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on Financial Development and Growth |
| By: | Jelson Serafim |
| Abstract: | This study provides evidence for the relationship between private credit, stock market indicators, income inequality, and poverty. Using the annual data that ranges from 1992 to 2018 on 9 African economies. We had applied the estimation method of the Autoregressive Distributed Lag Model (ARDL) to model the long-run effect. Besides, we use Dumitrescu and Hurlin Panel causality to test for checking the direction of causality. The results of long-run estimates indicate that the stock market indicators have a significant positive impact on income inequalities, but have a negative and significant impact on poverty. Further, our findings show that private credit adversely reduces income inequalities. Our results also establish significant short-run causalities among stock market indicators, private credit, income inequalities, and Poverty. |
| Keywords: | Private Credit, Stock market, income inequality, poverty. |
| JEL: | G10 G20 I30 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp01772021&r= |
| By: | Ofori, Isaac K.; Asongu, Simplice A. |
| Abstract: | Motivated by the projected rebound of foreign direct investment (FDI) inflow to sub-Saharan Africa (SSA) following the implementation of the AfCFTA and the finalization of the Africa Investment Protocol, we examine how FDI modulates the effects of various governance dynamics on inclusive growth in SSA. We do this by testing two hypotheses– first, whether unconditionally FDI and various governance indicators (rule of law, control of corruption, regulatory quality, governance effectiveness, political stability, and voice and accountability) foster inclusive growth in SSA; and second, whether these governance dynamics engender positive synergy with FDI on inclusive growth in SSA. Using data from the World Bank’s World Governance Indicators and the World Development Indicators for the period 1990–2020, we employ several fixed effects, random effects, and the system GMM estimators for the analysis. First, we find that FDI and all our governance dynamics are significant inclusive growth enhancers in SSA. Second, though FDI amplifies the effects of all our governance dynamics on inclusive growth in SSA, governance effectiveness, voice and accountability, and political stability are keys. Policy recommendations are provided. |
| Keywords: | AfCFTA,Economic Integration,FDI,Governance,Inclusive Growth,Africa |
| JEL: | F6 F15 O43 O55 R58 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:234518&r= |
| By: | Simplice A. Asongu (Yaounde, Cameroon); Nicholas M. Odhiambo (Pretoria, South Africa) |
| Abstract: | This research assesses the relevance of enhancing remittances on value added across economic sectors in sub-Saharan Africa for the period 1980 to 2014 using the Generalised Method of Moments. First, no significant net effects on added value to the agricultural sector are apparent. Second, enhancing remittances engenders a positive net effect on added value to the manufacturing sector. Third, there are negative net effects on added value to the service sector. Given that the unfavourable net incidence of remittances to the service sector is associated with a positive marginal or conditional effect, the analysis is extended by computing thresholds at which remittances induce net positive effects on added value to the service sector. The extended analysis shows that a remittance threshold of 48.5% of GDP is the critical mass needed for further enhancement of remittances to engender positive net effects on value added to the service sector. |
| Keywords: | Economic Output; Remitances; Sub-Saharan Africa |
| JEL: | E23 F24 F30 O16 O55 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:abh:wpaper:21/002&r= |
| By: | O'Brien, Martin (Central Bank of Ireland); Wosser, Michael (Central Bank of Ireland) |
| Abstract: | Growth at Risk (GaR) provides a methodology for understanding how financial conditions and the level of financial vulnerabilities contribute to the possibility of future episodes of weak economic growth. Using the GaR framework, we show that the likelihood and severity of future weak or negative economic growth in Ireland rises during periods where risks to financial stability are growing. In particular, we show that near term tail risks are heavily influenced by prevailing financial market conditions, but that medium horizon risks are more dependent upon systemic financial vulnerabilities, such as when credit growth is excessive. Our empirical analysis also suggests that structural characteristics of Ireland’s economy or financial system make it more exposed to potential weak growth outcomes, compared with other countries in our sample. We discuss how macroprudential policy can be better informed by tracking developments in the severity and likelihood of weak or negative economic outcomes made possible by a GaR framework. |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:fsnote:2/fs/21&r= |
| By: | Adrian, Tobias; Boyarchenko, Nina; Giannone, Domenico |
| Abstract: | We estimate the evolution of the conditional joint distribution of economic and financial conditions. While the joint distribution is approximately Gaussian during normal periods, sharp tightenings of financial conditions lead to the emergence of additional modes. The U.S. economy has historically resolved quickly to the "good" mode, but we conjecture that poor policy choices could lead to prolonged periods of multimodality. We argue that multimodality arises naturally in a macro-financial intermediary model with occasionally binding intermediary constraints. |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15088&r= |
| By: | Nizam, Ahmed Mehedi |
| Abstract: | A decrease in interest rate in traditional view of monetary policy transmission is linked to a lower cost of borrowing which eventually results into a greater spending in investment and a bigger GDP. However, a decrease in interest rate is also linked to a decrease in interest income which, in turn, affects the aggregate demand and total GDP. So far, no concerted effort has been made to investigate this positive inter-relation between interest income and GDP in the existing literature. Here in the first place we intuitively describe the inter-relation between interest income and output and then provide a micro-foundation of our intuitive reasoning in the context of a small endowment economy with finitely-lived identical households. Then we try to uncover the impact of nominal interest income on the macroeconomy using multiplier theory for a panel of some 04 (four) OECD countries. We define and calculate the corresponding multiplier values algebraically and then we empirically measure them using impulse response analysis under structural panel VAR framework. Large, consistent and positive values of the cumulative multipliers indicate a stable positive relationship between nominal interest income and output. Moreover, variance decomposition of GDP shows that a significant portion of the variance in GDP is attributed to interest income under VAR/VECM framework. Finally, we have shown how and where our analysis fits into the existing body of knowledge. |
| Keywords: | nominal interest expense, nominal lending rate, domestic credit, GDP, economic multiplier, monetary policy transmission mechanism, banking. |
| JEL: | E43 E50 E52 G21 H3 |
| Date: | 2021–06–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108169&r= |
| By: | Faria-e-Castro, Miguel |
| Abstract: | What are the quantitative macroeconomic effects of the countercyclical capital buffer (CCyB)? I study this question in a nonlinear DSGE model with occasional financial crises, which is calibrated and combined with US data to estimate sequences of structural shocks. Raising capital buffers during leverage expansions can reduce the frequency of crises by more than half. A quantitative application to the 2007-08 financial crisis shows that the CCyB in the 2:5% range (as in the Federal Reserve's current framework) could have greatly mitigated the financial panic of 2008, for a cumulative gain of 29% in aggregate consumption. The threat of raising capital requirements is effective even if this tool is not used in equilibrium. JEL Classification: E4, E6, G2 |
| Keywords: | countercyclical capital buffer, financial crises, macroprudential policy |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:2021120&r= |
| By: | Dean Corbae; Pablo D'Erasmo |
| Abstract: | We develop a model of banking industry dynamics to study the quantitative impact of regulatory policies on bank risk taking and market structure. Since our model is matched to U.S. data, we propose a market structure where big banks with market power interact with small, competitive fringe banks as well as non-bank lenders. Banks face idiosyncratic funding shocks in addition to aggregate shocks which affect the fraction of performing loans in their portfolio. A nontrivial bank size distribution arises out of endogenous entry and exit, as well as banks' buffer stock of capital. We show the model predictions are consistent with untargeted business cycle properties, the bank lending channel, and empirical studies of the role of concentration on financial stability. We find that regulatory policies can have an important impact on banking market structure, which, along with selection effects, can generate changes in allocative efficiency and stability. |
| Keywords: | Macroprudential policy; Bank size distribution; Industry dynamics with imperfect competition |
| JEL: | E44 G21 L11 |
| Date: | 2021–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:92399&r= |
| By: | Arief Rasyid; Jason Nassios; Elizabeth L Roos; James Giesecke |
| Abstract: | After the 2008 global financial crisis, authorities across the globe stressed the importance of equity capital to absorb losses. While many countries have raised bank capital adequacy requirements (CARs), the comprehensive impact assessment of this policy for emerging economies remains largely unexplored. We use a financial computable general equilibrium (FCGE) model of Indonesia called AMELIA-F to investigate the economy-wide impact of a 100 basis points increase in the CAR of Indonesian banks. We find that this causes small negative consequences on the economy. Bank balance sheets contract as they move away from holding riskier assets. This reduces investment in both non-housing and housing sectors, as equity financing raises banks weighted average costs of capital (WACC). The fall in real investment decreases foreign financing needs. |
| Keywords: | Financial CGE model weighted average cost of capital capital adequacy ratio macro prudential policy Indonesia |
| JEL: | C68 D58 E17 E44 G21 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:cop:wpaper:g-316&r= |
| By: | Ampudia, Miguel; Lo Duca, Marco; Farkas, Mátyás; Perez-Quiros, Gabriel; Pirovano, Mara; Rünstler, Gerhard; Tereanu, Eugen |
| Abstract: | Since the global financial crises, many countries have implemented macroprudential policies with the aim to render the financial system more resilient to shocks and limit the procyclicality of the financial system. We present theoretical and empirical evidence on the effectiveness of macroprudential policy, on both, financial stability and economic growth focussing on capital measures and borrower-based measures. JEL Classification: G21 |
| Keywords: | bank capital, borrowers, financial stability, macroprudential policy |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212559&r= |
| By: | Chavleishvili, Sulkhan; Engle, Robert F.; Fahr, Stephan; Kremer, Manfred; Manganelli, Simone; Schwaab, Bernd |
| Abstract: | Macro-prudential authorities need to assess medium-term downside risks to the real economy, caused by severe financial shocks. Before activating policy measures, they also need to consider their short-term negative impact. This gives rise to a risk management problem, an inter-temporal trade-off between expected growth and downside risk. Predictive distributions are estimated with structural quantile vector autoregressive models that relate economic growth to measures of financial stress and the financial cycle. An empirical study with euro area and U.S. data shows how to construct indicators of macro-prudential policy stance and to assess when interventions may be beneficial. JEL Classification: G21, C33 |
| Keywords: | financial conditions, growth-at-risk, macro-prudential policy, quantile vector autoregression, stress testing |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212565&r= |
| By: | Brandt, Lennart; Saint Guilhem, Arthur; Schröder, Maximilian; Van Robays, Ine |
| Abstract: | Financial asset prices contain a rich set of real-time information on the economy. To extract this information, it is crucial to understand the driving factors behind financial market developments. In this paper, we exploit daily cross-asset price movements in a sign-restricted BVAR model to analyse the extent to which euro area and US yields, equity prices, and the euro-US dollar exchange rate are jointly driven by monetary policy, macro and global risk factors. A novelty is that we allow for cross-Atlantic spillovers while also accounting for the unique role of the US in the global financial system. Our results underline the importance of US spillovers and shifts in global risk sentiment for understanding the dynamics of euro area financial variables. Euro area shocks transmit much less to US financial markets in comparison, with global risk shocks being more important instead. Using the daily shocks as instruments in a Proxy-SVAR, we demonstrate that the transmission of financial market movements to the macroeconomy depends on the underlying driver, thereby illustrating why it matters to look into the driving factors in the first place. JEL Classification: C32, C54, E44, E52 |
| Keywords: | financial conditions, high-frequency identification, international transmission, large-scale asset purchases, monetary policy |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212560&r= |
| By: | Maria Demertzis; Marta Domínguez-Jiménez; Lionel Guetta-Jeanrenaud |
| Abstract: | This Policy Contribution was produced with the financial support of the European Forum Alpbach The completion of Europe’s capital markets union is desirable not only from a financial stability standpoint. Equity-based financing is also better suited than banks to finance high-growth sectors (such as digital and hi-tech) where most capital is intangible. Additionally, stock markets reallocate funds towards less-polluting sectors more efficiently than banks, and provide incentives for carbon-intensive sectors... |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:43067&r= |
| By: | Maria Karadima; Helen Louri |
| Abstract: | Following the financial and debt crises in the euro area and the delays in formulating a cohesive policy response, Greek banks faced serious problems with the increase in non-performing loans (NPLs) being the most threatening. In this study, we attempt to empirically investigate the determinants of NPLs in the Greek banking sector, using quarterly aggregate data for the period 2003Q1-2020Q2 and the autoregressive distributed lag (ARDL) bounds testing approach. We find that NPLs are determined mostly by factors related to macroeconomic conditions in Greece during the period under investigation, rather than by bank-related factors. Of particular interest is the case of government debt, which is found to exert a significant and positive long-term impact on NPLs irrespective of some short-term dynamics that appear to provide a temporary relief. The fiscal balance is also found to exert a negative long-term effect, justifying the quest for surpluses post-crisis. As debt accumulation is a policy followed by most countries in order to stabilize economies hit by the COVID-19 crisis, its long-term effects on the financial system should be taken into account and institutional measures introduced to face the new risk. |
| Keywords: | Greece, Non-performing loans, fiscal expansion, ARDL, Bounds testing |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:hel:greese:160&r= |
| By: | Briana Chang; Matthieu Gomez; Harrison Hong |
| Abstract: | We document that banks which cut lending more during the Great Recession were lending to riskier firms. To explain this evidence, we build a competitive matching model of bank-firm relationships in which risky firms borrow from banks with low holding costs. Based on default probabilities and equilibrium loan rates, we use our sorting model to recover the latent bank holding cost distribution. The measure of banks with low holding costs dropped during the Great Recession. This credit supply shift conservatively accounted for around 50% of the decline in corporate loans over this period. Our attribution cannot be captured by panel regression estimates from the bank lending channel literature. |
| JEL: | G0 G01 G2 G23 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28842&r= |
| By: | Afees A. Salisu (Centre for Econometric & Allied Research, University of Ibadan, Ibadan, Nigeria); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield, 0028, South Africa); Idris A. Adediran (Centre for Econometric & Allied Research, University of Ibadan, Ibadan, Nigeria) |
| Abstract: | We contribute to the literature on the international propagation of uncertainty shocks with a Global Vector Autoregressive (GVAR) model that quantifies the spillover effects of uncertainty shocks in the US on to real equity prices of 32 advanced and emerging countries (besides the US). In this regard, we also account for the role of global financial market conditions in the propagation of these shocks, using high and low values of the Global Financial Cycle (GFCy) index. Using quarterly data over 1980:1 to 2019:2, our findings reveal greater response of advanced markets than emerging counterparts to an US uncertainty shock. Further, we show consistent higher negative responses during weak financial conditions than otherwise, confirming the intervening role of the GFCy index. Our results have important implications for investors and policymakers. |
| Keywords: | Uncertainty Shocks, International Financial Markets, Global Vector Autoregressive Model |
| JEL: | C32 G15 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:202136&r= |
| By: | Saffie, Felipe; Varela, Liliana; Yi, Kei-Mu |
| Abstract: | We empirically and theoretically study the effects of capital flows on resource allocation within sectors and cross-sectors. Novel data on service firms - in addition to manufacturing firms - allows us to assess two channels of resource reallocation. Capital inflows lower the relative price of capital, which promotes capital-intensive industries - an input-cost channel. Second, capital inflows increase aggregate consumption, which tilts the demand towards goods with high income elasticities - a consumption channel. We provide evidence for these two channels using firm-level census data from the financial liberalization in Hungary, a policy reform that led to capital inflows. We show that firms in capital-intensive industries expand, as do firms in industries producing goods with high income elasticities. In the short-term, the consumption channel dominates and resources reallocate towards high income elasticity activities, such as services. We build a dynamic, multi-sector, heterogeneous firm model of an economy transitioning to its steady-state. We simulate a capital account liberalization and show that the model can rationalize our empirical findings. We then use the model to assess the permanent effects of capital flows and show that the long-term allocation of resources and, thus, aggregate productivity depend on degree of long-term financial openness of the economy. Larger liberalizations trigger long-run debt pushing the country to a permanent trade surplus. This tilts long-run production towards manufacturing exporters, which also increases aggregate productivity |
| Keywords: | Capital Flows; Financial Liberalization; Firm Dynamics; non-homothetic preferences; reallocation |
| JEL: | F15 F41 F43 F63 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14893&r= |
| By: | Yoshihiko Norimasa (Bank of Japan); Kazuki Ueda (Bank of Japan); Tomohiro Watanabe (Nippon Life Insurance Company) |
| Abstract: | This study uses panel quantile regression to examine the risk of capital outflows in times of stress (capital flows-at-risk, CFaR) for 16 emerging economies. Our analysis shows that changes in financial conditions in advanced economies and in the monetary policy stance of the United States affect the risk of large capital outflows for some countries. In particular, we find that tighter financial conditions in advanced economies during a phase when the U.S. monetary policy stance is changing significantly affect emerging economies' CFaR. Further, using government debt as a measure of emerging economies' structural vulnerability, we find that an increase in government debt substantially raises the risk of capital outflows in times of stress. Moreover, while in the case of debt investment, CFaR tend to be greater the higher the level of government debt, in the case of other investment (consisting mainly of bank lending), CFaR tend to increase when financial conditions in advanced economies deteriorate. |
| Keywords: | Risk of Capital Outflows (CFaR: Capital Flows-at-Risk); Global Factors; Local Factors; Panel Quantile Regression; Relative Entropy |
| JEL: | E52 F32 F34 F37 |
| Date: | 2021–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:wp21e05&r= |
| By: | Taylor, Mark P; Wang, Zigan; Xu, Qi |
| Abstract: | We empirically investigate the real effects of exchange rate risk on investment activities of international firms. We provide cross-country, firm-level evidence that greater unexpected currency volatility leads to significantly lower capital expenditures. The effect is stronger for countries with higher economic openness and for firms that do not use currency derivatives to hedge. We empirically test the implications of two potential mechanisms: Real options and precautionary savings. Our findings are consistent with both explanations. Two historical events in the FX markets strengthen the identification of our results. |
| Keywords: | corporate investment; Exchange rate; uncertainty |
| JEL: | F31 G31 G32 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15053&r= |
| By: | Shesadri Banerjee; M S Mohanty |
| Abstract: | The effect of US monetary policy on EMEs is one of the fiercely debated issues in international finance. We contribute to this debate using micro- and macro-level analyses from India over the period 2004-2019. Using a dynamic panel estimation model of non-financial firms, we show that US monetary tightening adversely affects firms’ net worth and reduces domestic credit relative to external credit. Using a sign-identified VAR model, we find that the contractionary US monetary policy leads to a significant downturn in the domestic credit and business cycles. The responses of firms and the impact on the domestic credit cycle suggest that the financial channel of the exchange rate is one of the conduits transmitting US monetary policy to India. |
| Keywords: | US monetary policy, international transmission of monetary policy, dynamic panel estimation, sign-restricted VAR model, financial channel, Indian economy |
| JEL: | E32 E52 F41 F42 F61 F62 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:945&r= |
| By: | Weronika Garbacz; David Vilalta; Lasse Moller |
| Abstract: | The coronavirus (COVID-19) crisis provides a new context for donors to assess the relevance of guarantees in addressing challenges linked with a sustainable recovery. The paper argues there may be significant scope for more and better use of guarantees to build back better in response to the crisis. The paper also discusses how guarantees can promote more investment particularly in underdeveloped and underserved markets, such as least developed countries (LDCs). |
| Keywords: | Blended finance, Covid-19, Development cooperation, Development finance, Guarantees, LDC |
| JEL: | O10 |
| Date: | 2021–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:oec:dcdaaa:97-en&r= |
| By: | Fon, Roger; Filippaios, Fragkiskos; Stoian, Carmen; Lee, Soo-Hee |
| Abstract: | Foreign direct investment (FDI) inflows into Africa have increased since the turn of the millennium, mainly due to FDI growth into African countries by multinational enterprises (MNEs) from developing economies. While African governments view this growth as a positive development for the continent, many governments in the West have raised concerns regarding the institutional impact of investments from developing economies. This paper examines the impact of FDI flows on institutional quality in African countries by distinguishing investments from developed versus developing economies. Previous empirical studies have found a significant relationship between FDI flows and institutional quality in African countries but regard the relationship as MNEs rewarding African countries for adopting institutional reforms. However, little attention has been paid to the reverse causality, i.e. that FDI can cause an institutional change in African countries. Using bilateral greenfield FDI flows between 56 countries during 2003-2015, we find no significant FDI effect from developed and developing economies on institutional quality in host countries. However, aggregate FDI flows from developed and developing economies have a significant positive effect on host country institutional quality but differ concerning the impact's timing. In contrast, we find no significant effect of FDI flows from China on host country institutional quality. Our results are robust to alternative measures of institutional quality. |
| Keywords: | foreign direct investment; co-evolution; institutions; multinational enterprises; Internal OA fund |
| JEL: | F3 G3 R14 J01 |
| Date: | 2021–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:108968&r= |
| By: | Idris A. Abdulqadir (Federal University Dutse, Dutse, Nigeria); Simplice A. Asongu (Yaoundé, Cameroon) |
| Abstract: | This article investigates the asymmetric effect of internet access (index of the internet) on economic growth in 42 sub-Saharan African (SSA) countries over the period 2008-2018. The estimation procedure is obtained following a dynamic panel threshold regression technique via 1000 bootstrap replications and the 400 grids search developed by Hansen (1996, 1999, 2000). The investigation first explores the presence of inflection points in the relationship between internet access and economic growth through the application of Hansen's threshold models. The finding from the nonlinearity threshold model revealed a significant internet threshold-effect of 3.55 percent for growth. The article also examines the linear short-run effect of internet access on economic growth while controlling for the effects of private sector credit, trade openness, government regulation, and tariff regimes. The marginal effect of internet access is evaluated at the minimum, and the maximum levels of government regulation and tariffs regime are positive. On the other hand, the minimum and maximum levels of private sector credit and trade openness are negative via the interaction terms. The article advances the literature by its nonlinear transformation of the relevance of internet access on economic growth by exploring interactive mechanisms of: internet access versus financial resource, internet access versus trade, internet access versus government regulation, and internet access versus the tariff regimes from end-user subscriptions. In policy terms, the statistical significance of the joint impact of government regulations and tariff regimes is relevant in the operation of the telecommunication industry in SSA countries. |
| Keywords: | Internet access; economic growth; government regulations; trade openness; tariff regimes; sub-Saharan Africa |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:abh:wpaper:21/014&r= |
| By: | Sebastian Doerr; Thomas Drechsel; Donggyu Lee |
| Abstract: | This paper shows that rising income inequality reduces job creation at small firms. High-income households save relatively less in the form of bank deposits while small firms depend on banks. We argue that a higher share of income accruing to top earners therefore erodes banks' deposit base and their lending capacity for small businesses, thus reducing job creation. Exploiting variation in top incomes across US states and an instrumental variable strategy, we establish that a 10 percentage point (pp) increase in income share of the top 10% reduces the net job creation rate of small firms by 1.5–2 pp, relative to large firms. The effects are stronger at smaller firms and in bank-dependent industries. Rising top incomes also reduce bank deposits and increase deposit rates, in line with a reduction in the supply of household deposits. We then build a general equilibrium model with heterogeneous households that face a portfolio choice between high-return investments and low-return deposits that insure against liquidity risk. Banks use deposits to lend to firms of different sizes subject to information frictions. We study job creation across firm sizes under counterfactual income distributions. |
| Keywords: | income inequality, job creation, small businesses, bank lending, household heterogeneity, financial frictions |
| JEL: | D22 D31 G21 L25 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:944&r= |
| By: | Thais Laerkholm Jensen (Danmarks Nationalbank); Søren Leth-Petersen (CEBI, Department of Economics, University of Copenhagen, CEPR); Ramana Nanda (Harvard Business School, NBER) |
| Abstract: | We exploit a mortgage reform that differentially unlocked home equity across the Danish population and study how this impacted selection into entrepreneurship. We find that increased entry was concentrated among entrepreneurs whose firms were founded in industries where they had no prior work experience. In addition, we find that marginal entrants benefiting from the reform had higher pre-entry earnings and that a significant share of entrants started longer-lasting firms. Our results are most consistent with the view that housing collateral enabled high ability individuals with less-well-established track records to overcome credit rationing and start new firms, rather than just leading to `frivolous entry' by those without prior industry experience. |
| Keywords: | credit constraints, entrepreneurship, household wealth, mortgage finance |
| JEL: | D14 D31 G21 L25 L26 |
| Date: | 2021–06–03 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kucebi:2110&r= |
| By: | Kim, Mee Jung (Sejong University); Lee, Kyung Min (George Mason University); Brown, J. David (U.S. Census Bureau); Earle, John S. (George Mason University) |
| Abstract: | Black-owned businesses tend to operate with less finance and employ fewer workers than those owned by Whites. Motivated by a simple conceptual framework, we document these facts and show they are causally connected using large firm-level surveys linked to universal employer data from the Census Bureau. We find that the racial financing gap is most pronounced at start-up and tends to narrow with firm age. At any age, Black-owned firms are less likely to receive bank loans, more likely to refrain from applying because they expect denial, and more likely to report that lack of finance reduces their profitability. Yet the observable characteristics of Black entrepreneurs are similar in most respects to Whites, and in some ways - higher education, growth-oriented motivations, and involvement in the business - would seem to imply higher, not lower, demand for finance. Concerning employment, we find that Black-owned firms have on average about 12 percent fewer employees than those owned by Whites, but the difference drops when controlling for firm age and other characteristics. However, when the analysis holds financial variables constant, the results imply that equally well-financed Black-owned firms would be larger than White-owned by about seven percent. Exploiting the credit supply shock of changing assignment to Community Reinvestment Act treatment through a Regression Discontinuity Design in a firm-level panel regression framework, we find that expanded credit access raises employment 5-7 percentage points more at Black-owned businesses than White-owned firms in treated neighborhoods. |
| Keywords: | business ownership, racial inequality, firm employment, Community Reinvestment Act |
| JEL: | J15 G20 H81 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp14403&r= |
| By: | Mayordomo, Sergio; Pavanini, Nicola; Tarantino, Emanuele |
| Abstract: | Between 2009 and 2011, the Spanish banking system underwent a restructuring process based on consolidation of savings banks. The program's design allows us to study how alternative forms of consolidation affect credit supply and financial stability. We show that banks consolidating via mergers or business groups are ex-ante comparable in terms of local market's overlap, financial and economic characteristics. We find that, relative to business groups, the market power of merged banks produces a contraction in credit supply, higher interest rates, but also a reduction in non-performing loans. To determine the welfare effects of consolidation, we estimate a structural model of credit demand and supply. In our framework, banks compete on interest rates and can ration borrowers. We also allow borrower surplus to depend on banks' survival. Through counterfactuals, we quantify cost efficiencies and improvements in financial stability that consolidation should deliver to outweigh welfare losses from reduced credit supply. |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15069&r= |
| By: | Mäkinen, Mikko |
| Abstract: | Can a major financial crisis trigger changes in a bank’s risk-taking behavior? Using the 2008 Global Financial Crisis as a quasi-natural experiment and a difference-in-differences approach, I examine whether the worst crisis-hit Russian banks – the banks that have strong incentives to behavior-altering changes – can decrease their post-crisis exposure to risk. A shift in risk-taking behavior by these banks indicates the learning hypothesis. The findings are mixed. The evidence concerning credit risk is inconsistent with the learning hypothesis. On the other hand, the evidence concerning solvency risk is consistent with the learning hypothesis and corroborates evidence from the Nordic countries (Berglund and Mäkinen, 2019). As such, bank learning from a financial crisis may not depend on the institutional context and the level of development of national financial market. Several robustness checks with alternative regression specifications are provided. |
| JEL: | G01 G21 G32 |
| Date: | 2021–05–28 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofitp:2021_008&r= |
| By: | Babus, Ana; Farboodi, Maryam |
| Abstract: | We explore a model in which banks strategically hold interconnected and opaque portfolios, despite increasing the likelihood they are subject to financial crises. In our framework, banks choose their degree of exposure to other banks to influence how investors can use their information. In equilibrium banks choose portfolios which are neither fully opaque, nor fully transparent. However, their portfolios are excessively interconnected to obfuscate investor information. Banks can create a degree of opacity that decreases welfare, and makes bank crises more likely. Our model is suggestive about the implications of asset securitization, as well as government bailouts. |
| Keywords: | banking crises; interdependent portfolios; opacity |
| JEL: | D43 D82 G14 G21 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15079&r= |
| By: | Bo, Li; Ponticelli, Jacopo |
| Abstract: | Using new case-level data we document a set of stylized facts on bankruptcy in China and study how the staggered introduction of specialized courts across Chinese cities affected insolvency resolution and the local economy. For identification, we compare cases handled by specialized versus traditional civil courts within the same city. Specialized courts hire better-trained judges and cut case duration by 35%. State-owned firms experience larger declines in case duration relative to privately-owned firms, consistent with higher judicial independence. Cities introducing specialized courts experience faster firm entry, larger increase in average capital productivity and reallocation of employment out of "zombie" firms-intensive sectors. |
| Keywords: | Court efficiency; Political influence; Specialized Courts; Zombie firms |
| JEL: | G33 K22 O16 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15007&r= |
| By: | Michael Chui |
| Abstract: | Technology companies entering the financial services industry have become a global phenomenon over the past decade. This trend is most remarkable in China where two large technology firms (BigTechs) have emerged as important market players, especially in payment services. This paper examines the factors driving this development and whether the Chinese experience could be applied elsewhere. Several lessons emerge: first, like any company in a network industry, it is important to build and maintain a large user base and that is the key factor behind BigTechs' expansion into the financial industry. On this basis, these BigTechs can be seen as "accidental financiers" rather than "aggressive invaders". Second, these firms are cautious in offering higher-risk financial services as investment losses could lead to an exodus of customers. Third, Chinese authorities' regulatory tolerance during the early stage has been a key supporting factor and helped fostering innovation benefits. But that was balanced by the implementation of capital and liquidity rules to keep BigTechs from "excessive" growth, mis-selling of financial products and posing systemic risks. Fourth, initial conditions and government support matter. The rapid growth has benefitted from China's large population, the availability of low-cost mobile handsets and heavy investment by the government on mobile communication infrastructure. These may not be easily be replicated elsewhere. Last, BigTechs' overseas expansion may require policy coordination between home and host authorities to keep track of emerging risks. |
| Keywords: | BigTechs, banking and finance |
| JEL: | D85 E41 E42 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:947&r= |
| By: | Janeway, W.; Nanda, R.; Rhodes-Kropf, M. |
| Abstract: | We review the growing literature on the relationship between venture capital booms and startup financing, focusing on three broad areas: First, we discuss the drivers of large inflows into the venture capital asset class, particularly in recent years -- which are related to but also distinct from macroeconomic business cycles and stock market fluctuations. Second, we review the emerging literature on the real effects of venture capital financing booms. A particular focus of this work is to highlight the potential impact that booms (and busts) can have on the types of firms that VCs choose to fund and terms at which they are funded, independent of investment opportunities -- thereby shaping the trajectory of innovation being conducted by startups. Third, an important insight from recent research is that booms in venture capital financing are not just a temporal phenomenon but can also be seen in terms of the concentration of VC investment in certain industries and geographies. We also review the role of government policy, exploring the degree to which it can explain the concentration of VC funding in the US over the past forty years in just two broad areas – information and communication technologies (ICT) and biotechnology. We conclude by highlighting promising areas of further research. |
| Keywords: | Venture capital, start-ups, innovation |
| JEL: | G24 L26 M13 O30 |
| Date: | 2021–06–03 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:2147&r= |
| By: | Vincent Giorgis (ETH Zürich); Tobias Huber (ETH Zürich); Didier Sornette (ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Swiss Finance Institute; Southern University of Science and Technology; Tokyo Institute of Technology) |
| Abstract: | From 2004 to 2008, a bubble formed in clean technologies, such as solar, biofuels, batteries, and other renewable energy sources. In this paper, we analyze this clean-tech bubble through the lens of the Social Bubble Hypothesis, which holds that strong social interactions between enthusiastic supporters weave a network of reinforcing feedbacks that lead to widespread endorsement and extraordinary commitment by those involved. We present a detailed synthesis of the development of the clean-tech bubble, its history, and the role of venture capital and government funding in catalyzing it. In particular, we dissect the underlying narrative that was fueling the bubble. As bubbles can be essential in the process of accelerating the development of emerging technologies and diffusion of technological innovations, we present evidence that the clean-tech bubble constituted an example of an innovation-accelerating process. |
| Keywords: | Financial Bubbles, Narrative Economics, Technological Innovation, Clean Tech, Energy, Venture Capital |
| JEL: | C54 D61 D70 F64 G01 O25 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2136&r= |
| By: | Sharma, Rajesh; Sinha, Avik; Kautish, Pradeep |
| Abstract: | In the preceding two decades, the expansion of financial services has played a vital role in pursuing economic growth agendas in the developing Asian nations. However, its harmful effect on environmental quality cannot be denied. In this backdrop, in the present study, we investigated whether the financial sector development moderated the ecological footprint, carbon footprint, and land footprint in the eight developing nations of South and Southeast Asia from 1990-2015. In doing so, we included the per capita income, energy solutions, and trade expansions as determinants of the ecological indicators. The results of the second-generation unit root tests and Westerlund’s cointegration test reported the long-run stability and cointegration, respectively. To navigate the possible cross-country dependency, we employed the cross-sectional augmented autoregressive distributed lag approach (CS-ARDL). The results confirmed that per capita income, energy solutions, trade expansion, and financial sector development invigorated the ecological footprint, carbon footprint, and land footprint in the long run. Further, it is reported that the development in the financial sector has a significant moderating impact on the nexus between energy and environmental footprints. In other words, the financial sector development drove the association between the overall environmental quality and energy solutions in the long run. Similarly, we observed that the financial sector development worked as a significant mediator between environmental proxies and trade expansion. By including the ecological footprint, carbon footprint, and land footprint as environmental proxies, the study provides the wider environmental spectrum. Based on the outcomes of the study, we proposed a novel scheme, which may help to address the harmful environmental impacts of the financial sector development in the selected developing nations. |
| Keywords: | Ecological footprint; carbon footprint; land footprint, South Asian countries; Southeast Asian countries; per capita income; energy |
| JEL: | Q5 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108161&r= |
| By: | Sharma, Rajesh; Sinha, Avik; Kautish, Pradeep |
| Abstract: | The consistent performance on the economic front and alarmingly increasing air pollution in the eight emerging economies of South and Southeast Asia compelled us to scrutinize whether the association between per capita income and carbon dioxide (CO2) emissions remained nonlinear during the study period (1990-2015). Further, we intended to examine the long-run impacts of financial development, trade expansion, and nonrenewable energy consumption on CO2 emissions. Considering the possibility of the cross-sectional dependency, we employed a relatively new approach, i.e. the cross-sectional augmented distributed lag mean estimation. The simulation results of the study confirmed an N-shaped environmental Kuznets curve in the selected emerging economies. Further, the improvements in the financial sector, nonrenewable energy consumption, and trade expansion contributed to increasing the level of CO2 emissions in the long run. Based on the outcomes, we proposed the policy framework, which may help in achieving Sustainable Development Goals. |
| Keywords: | CO2 emissions; financial development; nonrenewable energy resources; South and Southeast Asian countries; CS-DL |
| JEL: | Q5 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108163&r= |
| By: | Chien, Fengsheng; Anwar, Ahsan; Hsu, Ching-Chi; Sharif, Arshian; Razzaq, Asif; Sinha, Avik |
| Abstract: | Sustainability through information and communication technologies is a complex matter, raising interesting debate among researchers. Pursuing the same, this research investigates the impact of information and communication technologies, economic growth, and financial development on carbon dioxide emissions by simultaneously testing the Environmental Kuznets curve (EKC) hypothesis in BRICS countries. In doing so, this study employs Methods of Moments - Quantile Regression, which confirms that the effects of the explanatory variables vary across different quantiles of carbon dioxide emissions. The overall results indicate that economic growth and financial development contribute to carbon dioxide emissions across all quantiles, while information and communication technologies significantly mitigate the level of carbon dioxide emissions only at lower emissions quantiles. Moreover, the results confirm the presence of the EKC hypothesis. Interestingly, the effect of economic growth and information and communication technologies on carbon dioxide emissions is lowest in magnitude at lower quantiles and highest at higher quantiles of carbon dioxide emissions. The empirical findings of DH panel heterogenous causality test confirm bidirectional causality between the model parameters, indicating that any policy intervention concerning explanatory variables significantly causes carbon dioxide emissions and vice versa. The results set out the foundation for policymakers to devise a policy framework to attain the objectives of Sustainable Development Goals (SDGs). |
| Keywords: | ICT; Financial development; EKC hypothesis; CO2 emissions; BRICS; MMQR |
| JEL: | Q5 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108162&r= |