mohammad; Zhengfei Yu
  15. BangladeshMicrofinance Competition and Multiple Borrowing:Evidence using Panel Data from Bangladesh By Minhaj Mahmud; Yasuyuki Sawada; Mari Tanaka
  16. Criteria for choosing the method of leasing finances in Small and Medium Enterprises (SMEs) in Cameroon By Thierry Kamga Tadie; Claude Essomba Ambassa; Louis Aimé Fono; Jules Sadefo Kamdem
  17. Bank profitability determinants: comparing the United States, Nigeria and South Africa By Ozili, Peterson
  18. Exchange Rate Fluctuations and Firm Leverage By Ṣebnem Kalemli-Özcan; Ilhyock Shim; Xiaoxi Liu
  19. Labor Informality and Credit Market Accessibility By Alina Malkova; Klara Sabirianova Peter; Jan Svejnar

  1. By: Zheng, Zhijie; Hu, Ruiyang; Yang, Yibai
    Abstract: This study explores the effects of monetary policy in a Schumpeterian growth model with endogenous quality increment and distinct cash-in-advance (CIA) constraints on consumption, manufacturing and R&D investment. Our results are summarized as follows. When the CIA constraint is solely on consumption expenditure, an increase in the nominal interest rate may stifle economic growth by lowering the arrival rate of innovation and stimulate it at the same time by raising the size of quality increment. An additional CIA constraint on manufacturing weakens the growth-retarding effect and enhances the growth-promoting effect, whereas an additional CIA constraint on R&D investment strengthens only the negative growth effect. The quantitative analysis finds that the relationship between inflation and growth can be either monotonically decreasing or hump-shaped, but the welfare effect of inflation is always negative.
    Keywords: Monetary Policy, Economic Growth, R&D, Endogenous Quality Increment
    JEL: E41 O30 O40
    Date: 2021–03–15
  2. By: Tiago V. Cavalcanti; Joseph P. Kaboski; Bruno S. Martins; Cezar Santos
    Abstract: Most aggregate theories of financial frictions model credit available at a single cost of financing but rationed. However, using a comprehensive firm-level credit registry, we document both high levels and high dispersion in credit spreads to Brazilian firms. We develop a quantitative dynamic general equilibrium model in which dispersion in spreads arises from intermediation costs and market power. Calibrating to the Brazilian data, we show that, for equivalent levels of external financing, dispersion has more profound impacts on aggregate development than single-price credit rationing and yields firm dynamics that are more consistent with observed patterns.
    JEL: E44 O11 O16
    Date: 2021–04
  3. By: Joana David Avritzer (Department of Economics, Connecticut College and IRID-UFRJ)
    Abstract: This paper discusses the financial sustainability of demand-led growth models. We assume a supermultiplier growth model in which household consumption is the autonomous component of demand that drives growth and discuss the financial sustainability of such dynamics of growth from the perspective of the working households. We show that for positive rates of growth the model converges to an equilibrium where worker households are accumulating debt and not wealth. We also show that when the economy is growing at a rate that is positive, and between 2% and 4.4%, the dynamics of the model also implies that households will not be able to service their debt at the point of full long run equilibrium. We then conclude that this household debt-financed consumption pattern of economic growth generates an internal dynamic that leads to financial instability.
    Keywords: Household debt dynamics, debt-financed consumption, growth and financial fragility
    JEL: E11 E12 E21 O41
    Date: 2021–03
  4. By: Francesco Ruggeri (Department of Social Sciences and Economics, Sapienza University of Rome)
    Abstract: This paper aims to study the effect of the increase in households’ debt on the economy. Starting from some empirical facts we develop a theoretical model that tries to replicate some of the dynamics in place in Anglo-Saxon economies before the financial crisis. In the model, we emphasize the role played by changing behavioural attitudes towards consumption and demand for loans by households that have led to an increase in financial instability in some advanced economies. The model is able to show the Janus-like faces of households’ debt: borrowing to finance consumption increases the level of aggregate demand and income, as in the standard Keynesian model and the multiplier-accelerator model by Samuelson, but at the same time fresh borrowing increases the level of the stock of debt. The stock of debt puts contractionary pressure on the aggregate demand because the repayment affects money balances and transfers resources from the high propensity to spend agents, to the low propensity to spend agents. The interaction of these phenomena creates a “predator-prey” type model in which fresh borrowing increases income, which feeds the ability to borrow more and consume; at the same time, the stock of accumulated debt “preys” on income due to the contractionary forces of the repayment mechanism.
    Keywords: households’ debt, consumption, credit supply, financial instability.
    JEL: E02 E12 E21 E32
    Date: 2021–03
  5. By: Daisuke Ikeda (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Hidehiko Matsumoto (Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, Assistant Professor, National Graduate Institute for Policy Studies, E-mail:
    Abstract: A macroprudential perspective posits a link between bank fundamentals and the likelihood of banking crises. We articulate this link by developing a dynamic general equilibrium model that features bank runs in a global game framework. The model endogenizes the probability of bank runs as a function of bank fundamentals, leverage in particular. The model generates procyclical leverage and shows that credit growth tends to precede banking crises, replicating the empirical finding of Schularick and Taylor (2012). Countercyclical leverage restrictions can improve social welfare by reducing the crisis probability despite dampening economic activities in normal times.
    Keywords: Banking crises, global games, macroprudential policy
    JEL: E32 E44 G21 G28
    Date: 2021–03
  6. By: Somnath Chatterjee; Marea Sing
    Abstract: MeasuringSystemicRiskinSouthAfricanBanks
    Date: 2021–04–06
  7. By: Ozili, Peterson K
    Abstract: This paper examines whether high levels of financial inclusion is associated with greater financial risk. The findings reveal that higher account ownership is associated with greater financial risk through high nonperforming loan and high cost inefficiency in the financial sector of developed countries, advanced countries and transition economies. Increased use of debit cards, credit cards and digital finance products reduced risk in the financial sector of advanced countries and developed countries but not for transition economies and developing countries. The findings also show that the combined use of digital finance products with increased formal account ownership improves financial sector efficiency in developing countries while the combined use of credit cards with increased formal account ownership reduces insolvency risk and improves financial sector efficiency in developing countries.
    Keywords: financial inclusion, digital finance, Fintech, financial technology, nonperforming loans, efficiency, financial innovation, insolvency risk, credit card, debit card, formal accounts, account ownership, black swan
    JEL: G21 G28 O31
    Date: 2021
  8. By: José Luis Oreiro (None); Carmem Aparecida Feijó; Lionelo Franco Punzo; João Pedro Heringer Machado
    Abstract: The main objective of this paper is to discuss the concept of financialization in developing economies, arguing that the broad definition of financialization - understood as a growing role of motivations, markets and financial institutions in the operation of domestic and international economies – does not take into consideration important features of those economies, such as the hierarchy of currencies and the subordination to the principles of the so-called Washington Consensus. The latter imposed the adoption of a foreign savings-driven growth model, which mostly applied to Latin American countries. Hence, the financialization process in LDCs will be denominated peripherical financialization, since it is associated with dependence upon capital inflows from developed countries and with the reduction in the autonomy of their macroeconomic policies, even within flexible exchange rate regimes. Attraction of capital inflows to countries with a subordinate position in international financial markets, requires high interest rate differentials which have as side effect a trend to the overvaluation of real exchange rates. This creates a trap, high interest rates with an associated overvalued exchange rate. This trap reduces policy space, turning procyclical even fiscal policy. Moreover, the overvaluation of real exchange rate reduces price competitiveness of the manufacturing industry, becoming the main drive toward these countries’ premature deindustrialization. It will be shown that the macroeconomic performance of the Brazilian economy in the period 2003-2015 fits almost perfectly this model of peripherical financialization.
    Keywords: Financialization, Premature Deindustrialization, high interest rate-overvalued exchange rate trap
    JEL: O11 O14 O16
    Date: 2021–02
  9. By: Raheem, Ibrahim; Tiwari, Aviral; Balsalobre-Lorente, Daniel
    Abstract: This study explores the role of the information and communication technology (ICT) and financial development (FD) in both carbon emissions and economic growth for the G7 countries for the period 1990 to 2014. Using PMG, we found that the ICT has a long-run positive effect on emissions, while FD is a weak determinant. The interactive term between the ICT and FD produces negative coefficients. Also, both the variables are found to impact negatively on economic growth. However, their interaction shows that they have mixed effect on economic growth, i.e., positive in the short run and negative in the long run. Policy implications were designed based on these results.
    Keywords: T . Financial development . Carbon emissions . Economic growth . G7 countries
    JEL: C0 O3
    Date: 2020
  10. By: Yannis Dafermos; Maria Nikolaidi
    Abstract: Using an ecological macrofinancial model, we explore the potential impact of the ‘green supporting factor’ (GSF) and the ‘dirty penalising factor’ (DPF) on climate-related financial risks. We identify the transmission channels by which these green differentiated capital requirements (GDCRs) can affect credit provision and loan spreads, and we analyse these channels within a dynamic framework in which climate and macrofinancial feedback effects play a key role. Our main findings are as follows. First, GDCRs can reduce the pace of global warming and decrease thereby the physical financial risks. This reduction is quantitatively small, but is enhanced when the GSF and the DPF are implemented simultaneously or in combination with green fiscal policies. Second, the DPF reduces banks' credit provision and leverage, making them less fragile. Third, both the DPF and the GSF generate some transition risks: the GSF increases bank leverage because it boosts green credit and the DPF increases loan defaults since it reduces economic activity. These effects are small in quantitative terms and are attenuated when there is a simultaneous implementation of the DPF and the GSF. Fourth, fiscal policies that boost green investment amplify the transition risks of the GSF and reduce the transition risks of the DPF; the combination of green fiscal policy with the DPF is thereby a potentially effective climate policy mix from a financial stability point of view.
    Keywords: : stock-flow consistent modelling, climate change, financial stability, green financial regulation
    JEL: E12 E44 G18 Q54
    Date: 2021–03
  11. By: Chan, Ying Tung; Zhao, Hong
    Abstract: Recessions associated with financial crises have become common in the US since 1990. This paper examines the importance of the financial frictions for US carbon emissions dynamics. Our empirical analysis reveals that financial market conditions have a substantial and nonlinear impact on carbon emissions dynamics. We build and estimate an environmental dynamic stochastic general equilibrium model that features financial frictions and a risk shock (a type of credit shock). The results show that: (i) the presence of financial frictions doubles the volatility of carbon emissions under positive TFP and government expenditure shocks; (ii) the risk shock generates counterfactual paths that can largely replicate the movements in emissions growth; (iii) the contribution share of the risk shock to emissions growth dynamics reaches a peak of around 50% after each recession; (iv) the optimal carbon tax rate response to shocks heavily depends on the Taylor rule specification.
    Keywords: Carbon tax; financial accelerator; business cycles
    JEL: E32 E44 Q51
    Date: 2019–08–16
  12. By: Emara, Noha; Zhang, Yuanhao
    Abstract: Due to the impact of COVID-19, it is important now more than ever to analyze the relationship between the improvement in digitization and the flow of remittances in order to fill the void that has come as a result of stay at home and quarantine orders. Using a comprehensive measure of digitization that encompasses the commonly used proxies of financial technology (Fintech) and employing a System Generalized Method of Moments (GMM) panel estimation methodology on annual data over the period 2004-2018, this paper examines the impact of digitization, as a proxy of Fintech, on the inflow of remittances for a sample of 34 developed and developing countries. Our analysis provides a case study on Brazil, Russia, India, China and South Africa (BRICS), known as five emerging markets with a great number of workers out of abroad and below the average level of digital transfers. Using the Digital Ecosystem Development Index developed by Katz and Calorda (2018), the results of the paper uncover a statistically significant nonlinear relationship between the improvement in digitization measures and the inflow of remittances with an exact threshold level. More specifically, our results for the full sample indicate that improvement in digitization may initially increase the remittances inflow leading to an increase in the stock of remittances received. Nevertheless, once the digitization index reaches its threshold level further improvement in digitization tends decrease as penetration increases, giving rise to a decline in the rate of remittances inflow. This result implies that the marginal effect of the digital penetration is larger when at its lower level, before the threshold level. For countries such as the BRICS, with a level of digitization below the average of our sample, policy makers should apply more aggressive and comprehensive policies to recoup the maximum gains of a digital ecosystem. Hence, our policy implications are directed towards increasing the investments in developing human capacity including carrying different skill development training programs to prepare individuals for the information age, expanding the internet coverage and speed especially in educational establishments, encouraging the use and access of electronic banking by consumers, producers, and governments, and taking cyber security and fraud protection more seriously to encourage the flow of remittances, especially in light of its renewed utility due to the recent pandemic.
    Keywords: Remittances; Digitization; FinTech; Financial Inclusion; BRICS
    JEL: C23 G21 O47
    Date: 2020–10–21
  13. By: Cumala, Putri
    Abstract: The Development of Digital Economy in Indonesia
    Date: 2021–03–21
  14. By: MD. Alamgir Hossain; Abdul Malek Mohammad; Zhengfei Yu
    Abstract: Access to rural credit has long been considered a potential solution to ease liquidity constraints and improve household welfare in Bangladesh.Earlier studies on rural credit mostly focused on the impact of microfinance; however, the available results could not provide conclusive findings and failed to suggest how different sources of credit, namely, banks, microfinance institutes, and informal channels affect household welfare in the long term. This study aims to evaluate the long-term impact of different rural credit sources on household welfare indicators. To generate evidence, we use five-round (1988, 2000, 2004, 2008, and 2014) panel datasets of a nationally representative sample survey. We use a household-level panel fixed-effect model to estimate the impact on different outcome indicators. The results suggest that access to rural credit from any source has no significant impact on the increase in the household economic welfare in the long term. However, in the short term, access to bank credit increases the access to rented-in land, improves rice yield, and enhances girls' school enrollment among rural households. The impact estimates are found to be consistent across different model specifications, implying the robust internal validity of the study results. Key words: Long-term impact, panel data, rural credit sources, rural households, economic welfare, Bangladesh.
    Date: 2021–03
  15. By: Minhaj Mahmud; Yasuyuki Sawada; Mari Tanaka
    Abstract: This paper examines the causes and consequences of multiple borrowing in rural Bangladesh using long-term household and village panel data covering the years 2000 to 2014. Our empirical analysis reveals that sharply growing number of microfinance institutions (MFIs) in a wider set of villages over time, coincides with corresponding increase in household borrowing from multiple MFIs as well as households accessing loans generally. The climbing number of MFIs also explains the significant rises in the total values of household assets especially in the form of agricultural equipment. Although the increasing number of MFIs resulted in some households borrowing for the purposes of repaying previous loans, the fraction of such households is still relatively small. Overall, our results suggest that the majority of the cases of multiple borrowing are “healthy” or “solvent” overlapping loans that meet the large demand for credit for productive purposes.
    Keywords: Microfinance Institutions, Household Borrowing, Micro Business, Bangladesh
    Date: 2021–01–19
  16. By: Thierry Kamga Tadie (Université de Douala); Claude Essomba Ambassa (Université de Douala); Louis Aimé Fono (Université de Douala); Jules Sadefo Kamdem (MRE - Montpellier Recherche en Economie - UM - Université de Montpellier)
    Abstract: Small and Meduim Entreprize, crucial part of Cameroonian economic tissue, face difficulties in accessing to credit through bank in particular and credit market in general. This phenomenon leads these companies to seek alternative financing. This article aims to determine the criteria explaining the choice of finance by leasing by Cameroonian SMEs. For that, we collect data using a questionnaire from a sample of 61 SMEs in four sectors of activity (service, commerce, industry and agriculture). This sample is segmented into two groups: those that use leasing and those that do not. Analysis of the data led to two sets of results. On the one hand, there is a strong association between the age of the company and the use of leasing. On the other hand, using a multiple component analysis, factors such as age, the quality of the information disseminated by the lessor, the field of activity, the nature of the asset and of investment, performance, constraints and accessibility explain the use of leasing.
    Abstract: Les PME constituent une composante principale du tissu économique camerounais. Cependant, le phénomène de rationnement dont elles sont victimes sur le marché du crédit à cause de leur vulnérabilité les obligent à se tourner vers des financements alternatifs. Cet article vise à déterminer les critères expliquant le choix du financement par crédit-bail par les PME camerounaises. Pour y parvenir, nous avons collecté les données à partir d'un questionnaire auprès de 61 PMEs relevant de quatre secteurs d'activité (service, commerce, industrie et agricole) et segmenté en deux groupes : celles qui recourent au crédit-bail et celles qui n'y recourent pas. L'analyse des données a conduit à deux séries de résultats. On constate d'une part une association forte entre l'âge de l'entreprise et le recours au crédit-bail. D'autre part, à l'aide d'une analyse en composante multiple, les facteurs tels que l'âge, la qualité de l'information diffusée par le bailleur, le domaine d'activité, la nature de l'actif et de l'investissement, la performance, les contraintes et l'accessibilité expliquent le recours au crédit-bail.
    Keywords: Leasing,Financing,Cameroonian SMEs,Lessor,Lessee,Crédit-bail,Financement,PME camerounaise,bailleur,preneur
    Date: 2021
  17. By: Ozili, Peterson
    Abstract: This study investigates the determinants of banking sector profitability in South Africa, Nigeria and the United States. The findings reveal that cost efficiency, the size of non-performing loans and overhead cost ratio are significant determinants of the banking sector profitability. In the comparative analysis, the findings from South Africa show that the cost efficiency ratio, overhead cost to total asset ratio and non-performing loans are significant determinants of banking sector profitability. In the United States, capital adequacy ratio and the size of non-performing loans are significant determinants of banking sector profitability. In Nigeria, the overhead cost to total asset ratio and cost efficiency ratio are significant determinants of the banking sector profitability. The descriptive analysis reveal that bank net interest margin and return on asset are higher in Nigeria and lowest in the United States which suggests that the Nigerian banking sector is more profitable than the US banking sector. Return on equity is higher in South Africa and lowest in the United States.
    Keywords: banks, profitability, non-performing loans, efficiency, Nigeria, South Africa, United States.
    JEL: G20 G21 G28 G29
    Date: 2021
  18. By: Ṣebnem Kalemli-Özcan; Ilhyock Shim; Xiaoxi Liu
    Abstract: We quantify the effect of exchange rate fluctuations on firm leverage. When home currency appreciates, firms who hold foreign currency debt and local currency assets observe higher net worth as appreciation lowers the value of their foreign currency debt. These firms can borrow more as a result and increase their leverage. When home currency depreciates, the reverse happens as firms have to de-lever with a negative shock to their balance sheets. Using firm-level data for leverage from 10 emerging market economies during the period from 2002 to 2015, we show that firms operating in countries whose non-financial sectors hold more of the debt in foreign currency, increase (decrease) their leverage relatively more after home currency appreciations (depreciations). Combining the leverage data with firm-level FX debt data for 4 emerging market countries, we further show that our results hold at the most granular level. Our quantitative results are asymmetric: the effects of depreciations, that are generally associated with sudden stops, are quantitatively larger than those of appreciations, which take place at a slower pace over time during capital inflow episodes. As our exercise compares depreciations and appreciations of similar size, these results are suggestive of financial frictions being more binding during depreciations than a possible relaxation of such frictions during appreciations.
    JEL: F3
    Date: 2021–03
  19. By: Alina Malkova; Klara Sabirianova Peter; Jan Svejnar
    Abstract: The paper investigates the effects of the credit market development on the labor mobility between the informal and formal labor sectors. In the case of Russia, due to the absence of a credit score system, a formal lender may set a credit limit based on the verified amount of income. To get a loan, an informal worker must first formalize his or her income (switch to a formal job), and then apply for a loan. To show this mechanism, the RLMS data was utilized, and the empirical method is the dynamic multinomial logit model of employment. The empirical results show that a relaxation of credit constraints increases the probability of transition from an informal to a formal job, and improved CMA (by one standard deviation) increases the chances of informal sector workers to formalize by 5.4 ppt. These results are robust in different specifications of the model. Policy simulations show strong support for a reduction in informal employment in response to better CMA in credit-constrained communities.
    Date: 2021–02

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