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on Financial Development and Growth |
| By: | Nobuhiro Kiyotaki; John Moore; Shengxing Zhang |
| Abstract: | Entrepreneurs appear to borrow largely against their near-term revenues, even when their investment has a longer horizon. In this paper, we develop a model of credit horizons. A question of particular concern to us is whether persistently low interest rates can stifle economic activity. With this in mind, our model is of a small open economy where the world interest rate is taken to be exogenous. We show that a permanent fall in the interest rate can reduce aggregate investment and growth, and even lead to a drop in the welfare of everyone in the domestic economy. We use our framework to examine how credit horizons interact with plant dynamics and the evolution of productivity. Finally, we speculate that the measurement of total investment may camouflage the true level of productive investment in plant and human capital, and give too rosy a picture of property-fuelled booms sparked by low interest rates. |
| JEL: | E44 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28742&r= |
| By: | Madeira, João; Palma, Nuno Pedro G.; van der Kwaak, Christiaan |
| Abstract: | Advanced economies tend to have large but unstable intermediation sectors. We employ a DSGE model with banks featuring limited liability to investigate how risk shocks in the financial sector affect long-run macroeconomic outcomes. With full deposit insurance, banks expand balance sheets when risk increases, leading to higher investment and output. With no deposit insurance, we observe substantial drops in long-run credit provision, investment, and output. These differences provide a novel argument in favor of deposit insurance. Finally, our welfare analysis finds that increased risk reduces welfare, except when there is full deposit insurance and deadweight costs are small. |
| Keywords: | Costly state verification; deposit insurance; endogenous leverage; intermediation; investment; limited liability; Regulation; risk |
| JEL: | E22 E44 G21 O16 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15841&r= |
| By: | Aikman, David; Bridges, Jonathan; Hacioglu Hoke, Sinem; O'Neill, Cian; Raja, Akash |
| Abstract: | Using quantile regressions applied to a panel dataset of 16 advanced economies, we examine how downside risk to growth over the medium term is affected by a set of macroprudential indicators. We find that credit and property price booms, and wide current account deficits increase downside risks 3 to 5 years ahead. However, such downside risks can be partially mitigated by increasing the capital ratio of the banking system. We show that GDP-at-Risk, defined as the the 5th quantile of the projected GDP growth distribution three years ahead, deteriorated in the US in the run-up to the Global Financial Crisis, driven by rapid growth in credit and house prices alongside a widening current account deficit. Our results suggest such indicators could provide useful information for the stance of macroprudential policy. |
| Keywords: | Financial Stability; GDP-at-Risk; local projections; macroprudential policy; quantile regressions |
| JEL: | G01 G18 G21 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15864&r= |
| By: | Diego Chicana (Central Reserve Bank of Peru); Rafael Nivin (Central Reserve Bank of Peru); |
| Abstract: | Growth at Risk (GaR) methodology developed by Adrian et al. (2019) has been of special interest by policymakers since it provides a measure of the relationship among macro-financial variables. GaR requires estimating a set of predictive quantile regressions (QR) where future economic activity (GDP growth) is linked to current financial conditions, measured through a set of alternative market or bank related indicators. As GaR methodology increased in popularity among policymakers, recent literature has stressed the need of model evaluation of GaR results. For instance, Reichlin et al. (2020) evaluate the out-of-sample performance of a GaR model and find little evidence of predictability beyond what can be achieved using timely indicators of the real economy. Moreover, Brownlees and Souza (2020) use a Garch-type model to forecast the distribution of future economic growth, and compare their forecasting power against GaR model, finding that a Garch-type model outperforms a GaR model. Taking into consideration the need for a proper evaluation of GaR results, our work implements several model evaluation techniques to increase the accuracy of a Growth at Risk model for the Peruvian Economy. Considering a broad sample of parametric and nonparametric distributions to fit the GaR results, we use log scoring, probability integral transform and entropy tests as model evaluation tools to select the best density forecast that fits Peruvian data. Once we obtain a more reliable GaR results, we use this model to implement a counterfactual analysis to evaluate the impact of Reactiva Peru, a government program that support the credit to firms during the lockdown due the Covid-19 crisis. Our results show that Reactiva Peru had a sizable impact in macroeconomic and financial stability, since it avoided a much deeper decrease in economy activity during the covid-19 crisis. |
| Keywords: | Growth-at-risk, financial stability, quantile regression |
| JEL: | C21 C22 C32 C38 C52 |
| Date: | 2021–04–28 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp07-2021&r= |
| By: | Daan Opschoor (Erasmus University Rotterdam); Dick van Dijk (Erasmus University Rotterdam); Philip Hans Franses (Erasmus University Rotterdam) |
| Abstract: | We analyze output growth risk with respect to financial conditions across U.S. manufacturing industries. Using a multi-level quantile regression approach, we find strong heterogeneity in growth risk, particularly between the more vulnerable durable goods sector and the more resilient nondurable goods sector. Moreover, we show that industry characteristics significantly explain these differences. Large, or material intensive durable goods producing, or energy intensive nondurable goods producing industries are more vulnerable to adverse financial conditions, while industries engaging in labor hoarding, or with a high capital or overhead labor intensity are less susceptible. |
| Keywords: | downside risk, business cycle, quantile regression, manufacturing, financial conditions |
| JEL: | C21 E32 E44 L16 L60 |
| Date: | 2021–05–04 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20210036&r= |
| By: | Tarek A. Hassan (Boston University); Jesse Schreger (Columbia University); Markus Schwedeler (Boston University); Ahmed Tahoun (London Business School) |
| Abstract: | We construct new measures of country risk and sentiment as perceived by global investors and executives using textual analysis of the quarterly earnings calls of publicly listed firms around the world. Our quarterly measures cover 45 countries from 2002-2020. We use our measures to provide a novel characterization of country risk and to provide a harmonized definition of crises. We demonstrate that elevated perceptions of a country's riskiness are associated with significant falls in local asset prices and capital outflows, even after global financial conditions are controlled for. Increases in country risk are associated with reductions in firm-level investment and employment. We also show direct evidence of a novel type of contagion, where foreign risk is transmitted across borders through firm-level exposures. Exposed firms suffer falling market valuations and significantly retrench their hiring and investment in response to crises abroad. Finally, we provide direct evidence that heterogeneous currency loadings on global risk help explain the cross-country pattern of interest rates and currency risk premia. |
| Keywords: | country risk, contagion, investment, employment, textual analysis, earnings calls |
| JEL: | D21 F23 F30 G15 |
| Date: | 2021–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:thk:wpaper:inetwp157&r= |
| By: | Matthias Rottner |
| Abstract: | Motivated by the build-up of shadow bank leverage prior to the Great Recession, I develop a nonlinear macroeconomic model that features excessive leverage accumulation and show how this can cause a bank run. Introducing risk-shifting incentives to account for fluctuations in shadow bank leverage, I use the model to illustrate that extensive leverage makes the shadow banking system runnable, thereby raising the vulnerability of the economy to future financial crises. The model is taken to U.S. data with the objective of estimating the probability of a run in the years preceding the financial crisis of 2007-2008. According to the model, the estimated risk of a bank run was already considerable in 2004 and kept increasing due to the upsurge in leverage. I show that levying a leverage tax on shadow banks would have substantially lowered the probability of a bank run. Finally, I present reduced-form evidence that supports the tight link between leverage and the possibility of financial crises. |
| Keywords: | Financial crises, Shadow banks, Leverage, Credit booms, Bank runs |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2021/02&r= |
| By: | Gersbach, Hans |
| Abstract: | What happens when banks compete with deposit and loan contracts contingent on macroeconomic shocks? We show that the private sector insures the banking system efficiently against banking crises through such contracts when banks focus on expected profit maximization and failing banks go bankrupt. When risks are large, banks may shift part of the risk to depositors who receive state-contingent contracts. Repackaging of the risk among depositors can improve welfare. In contrast, when failing banks are rescued, new phenomena such as risk creation or magnification emerge, which would not occur with non-contingent contracts. In particular, depositors receive non-contingent contracts with comparatively high interest rates, while entrepreneurs obtain loan contracts that demand high repayment in good times and low repayment in bad times. As a result, banks overinvest and generate large macroeconomic risks, even if the underlying productivity risk is small or zero. |
| Keywords: | Financial intermediation - Macroeconomics risks - State-contingent contracts - Banking regulation |
| JEL: | D41 E4 G2 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15884&r= |
| By: | Eberhardt, Markus; Presbitero, Andrea |
| Abstract: | Commodity prices are one of the most important drivers of output fluctuations in developing countries. We show that a major channel through which commodity price movements can affect the real economy is through their effect on banks' balance sheets and financial stability. Our analysis finds that the volatility of commodity prices is a significant predictor of banking crises in a sample of 60 low-income countries (LICs). In contrast to recent findings for advanced and emerging economies, credit booms and capital inflows do not play a significant role in predicting banking crises, consistent with a lack of de facto financial liberalization in LICs. We corroborate our main findings with historical data for 40 "peripheral" economies between 1848 and 1938. The effect of commodity price volatility on banking crises is concentrated in LICs with a fixed exchange rate regime and a high share of primary goods in production. We also find that commodity price volatility is likely to trigger financial instability through a reduction in government revenues and a shortening of sovereign debt maturity, which are likely to weaken banks' balance sheets. |
| Keywords: | banking crises; commodity prices; Low income countries; volatility |
| JEL: | F34 G01 Q02 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15959&r= |
| By: | Baron, Matthew; Laeven, Luc; Penasse, Julien; Usenko, Yevhenii |
| Abstract: | We investigate asset returns around banking crises in 44 advanced and emerging economies from 1960 to 2018. In contrast to the view that buying assets during banking crises is a profitable long-run strategy, we find returns of equity and other asset classes generally underperform after banking crises. While prices are depressed during crises and partially recover after acute stress ends, consistent with theories of fire sales and intermediary-based asset pricing, we argue that investors do not fully anticipate the consequences of debt overhang, which result in lower long-run dividends. Our results on bank stock underperformance suggest that government-funded bank recapitalizations can often lead to substantial taxpayer losses. |
| Keywords: | financial crises; fire sales; Investments; Returns |
| JEL: | G11 G14 G15 G41 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15858&r= |
| By: | Moreno Ibáñez, Antonio; Ongena, Steven; Ventula Veghazy, Alexia; Wagner, Alexander F |
| Abstract: | Is there a connection between the 2007-2009 financial crisis and the COVID-19 pandemic? To answer this question we examine the relation between both macroeconomic and financial losses derived from the financial crisis and the health outcomes associated with the first wave of the pandemic. At the European level, countries more affected by the financial crisis had more deaths relative to coronavirus cases. We find an analogous significant relation across Spanish provinces and a transmission mechanism running from finance to health outcomes through cross-sectional differences in health facilities. |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15900&r= |
| By: | Dimopoulos, Theodosios Sakis; Schürhoff, Norman |
| Abstract: | Optimal resolution of debt crises requires bailouts to account for borrowers' time-inconsistency. We show in a dynamic model of strategic default that myopic borrowers undervalue their option to default by a U-shaped error, which causes excessive leverage, imperfect consumption smoothing, underinvestment in normal times, and risk shifting in crisis times. Optimal bailouts either punish or reward myopia through smaller or larger transfers, leading to procrastinated default and protracted crises or the reverse, depending on whether financial transfers exacerbate or alleviate the borrowers' misperception of default risk. The model shows that borrowers and lenders ultimately self-inflict debt crises through their strategic interaction, myopic distress can be cheaper to resolve than rational distress, and myopia can benefit stakeholders. |
| Keywords: | bailout fund; borrower myopia; debt crisis; real options; Strategic Default; Time-Inconsistency |
| JEL: | D86 G01 G4 H63 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15781&r= |
| By: | Juan Carlos Cuestas (Department of Economics and Finance, Tallinn University of Technology, Estonia; IEI and Department of Economics, Universitat Jaume I, Castellón, Spain); Luis A. Gil-Alana (Department of Economics, University of Navarra, Spain); Maria Malmierca (Faculty of Law and Business , University Villanueva, Madrid, Spain) |
| Abstract: | In this article we investigate the degree of persistence in the credit-to-GDP ratio in 44 OECD economies in the context of nonlinear deterministic trends. In particular, we use Chebyshev’s polynomials in time, which allow us to model changes in the data in a smoother way than by structural breaks. Our results indicate that approximately one quarter of the series display non-linear structures, and only Argentina displays a mean reverting pattern. Policy implications of the results obtained are discussed at the end of the manuscript. |
| Keywords: | Chebyshev polynomials; fractional integration; persistence; private debt |
| JEL: | C22 G30 G51 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:jau:wpaper:2021/05&r= |
| By: | Buera, Francisco J; Kaboski, Joseph; Townsend, Robert M |
| Abstract: | Macroeconomic development remains an important policy goal because of its ability to lift entire populations out of poverty. In our review of the literature, we emphasize that the best way to achieve this objective is to embrace a synthesis of methods and ideas, with the science of experiments as a unifying feature. RCTs need representative data and structural modeling, and macro models need to be designed and disciplined to the realities and data of developing country economies. Macroeconomic models have key lessons for gathering and analyzing micro evidence and for moving to an evaluation of macro policy. Resource constraints, heterogeneity, general equilibrium effects, obstacles to trade, dynamics, and returns to scale can all play key roles. A synthesis for macro development is well under way. |
| Keywords: | STEG |
| JEL: | O1 O11 O12 O2 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15775&r= |
| By: | Joshua Aizenman; Yothin Jinjarak; Hien Thi Kim Nguyen; Donghyun Park |
| Abstract: | This paper examines the association between episodes of large fiscal impulses (expansions and adjustments) and sustainable development indicators (prosperity, resilience, and inclusivity). We provide country studies of Chile, Poland, South Africa, and Thailand, examining the components of government expenses and tax revenues, and reporting four stylized patterns from the analysis. (i) Fiscal expansions led to higher growth rates and reduced negative trade-offs, e.g., pollution and poor-health mortalities associated with economic growth. (ii) Fiscal adjustments led to a more inclusive economy, lowered poverty headcounts, improved sanitation, and cleaner technology access. (iii) Fiscal expansions followed an increase in direct taxes (especially corporate taxes) and a decline in social contributions, and preceded a decline in other direct taxes and an increase in wage bills. (iv) Fiscal adjustments followed a decline in other direct taxes and social contributions, an increase in wage bills, and preceded a decline in government consumption expenditure and transfers. In light of these findings, the domestic resource mobilization should consider the time paths of the taxes and expenditure components to understand their empirical linkages with the sustainable development outcomes in the respective countries. |
| JEL: | E62 F15 F41 O11 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28740&r= |
| By: | Mariia A. Elkina (National Research University Higher School of Economics) |
| Abstract: | Financial repression (FR) allows the government to save on its interest rate payments. However, forcing financial intermediaries to increase the share of government debt in their portfolios can alter transmission of macroeconomic shocks. In this paper, we raise the question whether it is the case. Simulations of a DSGE model with financial frictions indicate that the presence of FR creates an additional link between changes in government fiscal position and dynamics of corporate credit terms. Holding regulatory environment constant, if government wishes to issue more debt, it has to offer higher return on its debt and reduce its FR revenues. Lower FR revenues translate into better borrowing terms for entrepreneurs and higher private investment. Hence, FR can either amplify or dampen output response to the shock, depending on whether this shock increases or decreases government financing needs |
| Keywords: | financial repression, business cycle, government debt, general equilibrium, financial frictions. |
| JEL: | E32 E60 H60 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:hig:wpaper:246/ec/2021&r= |
| By: | Monnet, Eric; Puy, Damien |
| Abstract: | We estimate world cycles using a new quarterly macro-financial dataset assembled using IMF archives, covering a large set of countries since 1950. World cycles, real and financial, exist and US shocks drive them. But their strength is modest for GDP and credit. Global financial cycles are much weaker for credit than for asset prices. We also challenge the view that synchronization has increased with globalization. Although this is true for prices (goods and assets), it is not for quantities (output and credit). World business and credit cycles were as strong during Bretton Woods (1950-1972) as during the Globalization period (1982-2006). We investigate the economic and financial forces driving our results, connect them to the existing literature and discuss important policy implications. |
| Keywords: | business cycles; financial cycles; Financial Integration; Globalization; trade integration; US Monetary Policy; World Cycles |
| JEL: | E32 F41 F42 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15958&r= |
| By: | Emilio Gutierrez (Department of Economics, ITAM); David Jaume (Financial Stability Department, Bank of Mexico); Martín Tobal (Financial Stability Department, Bank of Mexico) |
| Abstract: | This paper studies the extent to which increases in bank credit supply available for small and medium firms can foster formal employment in Mexico. We use a detailed dataset containing loan-level information for all loans extended by commercial banks to private firms in Mexico during the 2010-2016 period, when the economy was relatively stable. To obtain exogenous variation in credit supply, we exploit differences in the regional presence of Mexican banks across local labor markets by combining pre-existing market shares with national-level changes in banks’ credit supply, after accounting for local credit demand shocks. Then, we use employment registry data to compare changes in the number of formal workers registered by small and medium firms in local labor markets differently exposed to these shocks. We find that credit supply shocks have a large impact on formal employment: a positive credit shock of one standard deviation increases yearly employment growth by 0.45 percentage points (13 percent of the mean). Our results differ from the null to small effects identified by previous literature for developed countries, suggesting that credit supply shocks play a more prominent role for employment creation (and destruction) in low and middle-income countries. |
| JEL: | D22 D53 G01 G1 G21 J01 J23 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:dls:wpaper:0277&r= |
| By: | G, Murugan; k, Pushpangadan |
| Abstract: | The paper develops a methodology for impact analysis of Coronavirus 2019 (COVID-19) pandemic based on Solow’s growth theory for a migration-driven subnational economy by a case study of Kerala, India. A log-linear growth equation of output per capita is regressed on capital stock-gross domestic product ratio (CSDR) and real remittances per capita (RRPC) for the period, 1980-2015. The robust regression on regional growth shows that the growth elasticity of CSDR is 0.43 and that of RRPC 0.28 with an explanatory power of 95 %. From growth accounting principle, only 29 % of the remaining variation needs to be accounted by other factors affecting regional growth. The impact of remittances on growth rate of the economy is positive and statistically significant at 1 % level as against the negative and statistically significant relationship observed in majority of cross-country analysis. The gross state domestic product (GSDP) for the year 2020/21 using national accounting framework incorporating unorganised economic activities shows a reduction of 38.85% from the pandemic impact in the region. The corresponding shrinkage of investment share in GSDP is 24. 5 % from its trend value of 0.63 in 2020/21.This alone reduces the growth rate of output per capita by 10.5 %. Similarly, the reduction in trend value of RRPC is 43.1 % and its impact on growth rate of output per capita is a shrinkage of 12.1 %. The impact of COVID19 on the overall growth rate of output per capita in the economy is- 22.6 %, the sum of the separate effects. It is interesting to note that reduction in growth rate is more from international remittances than from the share of investment in GSDP. Therefore, growthrevival strategy for the region requires special component plan compensating for the shortfall in the international remittances. |
| Keywords: | COVID-19, Solow’s growth model, investment-gross domestic ratio, international remittances and Growth accounting. |
| JEL: | E6 E65 E69 |
| Date: | 2021–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:107501&r= |
| By: | Chari, Anusha; Jain, Lakshita; Kulkarni, Nirupama |
| Abstract: | During the global financial crisis, the Reserve Bank of India enacted forbearance measures that lowered capital provisioning rates for loans under temporary liquidity stress. Matched bank-firm data reveal that troubled banks took advantage of the policy to also shield firms facing serious solvency issues. Perversely, in industries and bank portfolios with high proportions of failing firms, credit to healthy firms declined and was reallocated to the weakest firms. By incentivizing banks to hide true asset quality, the forbearance policy provided a license for regulatory arbitrage. The build-up of stressed assets in India's predominantly state-owned banking system is consistent with accounting subterfuge. |
| Keywords: | Non-performing Assets; Regulatory forbearance; Stressed Banks; zombie lending |
| JEL: | E58 G21 G28 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15773&r= |
| By: | Albertazzi, Ugo; Cimadomo, Jacopo; Maffei-Faccioli, Nicolò |
| Abstract: | This paper explores whether foreign intermediaries stabilise or destabilise lending to the real economy in the presence of sovereign stress in the domestic economy and abroad. Tensions in the government debt market may lead to serious disruptions in the provision of lending (i.e., the so-called “doom loop”). In this context, the presence of foreign banks poses a fundamental, yet unexplored, trade-off. On the one hand, domestic sovereign shocks are broadly inconsequential for the lending capacity of foreign banks, given that their funding conditions are not hampered by such shocks. On the other, these intermediaries may react more harshly than domestic banks to a deterioration in local loan risk and demand conditions. We exploit granular and confidential data on euro area banks operating in different countries to assess this trade-off. Overall, the presence of foreign lenders is found to stabilise lending, thus mitigating the doom loop. JEL Classification: E5, G21 |
| Keywords: | international banks, lending activity, sovereign stress |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212540&r= |
| By: | Isabelle RABAUD; Askandarou Cheik DIALLO; Luc JACOLIN |
| Keywords: | , Financial development, Domestic investment, Foreign direct Investment, Crowding-in/crowding-out effects |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:leo:wpaper:2879&r= |
| By: | Ayodele Idowu, Mr |
| Abstract: | This study examined econometric modelling and forecasting foreign direct investment inflows in Nigeria over the next decade using Box-Jenkins ARIMA model approach. The scope of the study is from 1970 to 2020. The correlogram show that the net foreign direct investment inflow in Nigeria is integrated of the first order. Based on the number of significant coefficients, highest adjusted R-squared, lowest volatility and the lowest SBIC and the AIC, the study estimated and presents the ARIMA (1, 1, 3) model. The diagnostic test also shows that the estimated model is not only consistent but good for forecasting the net foreign direct investment inflows in Nigeria and it also explains the dynamics around it. The result of the study shows that net foreign direct investment inflows in Nigeria are likely for exhibit very slow upward trend between 2.80 billion USD and 3.26 billion USD in the next decade which is not significantly different from values of FDI inflows in Nigeria in the recent years. The study also provide policy recommendations so as to assist policy makers and the Nigerian government on better ways to accelerate and maintain higher level of net foreign direct investment inflows in Nigeria. |
| Keywords: | ARIMA, Foreign Direct Investment Inflows, Forecasting, Box-Jenkins, Nigeria. |
| JEL: | E2 F1 F17 F4 F47 |
| Date: | 2021–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:107466&r= |
| By: | Lanteri, Andrea; Rampini, Adriano A. |
| Abstract: | We analyze the constrained-efficient allocation in an equilibrium model of investment and capital reallocation with heterogeneous firms facing collateral constraints. The model features two types of pecuniary externalities: collateral externalities, because the resale price of capital affects firms' ability to borrow, and distributive externalities, because buyers of old capital are more financially constrained than sellers, consistent with empirical evidence. We show analytically and quantitatively that the equilibrium price of old capital is inefficiently high in general, because the distributive pecuniary externality exceeds the collateral externality, by a factor of two in the calibrated model. New investment generates a positive aggregate externality by reducing the future price of old capital, fostering reallocation toward more constrained firms. The constrained-efficient allocation induces a consumption-equivalent welfare gain of 5% compared to the competitive equilibrium, and can be implemented with subsidies on new capital and taxes on old capital. |
| Keywords: | capital reallocation; Collateral; constrained efficiency; Investment Subsidies; Pecuniary externalities |
| JEL: | D51 E22 E44 G31 H21 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15690&r= |
| By: | Paul Gertler; Brett Green; Catherine Wolfram |
| Abstract: | A new form of secured lending utilizing “digital collateral” has recently emerged, most prominently in low and middle income countries. Digital collateral relies on “lockout” technology, which allows the lender to temporarily disable the flow value of the collateral to the borrower without physically repossessing it. We explore this new form of credit both in a model and in a field experiment using school-fee loans digitally secured with a solar home system. We find that securing a loan with digital collateral drastically reduces default rates (by 19 pp) and increases the lender’s rate of return (by 38 pp). Employing a variant of the Karlan and Zinman (2009) methodology, we decompose the total effect and find that roughly one-third is attributable to (ex-ante) adverse selection and two-thirds is attributable to (interim or ex-post) moral hazard. Access to a school-fee loan significantly increases school enrollment and school-related expenditures without detrimental effects to households’ balance sheet. |
| JEL: | G20 I22 O16 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28724&r= |
| By: | Oskar Kowalewski (IESEG School of Management, Paris, France, LEM-CNRS 9221, Lille, France, Institute of Economics, Polish Academy of Sciences, Warsaw, Poland); Pawel Pisany (Institute of Economics, Polish Academy of Sciences, Warsaw, Poland); Emil Slazak (Warsaw School of Economics, Warsaw, Poland) |
| Abstract: | This study is an investigation of the determinants of the development of technology-driven alternative credit markets, that is, fintech and bigtech credit. Using a data sample from 94 countries from 2013–2019, we confirmed the relevance of the availability of credit data, both the traditional and alternative types, with the latter being known as the so-called “digital footprint.” Furthermore, we have provided evidence to confirm the positive role of strengthening Internet privacy protections in fostering the development of the fintech credit market, which may not necessarily be the case for the bigtech credit market. We have also shown that the growth of the fintech and bigtech credit market is preceded by a rising paytech services market. Furthermore, we have found that the development of fintech credit services is fostered by the strength of both principal institutions, like the rule of law, and credit-specific institutions, especially in terms of insolvency framework effectiveness, while, for the bigtech credit market, only the latter matters. Interestingly, we have also found that various national cultural profiles can boost the development of fintech and bigtech credit services. Lastly, we have shown that the fintech credit market develops faster in countries characterized by high levels of societal distrust toward banks and that the opposite seems to be the case with the bigtech credit market. |
| Keywords: | alternative credit, fintech, bigtech, innovation, culture, trust, data access |
| JEL: | G21 G23 L26 O30 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:ies:wpaper:f202102&r= |
| By: | Erik Dolson; Julapa Jagtiani |
| Abstract: | There has been a great deal of interest recently in understanding the potential role of fintech firms in expanding credit access to the underbanked and credit-constrained consumers. We explore the supply side of fintech credit, focusing on unsecured personal loans and mortgage loans. We investigate whether fintech firms are more likely than other lenders to reach out to “underserved consumers,” such as minorities; those with low income, low credit scores, or thin credit histories; or those who have a history of being denied for credit. Using a rich data set of credit offers from Mintel, in conjunction with credit information from TransUnion and other consumer credit data from the FRBNY/Equifax Consumer Credit Panel, we compare similar credit offers that were made by banks, fintech firms, and other nonbank lenders. Fintech firms are more likely than banks to offer mortgage credit to consumers with lower income, lower-credit scores, and those who have been denied credit in the recent past. Fintechs are also more likely than banks to offer personal loans to consumers who had filed for bankruptcy (thus also more likely to receive credit card offers overall) and those who had recently been denied credit. For both personal loans and mortgage loans, fintech firms are more likely than other lenders to reach out and offer credit to nonprime consumers. |
| Keywords: | fintech; P2P lending; consumer credit access; personal lending; credit cards; mortgage lending; online lending; credit offers |
| JEL: | G21 G23 G28 G51 |
| Date: | 2021–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:91246&r= |
| By: | Abugamea, Gaber |
| Abstract: | The objective of this study is to examine the impact of bank-specific and major macroeconomic factors on the profitability of the biggest two Islamic banks in Palestine over the time period 1997-2018. It employs Pooled Regression analysis to investigate the effect of bank’s asset size, capital, loans, liabilities, operating cost, economic growth and inflation on key bank profitability indicators; return on assets (ROA) and return on equity (ROE), respectively. The main findings show that size and capital have positive impact on ROE. Loans are positively correlated with both ROA and ROE. Liabilities are negatively related to ROA and operating cost has negative impact on both ROA and ROE. Moreover, Islamic banks not benefited significantly from both the inflationary environment and economic growth. |
| Keywords: | Banking Profitability, Internal & External Factors, Pooled Regression |
| JEL: | G12 |
| Date: | 2021–05–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:107527&r= |
| By: | Bari, Faisal; Malik, Kashif; Meki, Muhammad; Quinn, Simon |
| Abstract: | We conduct a field experiment offering graduated microcredit clients the opportunity to finance a business asset worth four times their previous borrowing limit. We implement this using a hire-purchase contract; our control group is offered a zero-interest loan. We find large, significant and persistent effects from asset finance contracts: treated microenterprise owners run larger businesses and enjoy higher profits; consequently, household consumption increases, particularly on food and children's education. A dynamic structural model with non-convex capital adjustment costs rationalises our results; this highlights the potential for welfare improvements through large capital injections that are financially sustainable for microfinance institutions. |
| Keywords: | Capital Adjustment Costs; Microfinance; Randomized field experiment |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15768&r= |
| By: | Burchardi, Konrad B.; de Quidt, Jonathan; Gulesci, Selim; Sulaiman, Munshi |
| Abstract: | We study how credit constraints affect access to a remedial education program for girls. We gave an unconditional cash transfer to randomly selected households, then measured their Willingness To Pay (WTP) for the program. In the control group average WTP was 3,300 Tanzanian Shillings, seven percent of per-capita monthly expenditures. For those identified at baseline as able to borrow, the cash transfer increases WTP by three percent. For those unable to borrow, the cash transfer increases WTP by 27 percent. We conclude that credit constraints limit access to educational programs, and may increase inequality of outcomes. |
| JEL: | O12 O15 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15862&r= |
| By: | Agarwala, Matthew; Burke, Matt; Klusak, Patrycja; Kraemer, Moritz; Mohaddes, Kamiar |
| Abstract: | Enthusiasm for 'greening the financial system' is welcome, but a fundamental challenge remains: financial decision makers lack the necessary information. It is not enough to know that climate change is bad. Markets need credible, digestible information on how climate change translates into material risks. To bridge the gap between climate science and real-world financial indicators, we simulate the effect of climate change on sovereign credit ratings for 108 countries, creating the world's first climate-adjusted sovereign credit rating. Under various warming scenarios, we find evidence of climate-induced sovereign downgrades as early as 2030, increasing in intensity and across more countries over the century. We find strong evidence that stringent climate policy consistent with limiting warming to below 2êC, honouring the Paris Climate Agreement, and following RCP 2.6 could nearly eliminate the effect of climate change on ratings. In contrast, under higher emissions scenarios (i.e., RCP 8.5), 63 sovereigns experience climate-induced downgrades by 2030, with an average reduction of 1.02 notches, rising to 80 sovereigns facing an average downgrade of 2.48 notches by 2100. We calculate the effect of climate-induced sovereign downgrades on the cost of corporate and sovereign debt. Across the sample, climate change could increase the annual interest payments on sovereign debt by US$ 22-33 billion under RCP 2.6, rising to US$ 137- 205 billion under RCP 8.5. The additional cost to corporates is US$ 7.2-12.6 billion under RCP 2.6, and US$ 35.8-62.6 billion under RCP 8.5. |
| Keywords: | sovereign credit rating,climate change,counterfactual analysis,climate-economy models,corporate debt,sovereign debt |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:imfswp:158&r= |