nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2021‒05‒03
twenty-two papers chosen by
Georg Man

  1. Financial development and macroeconomic performance: a panel data approach By Cândida Ferreira
  2. Capital inflows and economic growth nexus in Sub-Saharan Africa: evidence on the role of institutions By Ndiweni, Zinzile Lorna; Bonga-Bonga, Lumengo
  3. Determinants of Foreign Direct Investment in Europe: Bayesian Model Averaging in the Presence of Weak Exogeneity By Chupryhin, Radzivon
  4. Contracts, Firm Dynamics, and Aggregate Productivity By Bernabe Lopez-Martin; David Perez-Reyna
  5. The Credit Channel Through the Lens of a Semi- Structural Model By Francisco Arroyo Marioli; Juan Sebastián Becerra; Matías Solorza
  6. Financial Consolidation and the Cyclicality of Corporate Financing By Minetti, Raoul; Moreland, Timothy; Kokas, Sotirios
  7. Global Credit Shocks and Real Economies By Helmut Herwartz; Christian Ochsner; Hannes Rohloff
  8. The Credit Composition of Global Liquidity By Helmut Herwartz; Christian Ochsner; Hannes Rohloff
  9. Breaking Bad: Supply Chain Disruptions in a Streamlined Agent Based Model By Domenico Delli Gatti; Elisa Grugni
  10. Welfare Effects of the Allocation of Talent to Financial Trading: What Does the Grossman-Stiglitz Model Say? By Lutz G. Arnold; Sebastian Zelzner
  11. Financial Access and Labor Market Outcomes: evidence from credit lotteries By Bernardus Van Doornik; Armando Gomes; David Schoenherr; Janis Skrastins
  12. Public financing with financial frictions and underground economy By Martinez, Tomás R.; Fuster Pérez, Luisa; Erosa Etchebehere, Andrés
  13. Human Capital and Startup Financing By Mauricio Medeiros Jr; Bernardus Van Doornik
  14. Social capital and small business productivity: The mediating roles of financing and customer relationships By Christopher Boudreaux; George Clarke; Anand Jha
  15. Determinants of Peer-to-Peer Lending Expansion: The Roles of Financial Development and Financial Literacy By Oh, Eun Young; Rosenkranz, Peter
  16. The Impact of Fintech Startups on Financial Institutions' Performance and Default Risk By Christian Haddad; Lars Hornuf
  17. Bank Efficiency and the Bond Markets: Evidence from the Asia and Pacific Region By Park, Donghyun; Tian, Shu; Wu, Qiongbing
  18. Impact of oil prices on remittances to Pakistan from GCC countries: evidence from panel asymmetric analysis By Abbas, Shujaat
  19. Is Mobile Money Changing Rural Africa? Evidence from a Field Experiment By Catia Batista; Pedro C. Vicente
  20. No Men, No Cry? How Gender Equality in Access to Credit Enhances Financial Stability By Caroline PERRIN; Laurent WEILL
  21. Rural Transformation, Inequality, and the Origins of Microfinance By Suesse, Marvin; Wolf, Nikolaus
  22. Circular economy, banks and other financial institutions: what’s in it for them? By Ozili, Peterson K

  1. By: Cândida Ferreira
    Abstract: Using panel fixed and random effects estimations as well as panel dynamic GMM estimations this paper analyses the contribution of the financial development, measured through the nine IMF financial development indices, to five macro performance indicators. The paper considers a panel with 46 developed countries, and a panel including only the sub-sample of the 28 EU countries, both over the interval 1990-2017. There are no remarkable differences between the results obtained for the two panels, and despite the lack of full convergence regarding the sign and strength of all estimation results, it is still possible to conclude that the IMF financial development indices have a dynamic and robust influence on all the five macro performance indicators. Overall, these indices contribute positively to the real GDP and negatively to the deflator, to the unemployment rate, to the current account, as well as to the net international investment position. There is also evidence that the results regarding the indices related to the different aspects of the financial institutions (access, depth, and efficiency) are statistically more robust than the results regarding the indices addressing the same aspects of the financial institutions.
    Keywords: Financial development; IMF financial development indices; macroeconomic performance; panel estimations; fixed and random effects estimations; panel dynamic GMM estimations.
    JEL: C33 E02 E44 G20 O43
    Date: 2021–04
  2. By: Ndiweni, Zinzile Lorna; Bonga-Bonga, Lumengo
    Abstract: This paper assesses the relationship between international capital inflows and economic growth in developing economies. We employ methods of threshold regression to examine whether capital flows have different effects in developing economies with weak institutions as compared to those with good institutional infrastructure.. Our findings show that a threshold effect exists in the capital inflows and growth nexus. More precisely, the results obtained demonstrated that the impact of capital inflows on economic growth is positive and significant once a defined threshold level of institutional quality has been exceeded. At any point below that threshold level, the capital inflows-growth relationship appears to be non- existent. These results support the notion of the capital inflows and growth relationship being contingent on the level of institutional development in an economy. Therefore, providing vital policy implications for policy makers and government in ensuring the improvement of a country’s institutional environment with the purpose of enhancing economic growth through capital flows.
    Keywords: Capital inflows, economic growth, institutional quality, threshold regression
    JEL: C13 C51 F3 F43
    Date: 2021–03–17
  3. By: Chupryhin, Radzivon
    Abstract: This paper derives the robust determinants of Foreign Direct Investment (FDI) in Europe under model uncertainty and weak exogeneity issues. For this reason, Bayesian Averaging of Limited Information Maximum Likelihood Estimates (BALIMLE) approach was utilized. The chosen methodology allows for the estimation of a dynamic panel model with fixed effects. Also, the jointness measures were computed. The considered sample includes bilateral FDI flows between 36 European countries over the 2004 – 2017 period. The empirical evidence shows the importance of the endowment theory and the significance of output per worker and labor force variables in explaining the FDI flows. A market size theory was proposed to be augmented with a relative growth hypothesis. The calculated jointness measures indicated the complementary nature of considered regressors and theories.
    Keywords: Bayesian Model Averaging, FDI, Europe, model uncertainty, weakly exogenous regressors
    JEL: F2 F21 F23 F41 F62 F66 I26 O3 O33
    Date: 2021–04–15
  4. By: Bernabe Lopez-Martin; David Perez-Reyna
    Abstract: We construct a firm-dynamics framework to evaluate the impact of the enforcement of contracts between final goods producers and intermediate goods suppliers on firm life-cycle growth, technology accumulation, and aggregate productivity. We show that contractual incompleteness implies a wedge on profits, which disincentives technology accumulation and is potentially correlated with technology, in addition to wedges on production decisions. We find that our model accounts for differences in output per worker of up to 33 percent across economies. The impact on firm life-cycle growth, the age and size distribution of firms is quantitatively significant.
    Date: 2021–04
  5. By: Francisco Arroyo Marioli; Juan Sebastián Becerra; Matías Solorza
    Abstract: In this paper, we estimate a semi-structural model with a banking sector for the Chilean economy. Our innovation consists of incorporating a system of equations that reflects the dynamics of credit, interest rate spreads and loan-loss provisions to the Central Bank of Chile’s semi-structural model “MSEP”. We estimate the model and analyze the macroeconomic effects of incorporating this sector. We find that the banking sector plays a role in accelerating the business cycle through lower spreads and procyclical credit supply, in contrast to the counter-cyclical role it has had in COVID-19 crisis. Additionally, we decompose the effects of this sector’s variables in the historical business cycle. We find that credit growth can explain on average about 0.3 pp of total output gap variation. Moreover, we find that in episodes of severe stress, this role can grow to 1.9 pp, as has been the case of the COVID-19 pandemic. This last fact is important, given that in many cases, monetary policy is faced with the challenge of implementing non-conventional measures, many of them through the commercial banking sector. We find that this specification allows the model to better quantify the impact of measures that have favored the flow of credit specially in periods of stress.
    Date: 2021–04
  6. By: Minetti, Raoul (Michigan State University, Department of Economics); Moreland, Timothy (Michigan State University, Department of Economics); Kokas, Sotirios (Essex Business School, University of Essex)
    Abstract: We study the impact of the concentration and complexity of the banking sector on firms' financing and investment behavior over the business cycle. We find that, after the late 1990s, while debt issuance remained procyclical for U.S. firms of all sizes, equity issuance and liquidity accumulation switched from countercyclical to procyclical for small and medium-sized publicly-traded firms. Using matched firm-bank data, we provide evidence that bank consolidation contributed to this change. We rationalize these findings in a general equilibrium business cycle model. After bank consolidation, the weakening in firms' bargaining power and relational ties with banks enhances firms' precautionary demand for liquidity and equity issuance incentives following positive shocks. The change in financing behavior increases investment and employment sensitivity to aggregate productivity shocks.
    Keywords: Financial frictions; business cycles; nancial structure; credit shocks
    JEL: E22 E32 E44 G32
    Date: 2021–04–06
  7. By: Helmut Herwartz (University of Goettingen); Christian Ochsner (University of Goettingen); Hannes Rohloff (University of Goettingen)
    Abstract: We estimate the marginal effects of identified components of global liquidity on 43 real economies. To this end, we employ global public and private credit components of Herwartz, Ochsner, and Rohloff (2021) in factor-augmented vector-autoregressions to trace credit shocks through the real economy (output, inflation and unemployment). Specifically, two components of global credit boost the business cycle and lower unemployment in the short-run, namely government credit demand and business credit supply, whereas household credit supply is found to deteriorate output. We find substantial heterogeneity with respect to prevalence and amplitude of global sectoral credit effects on real aggregates within the time and cross-sectional (country) dimension.
    Keywords: Credit shocks, credit composition, real economy, structural VAR, FAVAR
    JEL: C22 E32 E44 E51
    Date: 2021
  8. By: Helmut Herwartz (University of Goettingen); Christian Ochsner (University of Goettingen); Hannes Rohloff (University of Goettingen)
    Abstract: We conceptualize global liquidity as global monetary policy and credit components by means of a large-scale dynamic factor model. Going beyond previous work, we decompose aggregate credit components into credit supply and demand flows directed at businesses, households and governments. We show that this decomposition enhances the understanding of global liquidity considerably. Whereas global government sector credit supply is best understood as a safe-haven lending factor from an investors perspective, lenders supply the businesses and households with credit to maximize profits along the financial cycle. Moreover, the government sector demands credit in times of bust-episodes, whereas private entities demand credit in times of booms. In particular, we find that our global credit estimates explain substantial variance shares of a large panel of international financial aggregates.
    Keywords: global liquidity, credit composition, nancial cycle, dynamic factor model
    JEL: C32 C38 E32 E44 E51
    Date: 2021
  9. By: Domenico Delli Gatti; Elisa Grugni
    Abstract: We explore the macro-financial consequences of the disruption of a supply chain in an agent based framework characterized by two networks, a credit network connecting banks and firms and a production network connecting upstream and down-stream firms. We consider two scenarios. In the first one, because of the lockdown all the upstream firms are forced to cut production. This generates a sizable down-turn during the lockdown due to the indirect effects of the shock (network based financial accelerator). In the second scenario, only those upstream firms located in the “red zone” are forced to contract production. In this case the recession is milder and the recovery begins earlier. Upstream firms hit by the shock, in fact, will be abandoned by their customers who will switch to suppliers who are located outside the red zone. In this way firms endogenously reconstruct (at least in part) the supply chain after the disruption. This is the main determinant of the mitigated impact of the shock in the “red zone” type of lockdown.
    Keywords: supply chain disruption, agent based macroeconomic model
    JEL: E17 E44 E70
    Date: 2021
  10. By: Lutz G. Arnold; Sebastian Zelzner
    Abstract: This paper investigates the implications of the Grossman-Stiglitz (1980) model on the informational eficiency of financial markets for the optimality of the allocation of talent to financial trading versus entrepreneurship. Informed traders make the financial market more informationally eficient, entrepreneurs create output and jobs. The model indicates that financial trading attracts too much, rather than too little, talent.
    Keywords: : market eficiency, asymmetric information, allocation of talent, occupational choice
    JEL: G14 J24
    Date: 2020–02
  11. By: Bernardus Van Doornik; Armando Gomes; David Schoenherr; Janis Skrastins
    Abstract: We assess the employment and income effects of access to credit dedicated to investment in individual mobility (a motorcycle). For identification, we exploit random time-series variation in access to credit through random lotteries for participants in a group-lending mechanism in Brazil. We find that access to credit for investment in individual mobility permanently increases formal employment rates and salaries, yielding an annual real rate of return of 16.94 percent over a ten-year horizon. Consistent with a geographically broader job search, we find that individuals transition to jobs further away from home and public transportation. Our results suggest that credit constraints prevent individuals from accessing parts of the labor market. As a consequence, extending credit for investment in mobility enables individuals to access geographically distant labor market opportunities, yielding high and persistent returns.
    Date: 2021–04
  12. By: Martinez, Tomás R.; Fuster Pérez, Luisa; Erosa Etchebehere, Andrés
    Abstract: What are the aggregate effects of informality in a financially constrained economy? We develop and calibrate an entrepreneurship model to data on matched employer-employee from both formal and informal sectors in Brazil. The model distinguishes between informality on the business side (extensive margin) and the informal hiring by formal firms (intensive margin). We find that when informality is eliminated along both margins, aggregate output increases 9.3%, capital 14.7%, TFP 5.4%, and tax revenue37%. The output and TFP increases would be much larger if informality were only eliminated on the extensive margin, a result that supports the view that the informal economy can play a positive role in an economy with financial frictions. Finally, we find that the output cost of financing social security in our baseline model is about twice as large as the one in an economy with no frictions.
    Keywords: Tax Revenue; Social Security; Financial Frictions; Informality; Occupational Choice
    JEL: O16 L26 H55 H20 E26 E22
    Date: 2021–04–27
  13. By: Mauricio Medeiros Jr; Bernardus Van Doornik
    Abstract: We establish the relevance of human capital to startup financing. Using administrative databases from the Central Bank of Brazil, we obtain information on private firms, their founders and their access to bank credit. Our empirical strategy is based on the premature death of founders, which allows us to identify how losing founders’ human capital affects startup financing. The results show that once a founder dies unexpectedly, there is a decrease in the amount of credit and an increase in interest rates and default rates. These findings are mainly driven by the death of founders who are also managers in the firm, which is consistent with the theory of founders contributing critical resources to their firms.
    Date: 2021–04
  14. By: Christopher Boudreaux; George Clarke; Anand Jha
    Abstract: How does an entrepreneur's social capital improve small informal business productivity? Although studies have investigated this relationship, we still know little about the underlying theoretical mechanisms driving these findings. Using a unique Zambian Business Survey of 1,971 entrepreneurs administered by the World Bank, we find an entrepreneur's social capital facilitates small business productivity through the mediating channels of firm financing and customer relationships. Our findings identify specific mechanisms that channel social capital toward an informal business' productivity, which prior studies have overlooked.
    Date: 2021–04
  15. By: Oh, Eun Young (University of Portsmouth); Rosenkranz, Peter (Asian Development Bank)
    Abstract: To explore the determinants of peer-to-peer (P2P) lending expansion, this study examines factors that impact P2P lending using a sample of 62 economies over the period 2015–2017. We investigate the effects of financial development and financial literacy on the expansion of P2P lending. The level of development of financial institutions is assessed by access, efficiency, and depth. We find that financial institutions’ efficiency, financial literacy, and lower branch and ATM penetration are positively related with the expansion of P2P lending. This finding suggests that P2P lending can fill funding gaps in economies where traditional financial institutions may be less available, and thus promote financial inclusion. We also find that better information technology infrastructure and high new business density are positively associated with the expansion of P2P lending, suggesting that physical infrastructure is an essential prerequisite for it, while this is more likely to happen in dynamic business environments.
    Keywords: financial development; financial literacy; fintech; peer-to-peer lending
    JEL: E51 G23 G53 N20 O33
    Date: 2020–03–19
  16. By: Christian Haddad; Lars Hornuf
    Abstract: We study the impact fintech startups have on the performance and the default risk of traditional financial institutions. We find a positive relationship between fintech startup formations and incumbent institutions’ performance for the period from 2005 to 2018 and a large sample of financial institutions from 87 countries. We further analyze the link between fintech startup formations and the default risk of traditional financial institutions. Fintech startup formations decreases stock return volatility of incumbent institutions and decreases the systemic risk exposure of financial institutions. Our findings indicate that the development of fintech startups should be monitored very closely by legislators and financial supervisory authorities, because fintechs not only have a positive effect on the financial sector’s performance, but can also improve financial stability relative to the status quo.
    Keywords: fintech, bank performance, default risk, financial stability
    JEL: K00 L26 O30
    Date: 2021
  17. By: Park, Donghyun (Asian Development Bank); Tian, Shu (Asian Development Bank); Wu, Qiongbing (Western Sydney University)
    Abstract: This study examines the impact of bond markets on both bank profit and cost efficiency. By employing the stochastic frontier approach and utilizing a large micro dataset for 926 banks covering 27 economies from the Asia and Pacific region over the period from 2004 to 2017, we find that both the bond market development and bond market structure are relevant to bank efficiency. The development of bond markets generally has a positive (negative) effect on bank profit (cost) efficiency. Given the development level of the aggregate bond market, increasing the proportion of corporate bonds will enhance both bank profit and cost efficiency. Moreover, given the development level of a country’s corporate bond market, a greater share of local currency corporate bonds is significantly and positively related to both bank profit and cost efficiency. In addition, increasing share of bank-issued corporate bonds in corporate bonds significantly increases (decreases) bank profit (cost) efficiency. Overall, our results point to the significant importance of local currency corporate bonds to the overall bank efficiency. Our findings provide important implications for both policy makers and bank management.
    Keywords: Asia and Pacific region; bank efficiency; bond market development; bond market structure; stochastic frontier analysis
    JEL: D20 G21 G28
    Date: 2020–03–16
  18. By: Abbas, Shujaat
    Abstract: International migration and remittances from oil-exporting Gulf countries are important sources of employment, income, and foreign exchange for Pakistan. This study investigates the asymmetric impact of oil prices on remittances to Pakistan from GCC countries, over the period 1980 to 2018, by employing the recently advanced non-linear panel Pooled Mean Group (PMG) model. The findings show that oil prices and remittance are asymmetrically associated. The increasing oil prices have a significant positive effect only in the long run; whereas, reducing oil prices reveal a significant negative effect only in the short run. Findings of other explanatory variables show that the economic condition in host countries, exchange rate, and trade relations have positive effects only in the long run; whereas the economic condition in the home country has significant negative effects in the long run and positive effect in the short run. This study urges oil exports to stabilize oil supply and prices, and Pakistan to enhance trade relations, exchange rate adjustments, and financial development
    Keywords: Energy prices, remittances flow, asymmetric analysis, panel data, Pakistan
    JEL: F22 F24 Q4
    Date: 2020
  19. By: Catia Batista (Nova School of Business and Economics, CReAM, IZA and NOVAFRICA); Pedro C. Vicente (Nova School of Business and Economics, BREAD, and NOVAFRICA)
    Abstract: Rural areas in sub-Saharan Africa are typically underserved by financial services. We measure the economic impact of introducing mobile money for the first time in rural villages of Mozambique using a randomized control trial. This intervention led to consumption smoothing through increased transfers as a response to both geo-referenced village-level floods and household-level idiosyncratic shocks. Importantly, we find that the availability of mobile money increased migration out of rural areas, where we observe lower agricultural activity and investment. Our work illustrates how financial inclusion can accelerate African urbanization and structural change while improving welfare in rural areas.
    Keywords: mobile money, migration, remittances, technology adoption, insurance, consumption smoothing, investment, savings, Mozambique, Africa.
    JEL: O12 O15 O16 O33 G20 R23
    Date: 2021–04
  20. By: Caroline PERRIN (LaRGE Research Center, Université de Strasbourg); Laurent WEILL (LaRGE Research Center, Université de Strasbourg)
    Abstract: Literature has found that women outperform men in terms of loan repayment. We can therefore question whether more gender equality in access to credit fosters financial stability. We test this hypothesis using cross-country data on financial inclusion from the World Bank’s Global Findex database and bank-level data on financial stability. We perform regressions at the bank level to check if the female-to-male ratio of access to credit affects financial stability. We find evidence that the gender gap in access to credit exerts a detrimental influence on financial stability. This finding is confirmed in robustness checks that control for alternative measures of financial stability and endogeneity. Therefore our findings support the view that enhancing access to credit for women relative to men is beneficial for financial stability.
    Keywords: financial inclusion, access to credit, financial stability, gender equality.
    JEL: G21 J16
    Date: 2021
  21. By: Suesse, Marvin (Trinity College Dublin); Wolf, Nikolaus (HU Berlin and CEPR)
    Abstract: What determines the development of rural financial markets? Starting from a simple theoretical framework, we derive the factors shaping the market entry of rural microfinance institutions across time and space. We provide empirical evidence for these determinants using the expansion of credit cooperatives in the 236 eastern counties of Prussia between 1852 and 1913. This setting is attractive as it provides a free market benchmark scenario without public ownership, subsidization, or direct regulatory intervention. Furthermore, we exploit features of our historical set-up to identify causal effects. The results show that declining agricultural staple prices, as a feature of structural transformation, leads to the emergence of credit cooperatives. Similarly, declining bank lending rates contribute to their rise. Low asset sizes and land inequality inhibit the regional spread of cooperatives, while ethnic heterogeneity has ambiguous effects. We also offer empirical evidence suggesting that credit cooperatives accelerated rural transformation by diversifying farm outputs.
    Keywords: microfinance; credit cooperatives; rural transformation; land inequality; prussia;
    JEL: G21 N23 O16 Q15
    Date: 2019–12–04
  22. By: Ozili, Peterson K
    Abstract: In this paper, I highlight the benefit of the circular economy to banks and other financial institutions. The paper uses discourse analysis methodology to present an overview of the circular economy concept and the benefit of the circular economy to banks and other financial institutions. The findings show that some benefit of the circular economy to banks include: (i) greater loan diversification opportunities, (ii) promotes responsible and sustainable banking, (iii) increased lending to circular clients and the recycling sector which means more profit for banks, and (iv) correcting the bad perception about banks in society. Some benefit of the circular economy to other financial institutions include: (i) issuance of special insurance policies for reused products; (ii) greater sustainability-adjusted return on investment; (iii) greater funding to microfinance institutions; and (iv) more opportunities for collaborative funding to circular businesses. This study contributes to the scant literature that examine the role of the finance industry in the circular economy.
    Keywords: circular economy, linear economy, banks, financial institutions, criticism, sustainability, climate change, waste, insurance, sustainable finance, sustainable banking, hedge funds, microfinance institutions
    JEL: G02 G21 G22 G23 G24 G29 Q01 Q20 Q32 Q54 Q56
    Date: 2021

This nep-fdg issue is ©2021 by Georg Man. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.