nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2021‒06‒21
29 papers chosen by
Georg Man

  1. Liquidity Creation, Investment, and Growth By Beck, Thorsten; Döttling, Robin; Lambert, Thomas; Van Dijk, Mathijs A
  2. US banking deregulation and local economic growth: A spatial analysis By Laura Spierdijk; Pieter IJtsma; Sherrill Shaffer
  3. The Good, the Bad, and the not-so Ugly of Credit Booms: Capital Allocation and Financial Constraints By Matias Braun; Francisco Marcet; Claudio E. Raddatz K.
  4. Economic vulnerability is state dependent By Leopoldo Catania; Alessandra Luati; Pierluigi Vallarino
  5. Quantiles of growth: Household debt and growth vulnerabilities in Finland By Nyholm, Juho; Voutilainen, Ville
  6. Growth and Welfare Effects of Interventions in Patent Licensing Negotiations By Kishimoto, Shin; Suzuki, Keishun
  7. Aggregate productivity slowdown in Europe: New evidence from corporate balance sheets By Maurin, Laurent; Wolski, Marcin
  8. Colocación de cartera y crecimiento sectorial By Joab D. Valdivia C.
  9. The Relationship between Foreign Direct Investment and Economic Growth: A Case of Turkey By Orhan Gokmen
  10. Impact of Public and Private Investments on Economic Growth of Developing Countries By Faruque Ahamed
  11. The Relationship between Debt and Output By Yun Jung Kim; Jing Zhang
  12. The elusive quest for the holy grail of an impact of EU funds on regional growth By Jan Fidrmuc; Martin Hulényi; Olga Zajkowska
  13. Chinese Aid and Health at the Country and Local Level By Cruzatti C., John; Dreher, Axel; Matzat, Johannes
  14. Does India use development finance to compete with China? A subnational analysis By Asmus, Gerda; Eichenauer, Vera; Fuchs, Andreas; Parks, Bradley
  15. Commodity Prices and Forecastability of South African Stock Returns Over a Century: Sentiments versus Fundamentals By Afees A. Salisu; Rangan Gupta
  16. Dampening Global Financial Shocks: Can Macroprudential Regulation Help (More than Capital Controls)? By Bergant, Katharina; Grigoli, Francesco; Hansen, Niels-Jakob; Sandri, Damiano
  17. The Long-Term Effects of Capital Requirements By Gianni De Nicolò; Nataliya Klimenko; Sebastian Pfeil; Jean-Charles Rochet
  18. Measuring the impact of a bank failure on the real economy: an EU-wide analytical framework By Vacca, Valerio Paolo; Bichlmeier, Fabian; Biraschi, Paolo; Boschi, Natalie; Álvarez, Antonio J. Bravo; Di Primio, Luciano; Ebner, André; Hoeretzeder, Silvia; Ballesteros, Elisa Llorente; Miani, Claudia; Ricci, Giacomo; Santioni, Raffaele; Schellerer, Stefan; Westman, Hanna
  19. Firm-bank linkages and optimal policies in a lockdown By Segura, Anatoli; Villacorta, Alonso
  20. Global Banks and Systemic Debt Crises By Juan M. Morelli; Pablo Ottonello; Diego J. Perez
  21. The Financial US Uncertainty Spillover Multiplier: Evidence from a GVAR Model By Afees A. Salisu; Rangan Gupta; Riza Demirer
  22. Determinantes del ciclo crediticio en Bolivia By Joab D. Valdivia C.
  23. International Capital Flows: Private Versus Public Flows in Developing and Developed Countries By Yun Jung Kim; Jing Zhang
  24. Does Household Borrowing Reduce the Trade Balance? Evidence from Developing and Developed Countries By Can Xu; Jan Jacobs; Jakob de Haan
  25. Local Bank, Digital Financial Inclusion and SME Financing Constraints: Empirical Evidence from China By Zhiqiang Lu; Junjie Wu; Hongyu Li; Duc Khuong Nguyen
  26. Foreign Bank Assets and Presence on Banking Stability in Africa: Does Strong and Weak Corporate Governance Systems under different Regulatory Regimes Matter? By Baah Aye Kusi; Elikplimi Agbloyor; Simplice A. Asongu; Joshua Yindenaba Abor
  27. Comprehensive Analysis On Determinants Of Bank Profitability In Bangladesh By Md Saimum Hossain; Faruque Ahamed
  28. Asset diversification versus climate action By Hambel, Christoph; Kraft, Holger; van der Ploeg, Frederick
  29. The Preferential Treatment of Green Bonds By Francesco Giovanardi; Matthias Kaldorf; Lucas Radke; Florian Wicknig

  1. By: Beck, Thorsten; Döttling, Robin; Lambert, Thomas; Van Dijk, Mathijs A
    Abstract: Liquidity creation (the transformation of liquid liabilities into illiquid assets) is a key function of banks. We show that liquidity creation is positively associated with economic growth at both country and industry levels. In particular, liquidity creation helps growth by boosting tangible, but not intangible investment. Our results suggest an important non-linearity; liquidity creation does not contribute to growth in countries with a higher share of industries relying on intangible assets. We rationalize these results using a model in which banks increase aggregate investment by reducing liquidity risk, but low asset tangibility hampers liquidity creation by exacerbating moral hazard problems. Together, these findings provide new insights into the functions of banks, but also highlight their more limited role in supporting innovative industries.
    Keywords: Banking sector development; economic growth; investment; liquidity creation; tangible assets
    JEL: E22 G21 O16 O40
    Date: 2020–06
  2. By: Laura Spierdijk; Pieter IJtsma; Sherrill Shaffer
    Abstract: The economic literature has largely ignored the existence of global common factors and local spatial dependence in the assessment of the real effects of U.S. banking deregulation. Motivated by consistency concerns, this study uses spatial econometric models with common factors to analyze the impact of U.S. banking deregulation on county-level economic growth during the 1970–2000 period. We estimate the direct effects of banking deregulation, as well as the size, geographic scope and source of any spatial spillovers. Statistically and economically significant growth effects were experienced by counties in states that deregulated intrastate branching, but only after an initial period without any growth effects. We find no significant growth effects of interstate banking deregulation. During the later half of the sample, intrastate branching deregulation increased the average expected annual growth rates of counties in the deregulated state by about 0.5 p.p. in the long run. Local spatial dependence turns out to be a crucial feature of county-level economic growth, even after common factors are accounted for. As a result, significant spatial spillovers of intrastate branching deregulation were experienced by counties in states surrounding the deregulated state during the later half of the sample. Intrastate branching deregulation increased the average expected annual growth rates of counties adjacent to the deregulated state by about 0.2 p.p. in the long run, while the spillovers to hinterland counties in adjacent states were still about 0.05–0.1 p.p. A comparison to models that ignore common factors or local spatial dependence substantiates our consistency concerns.
    Keywords: U.S. banking deregulation, common factors, spatial autocorrelation, spatial spillovers, local economic growth
    Date: 2021–03
  3. By: Matias Braun; Francisco Marcet; Claudio E. Raddatz K.
    Abstract: We provide international empirical evidence that periods of rapid expansion in credit—credit booms—lead to a tradeoff between a relaxation of financial constraints and a worsening of capital allocation. This tradeoff is stronger across small, financially constrained, and more innovative firms, as well as for firms in less tangible industries. In advanced economies the misallocation effect is stronger than the relaxation of financial constraints, and the opposite is true among emerging markets. Credit booms with larger capital misallocation are associated with a higher probability of experiencing a banking crisis and with poor economic and financial performance after the boom.
    Date: 2021–06
  4. By: Leopoldo Catania (Aarhus University and CREATES); Alessandra Luati (University of Bologna); Pierluigi Vallarino (Aarhus University and CREATES)
    Abstract: This paper shows that different states of the financial system command a different effect in worsening financial conditions on economic vulnerability. As soon as financial conditions start deteriorating, the economic outlook becomes more pessimistic and uncertain. No increase in macroeconomic uncertainty is expected when financial conditions worsen from an already tighter than usual situation. We also find that past information on GDP growth is paramount to study and predict economic vulnerability. Both these findings have relevant forecasting and policymaking implications, and persist once we consider other measures of the real economic activity. From a methodological perspective, we carry out the analysis under a novel approach which relies on the state of the art in dynamic modelling of multiple quantiles. The proposed methodology exploits the entire information of past GDP growth, can accommodate a state dependent effect of financial conditions and allows for statistical inference under the standard quasi maximum likelihood setting.
    Keywords: Economic vulnerability, Macro-financial linkages, Growth-at-Risk, Score driven models
    JEL: C32 C53 E32 E44
    Date: 2021–06–15
  5. By: Nyholm, Juho; Voutilainen, Ville
    Abstract: We analyze the relationship of the distribution of future GDP growth and accumulation of household debt in Finnish macroeconomic data from 1980 to 2019. We find clear evidence that exuberant accumulation of household debt is related to the thickening of the left tail of the future growth distribution, while reaction in the right tail of the distribution is more damped. Thus, there is a link between rapid household debt growth and increase in probabilities of more severe downturns. We also re-establish the result of Mian, Sufi, and Verner (2017) that, on average, rapid household debt accumulation is associated with slower subsequent economic growth. While the relationship of the debt growth and negative tail effects is robust along our sample period, the association between debt growth and median of the GDP growth distribution varies from significantly negative to zero, depending on the estimation sample and especially if the Finnish Great Depression of early 1990's is included.
    Keywords: household debt,GDP forecasting,quantile regression
    JEL: E44 E47 G51
    Date: 2021
  6. By: Kishimoto, Shin; Suzuki, Keishun
    Abstract: Policy makers sometimes intervene in patent licensing negotiations to guide licensing fees, but the impacts of such interventions on economic growth and welfare are relatively unknown. This paper develops a novel Schumpeterian growth model featuring a cooperative game-theoretic framework that describes negotiations about licensing fees. We find that the growth effect of intervention is negative if firms can raise unlimited external funds for their R&D investment. However, when the amount of external funds available is limited, both the growth and the welfare effects of intervention can be positive. This result means that interventions are desirable when the internal funds of firms are the main source of their R&D investment.
    Keywords: Patent licensing negotiations, Schumpeterian growth, Cooperative game, Patent protection, Financial constraints.
    JEL: C71 D45 O30
    Date: 2021–05–28
  7. By: Maurin, Laurent; Wolski, Marcin
    Abstract: Capitalising on the productivity decomposition proposed by Olley and Pakes (1996), we analyse the role of financial factors behind the relatively muted post-crisis rebound in productivity compared to previous upturns in Europe. Firstly, we provide an OLS-consistent framework to decompose sector-level productivity into trend and allocative efficiency components. We then extend our approach to estimate the contribution of firm-level confounders to the sector-level allocative component. Secondly, we find that financial leverage played an important role in explaining the change in aggregate productivity growth in Europe between 2004 and 2017. Thirdly, focusing on Northern and Western Europe, we show that the productivity potential could not be fully exploited due to access to credit conditions. Specifically, reducing collateral bottlenecks could more than double the effectiveness of financial leverage in spurring productivity growth in this region between 2014-17.
    Date: 2021
  8. By: Joab D. Valdivia C. (Banco Central de Bolivia)
    Abstract: La presente investigación examina la relación entre crecimiento sectorial y el crédito destinado al sector productivo en Bolivia. La naturaleza de los datos es de corte longitudinal, por lo cual se optó por la metodología de Efectos Fijos y Vectores Auto-Regresivos en datos de panel (PVAR). Asimismo, se realizó la versión recursiva de ambas metodologías para observar la evolución del impacto en el tiempo de colocación de cartera – PIB sectorial. Bajo la estimación de Efectos Fijos la colocación de cartera afecta positivamente al PIB sectorial en 0,12%; los resultados del modelo PVAR muestran que shocks del financiamiento al producto representan 0,51%; en la tasa de interés el efecto es contractivo (0,05%) y los efectos de la Ley de Servicios Financieros alcanzan a 0,02%. La versión recursiva de ambas metodologías devela un comportamiento similar en la evolución de las elasticidades y las funciones impulso respuesta.
    Keywords: Efectos fijos, efectos aleatorios, panel VAR, estimación recursiva, tasa de interés
    JEL: C50 E51 E52
    Date: 2019–11
  9. By: Orhan Gokmen
    Abstract: This paper examines the relationship between net FDI inflows and real GDP for Turkey from 1970 to 2019. Although conventional economic growth theories and most empirical research suggest that there is a bi-directional positive effect between these macro variables, the results indicate that there is a uni-directional significant short-run positive effect of real GDP on net FDI inflows to Turkey by employing the Vector Error Correction Model, Granger Causality, Impulse Response Functions and Variance Decomposition. Also, there is no long-run effect has been found. The findings recommend Turkish authorities optimally benefit from the potential positive effect of net incoming FDI on the real GDP by allocating it for the productive sectoral establishments while effectively maintaining the country's real economic growth to attract further FDI inflows.
    Date: 2021–06
  10. By: Faruque Ahamed
    Abstract: This paper aims to study the impact of public and private investments on the economic growth of developing countries. The study uses the panel data of 39 developing countries covering the periods 1990-2019. The study was based on the neoclassical growth models or exogenous growth models state in which land, labor, capital accumulation, etc., and technology proved substantial for economic growth. The paper finds that public investment has a strong positive impact on economic growth than private investment. Gross capital formation, labor growth, and government final consumption expenditure were found significant in explaining the economic growth. Overall, both public and private investments are substantial for the economic growth and development of developing countries.
    Date: 2021–05
  11. By: Yun Jung Kim; Jing Zhang
    Abstract: In this paper we empirically explore the relationship between debt and output in a panel of 72 countries over the period 1970–2014 using a vector autoregression (VAR). We document two puzzling empirical findings that contrast with what is predicted by a standard small open economy model by Aguiar and Gopinath (2007), where debt and output endogenously respond to total factor productivity (TFP) shocks. First, developing countries’ debt falls after a positive output shock, while the model predicts a debt expansion. Second, output declines in developed and developing countries after a debt shock, while the model predicts higher output. The relationship between debt and output depends on the sector taking on debt (households, firms, or governments) and the source of financing (domestic versus external) and differs across countries with varying degrees of economic development or different exchange rate regimes.
    Keywords: public debt; household debt; firm debt; foreign debt
    JEL: E44 F32 F34 F41
    Date: 2020–11–19
  12. By: Jan Fidrmuc (Brunel University); Martin Hulényi (Institute for Strategy and Analysis (ISA)); Olga Zajkowska (Narodowy Bank Polski)
    Abstract: We analyse the impact of EU structural and cohesion funds on economic growth of European regions using 2SLS to tackle their potential endogeneity and estimating a spatial model to account for inter-regional spillovers. We use the presence of environmentally protected areas as instruments for Cohesion Policy funds. We find that the European funds have a significant and positive effect on regional economic growth in the EU. However, there is considerable heterogeneity in the effect of Cohesion Policy across individual EU member states: the effect is stronger in the new member states, and weak or negative in the countries hit by the recent austerity measures. The inter-regional spillovers in the effect of Cohesion Policy on regional growth are found to be important: most of the effect takes place outside the recipient region rather than inside. Finally, our results also confirm the positive impact of institutional quality.
    Keywords: Regional aid; growth; environmental conservation; 2SLS; spatial.
    JEL: C21 C36 F36 E62 O11 P48
    Date: 2020
  13. By: Cruzatti C., John; Dreher, Axel; Matzat, Johannes
    Abstract: We investigate whether and to what extent Chinese development finance affects infant mortality, combining 92 demographic and health surveys (DHS) for a maximum of 53 countries and almost 55,000 sub-national locations over the 2002-2014 period. We address causality by instrumenting aid with a set of interacted variables. Variation over time results from indicators that measure the availability of funding in a given year. Cross-sectional variation results from a sub-national region's "probability to receive aid." Controlled for this probability in tandem with fixed effects for country-years and provinces, the interactions of these variables form powerful and excludable instruments. Our results show that Chinese aid increases infant mortality at sub-national scales, but decreases mortality at the country-level. In several tests, we show that this stark contrast likely results from aid being fungible within recipient countries.
    Keywords: Fungibility; Health Aid; infant mortality
    JEL: F35 I15
    Date: 2020–06
  14. By: Asmus, Gerda; Eichenauer, Vera; Fuchs, Andreas; Parks, Bradley
    Abstract: China and India increasingly provide aid and credit to developing countries. This paper explores whether India uses these financial instruments to compete for geopolitical and commercial influence with China (and vice versa). To do so, we build a new geocoded dataset of Indian government-financed projects abroad between 2007 and 2014 and combine it with data on Chinese government-financed projects. Our regression results for 2,333 provinces within 123 countries demonstrate that India's Exim Bank is significantly more likely to locate a project in a given jurisdiction if China provided government financing there in the previous year. Since this effect is more pronounced in countries where China has made public opinion gains relative to India and where both lenders have a similar export structure, we interpret this as evidence of India competing with China. By contrast, we do not find evidence that China uses official aid or credit to compete with India through co-located projects.
    Keywords: development finance,foreign aid,social development assistance,official credits,new donors,China,India,geospatial analysis
    JEL: F34 F35 F59 H77 H81 O19 O22 P33 R58
    Date: 2021
  15. By: Afees A. Salisu (Centre for Econometric and Allied Research, University of Ibadan, Ibadan, Nigeria); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield, 0028, South Africa)
    Abstract: We forecast real stock returns of South Africa over the monthly period of 1915:01 to 2021:03 using real oil, gold and silver prices, based on an autoregressive type distributed lag model that controls for persistence and endogeneity bias. Oil price proxies for fundamentals, while gold and silver prices capture sentiments. We find that the metrics for fundamentals and sentiments both predict real stock returns of South Africa, with nonlinearity, modelled by decomposition of these prices into their respective positive and negative counterparts, playing an important role in terms of forecasting when a longer out-of-sample period spanning over three-quarters of a century is used. When compared to fundamentals, sentiments, particularly real gold prices, have a relatively more stronger role to play in forecasting real stock returns. Further, the predictability of stock returns emanating from fundamentals and sentiments is in line with the findings over the same period derived for two other advanced markets namely, the United Kingdom (UK) and the United States (US), but the stock market of another emerging economy, i.e., India covering 1920:08 to 2021:03, unlike South Africa, is found to be completely unpredictable. In other words, South Africa, in terms of its predictability, behaves like a developed stock market. Finally, given the importance of platinum and palladium for South Africa, our forecasting exercise based on their real prices over 1968:01 to 2021:03, depicts strong predictive content for real stock returns, thus again highlighting the importance of behavioral variables. However, these prices do not necessarily contain additional information over what is already available in gold, silver and oil real prices. Our results have important implications for academicians, investors and policymakers.
    Keywords: Commodity prices, real stock returns, emerging and developed markets, forecasting
    JEL: C22 C53 G15 G17 Q02
    Date: 2021–06
  16. By: Bergant, Katharina; Grigoli, Francesco; Hansen, Niels-Jakob; Sandri, Damiano
    Abstract: We show that macroprudential regulation can considerably dampen the impact of global financial shocks on emerging markets. More specifically, a tighter level of regulation reduces the sensitivity of GDP growth to VIX movements and capital flow shocks. A broad set of macroprudential tools contribute to this result, including measures targeting bank capital and liquidity, foreign currency mismatches, and risky forms of credit. We also find that tighter macroprudential regulation allows monetary policy to respond more countercyclically to global financial shocks. This could be an important channel through which macroprudential regulation enhances macroeconomic stability. These findings on the benefits of macroprudential regulation are particularly notable since we do not find evidence that stricter capital controls provide similar gains.
    Keywords: capital controls; macroprudential policies; monetary policy
    JEL: E5 F3 F4
    Date: 2020–06
  17. By: Gianni De Nicolò; Nataliya Klimenko; Sebastian Pfeil; Jean-Charles Rochet
    Abstract: We build a stylized dynamic general equilibrium model with financial frictions to analyze costs and benefits of capital requirements in the short-term and long-term. We show that since increasing capital requirements limits the aggregate loan supply, the equilibrium loan rate spread increases, which raises bank profitability and the market-to-book value of bank capital. Hence, banks build up larger capital buffers which (i) lowers the public losses in case of a systemic crisis and (ii) restores the banking sector’s lending capacity after the short-term credit crunch induced by tighter regulation. We confirm our model’s dynamic implications in a panel VAR estimation, which suggests that bank lending has even increased in the long-run after the implementation of Basel III capital regulation.
    Keywords: bank capital requirements, credit crunch, systemic risk
    JEL: E21 E32 F44 G21 G28
    Date: 2021
  18. By: Vacca, Valerio Paolo; Bichlmeier, Fabian; Biraschi, Paolo; Boschi, Natalie; Álvarez, Antonio J. Bravo; Di Primio, Luciano; Ebner, André; Hoeretzeder, Silvia; Ballesteros, Elisa Llorente; Miani, Claudia; Ricci, Giacomo; Santioni, Raffaele; Schellerer, Stefan; Westman, Hanna
    Abstract: The crisis management framework for banks in the European Union (EU) requires the resolution authorities to identify the existence of a public interest to resolve an ailing bank, rather than to open normal insolvency proceedings (NIPs). The Public Interest Assessment (PIA) determines whether resolution objectives, including the safeguard of financial stability, can be better preserved using resolution tools than NIPs .This paper provides a contribution to the ongoing discussion on the implementation of the PIA, by presenting an analytical framework to quantify the potential impact on the real economy stemming from a bank’s failure under NIPs through the interruption of the lending activity (“credit channel”). The framework is harmonized across the jurisdictions belonging to the Banking Union and aims to improve the quantitative leg of the PIA, to be coupled with qualitative elements. In a first step, we quantify the potential credit shortfall faced by firms and households due to the abrupt closure of a bank. In a second step, the impact of the credit shortfall on real outcomes is estimated via a FAVAR model and via a micro-econometric model. Reference values are provided to assess the relevance of the estimated outcomes. The illustrative results show that such a harmonized approach can be applied across the Banking Union and to banks of heterogeneous size. In case of mid-sized banks, this common analytical framework could reduce the uncertainty regarding the extent to which the failure of the institution could have a negative impact to the real economy if the lending activity is interrupted as possibly the case under NIPs. JEL Classification: E58, G01, G21, G28
    Keywords: bank insolvency, bank lending, bank resolution, EU crisis management framework, public interest assessment
    Date: 2021–06
  19. By: Segura, Anatoli; Villacorta, Alonso
    Abstract: We develop a novel framework that features loss amplification through firm-bank linkages. We use it to study optimal intervention in a lockdown that creates cash shortfalls to firms, which must borrow from banks to avoid liquidation. Firms' increase in debt reduces firms' output due to moral hazard. Banks need safe collateral to raise funds. Without intervention, aggregate risk constrains bank lending, increasing its cost and amplifying output losses. Optimal government support must provide sufficient aggregate risk insurance, and can be implemented with transfers to firms and fairly-priced guarantees on banks' debt. Non-priced bank debt guarantees and loan guarantees are suboptimal.
    Keywords: COVID-19; Financial Intermediation; firm's leverage; Government interventions; liquidity
    JEL: G01 G20 G28
    Date: 2020–06
  20. By: Juan M. Morelli; Pablo Ottonello; Diego J. Perez
    Abstract: We study the role of global financial intermediaries in international lending. We construct a model of the world economy, in which heterogeneous borrowers issue risky securities purchased by financial intermediaries. Aggregate shocks transmit internationally through financial intermediaries' net worth. The strength of this transmission is governed by the degree of frictions intermediaries face in financing their risky investments. We provide direct empirical evidence on this mechanism showing that around Lehman Brothers' collapse, emerging-market bonds held by more distressed global banks experienced larger price contractions. A quantitative analysis of the model shows that global financial intermediaries play a relevant role in driving borrowing-cost and consumption fluctuations in emerging-market economies, during both debt crises and regular business cycles. The portfolio of financial intermediaries and the distribution of bond holdings in the world economy are key to determine aggregate dynamics.
    JEL: E3 F3 F41
    Date: 2021–06
  21. By: Afees A. Salisu (Centre for Econometric and Allied Research, University of Ibadan, Ibadan, Nigeria); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield, 0028, South Africa); Riza Demirer (Department of Economics and Finance, Southern Illinois University Edwardsville, Edwardsville, IL 62026-1102, USA)
    Abstract: This study examines the role of the Global Financial Cycle (GFCy) in the propagation of uncertainty shocks from the U.S. to global economies. Specifically, we construct a large-scale global vector autoregressive (GVAR) model of 33 countries and analyze the response of real Gross Domestic Product (GDP) to uncertainty shocks associated with the U.S. as well as the domestic economy, conditional on the state of the Global Financial Cycle. While our findings confirm the dominant role of U.S. uncertainty over global economic dynamics, we show that the global financial cycle plays a moderating role over the spillover effects of such shocks. U.S. uncertainty shocks, compared to own domestic uncertainty shocks, are found to have a more prominent negative impact on output, during overstressed financial markets implied by the low values of the GFCy, while the impact turns largely insignificant during high global financial cycle states. The effects are particularly evidence in the case of the European and other G7 economies, highlighting the strong connection across these developed economies compared to their emerging counterparts. Overall, the findings provide evidence in favor of a U.S. uncertainty spillover multiplier, suggesting that the design of expansionary monetary policy as a response to U.S. uncertainty needs to be contingent on the state of the integrated global financial markets, captured by the global financial cycle.
    Keywords: Uncertainty Shocks, Global Financial Cycle, Real GDP, Global Vector Autoregressive Model
    JEL: C32 D8 E32 G15
  22. By: Joab D. Valdivia C. (Banco Central de Bolivia)
    Abstract: El ciclo crediticio o financiero en economías en desarrollo tiene un importante rol en la sostenibilidad del crecimiento en el mediano y largo plazo. La sincronización del ciclo crediticio con el económico influye en la duración del periodo expansivo o contractivo de la actividad real. Los episodios de riesgo sistémico ayudan a identificar variables deterioradas para la aplicación de políticas contracíclicas. A partir de la metodología de Holló et al. (2012) y en combinación con cuasi-correlaciones cruzadas se construyó un Indicador Compuesto de Stress Sistémico (ICSS). La descomposición del ICSS en el último periodo indica que la liquidez, crecimiento del crédito, el spread en moneda extranjera y el ciclo de precio de vivienda determinan, en mayor cuantía, el comportamiento del indicador creado, evidenciando escenarios de estrés sistémico.
    Keywords: Riesgo sistémico, ciclo crediticio o financiero, correlaciones cruzadas, modelo MarkovSwitching
    JEL: G01 G10 G20 E44
    Date: 2019–11
  23. By: Yun Jung Kim; Jing Zhang
    Abstract: Empirically, net capital inflows are pro-cyclical in developed countries and counter-cyclical in developing countries. That said, private inflows are pro-cyclical and public in flows are counter-cyclical in both groups of countries. The dominance of private (public) in flows in developed (developing) countries drives the difference in total net inflows. We rationalize these patterns using a dynamic stochastic two-sector model of a small open economy facing borrowing constraints. Private agents over-borrow because of the pecuniary externality arising from constraints. The government saves abroad to reduce aggregate debt, making the economy resilient to adverse shocks. Differences in borrowing constraints and shock processes across countries explain the empirical patterns of capital inflows.
    Keywords: reserves; pecuniary externality; cyclicality of net capital ows
    JEL: E44 F32 F34 F41
    Date: 2020–11–13
  24. By: Can Xu; Jan Jacobs; Jakob de Haan
    Abstract: We examine the dynamic impact of household borrowing on the trade balance using data from 33 developing countries and 36 developed countries over the 1980-2017 period. Our findings suggest that the impact of household borrowing on the trade balance is by and large negative, both in the short and long run. We show that household borrowing’s adverse effects on the trade balance are more pronounced but less persistent in developing countries.
    Keywords: household borrowing, trade balance, dynamic effects, panel ARDL model
    JEL: E21 F32 G21
    Date: 2021
  25. By: Zhiqiang Lu; Junjie Wu; Hongyu Li; Duc Khuong Nguyen
    Abstract: This paper investigates the impact of local banks and digital financial inclusion on small and medium enterprise (SME) financing constraints. Using data of Chinese SMEs for the period 2007?2017, our robust results find (1) SMEs financing constraints are negatively associated with the proportion of local bank branches and the degree of digital financial inclusion; (2) the effect of local banks is more pronounced for small, transparent, and firms in the regions less dependent on bank credit; and (3) local bank branches and digital financial inclusion have a substitution effect on alleviating SMEs financial constraints. The findings shed light on how digital finance technologies could influence traditional SME-bank relationship and have important policy and managerial implications.
    Keywords: local banks; digital financial inclusion; financing constraints; SMEs; China.
    Date: 2021–01–01
  26. By: Baah Aye Kusi (University of Ghana Business School, Ghana); Elikplimi Agbloyor (University of Ghana Business School, Ghana); Simplice A. Asongu (Yaoundé, Cameroon); Joshua Yindenaba Abor (University of Ghana Business School, Ghana)
    Abstract: This study examines the effect of foreign bank assets and presence on banking stability in the economies with strong and weak country-level corporate governance in Africa between 2006 and 2015. Employing a Prais-Winsten panel data model on 86 banks in about 30 African economies, the findings on how foreign bank assets and presence influence banking stability in strong and weak corporate governance economies under different regulatory regimes are reported for the first time in Africa. The initial findings show that foreign bank presence and assets promote banking stability. However, the positive effect of foreign bank assets and presence is enhanced in economies with strong country-level corporate governance, while the positive effect of foreign bank assets and presence is weakened in economies with weak country-level corporate governance. After introducing different regulatory variables (regimes), it is observed that the enhancing effect of foreign bank presence and assets on banking stability in the full sample and economies with strong and weak country level corporate governance systems is deepened or improved under loan loss provision regulation regime. However, under the private and public sector-led financial transparency regulations, the reducing effect of foreign bank presence and assets on banking stability in economies with weak corporate governance systems is further dampened. These findings show that the relationship between foreign bank presence and assets is deeply shaped by corporate governance systems and regulatory regimes in Africa. Hence, policymakers must build strong corporate governance and sound regulatory regimes to enhance how foreign bank operations promote banking stability.
    Keywords: Stability; Foreign banks; Regulation, Corporate governance; Africa
    JEL: G0 G2 G3
    Date: 2021–01
  27. By: Md Saimum Hossain; Faruque Ahamed
    Abstract: The study investigates the relationship between bank profitability and a comprehensive list of bank specific, industry specific and macroeconomic variables using unique panel data from 23 Bangladeshi banks with large market shares from 2005 to 2019 employing the Pooled Ordinary Least Square (POLS) Method for regression estimation. The random Effect model has been used to check for robustness. Three variables, namely, Return on Asset (ROA), Return on Equity (ROE), and Net Interest Margin (NIM), have been used as profitability proxies. Non-interest income, capital ratio, and GDP growth have been found to have a significant relationship with ROA. In addition to non-interest income, market share, bank size, and real exchange rates are significant explaining variables if profitability is measured as NIM. The only significant determinant of profitability measured by ROE is market share. The primary contribution of this study to the existing knowledge base is an extensive empirical analysis by covering the entire gamut of independent variables (bank specific, industry related, and macroeconomic) to explain the profitability of the banks in Bangladesh. It also covers an extensive and recent data set. Banking sector stakeholders may find great value from the outputs of this paper. Regulators and policymakers may find this useful in undertaking analyses in setting policy rates, banking industry stability, and impact assessment of critical policy measures before and after the enactment, etc. Investors and the bank management are to use the findings of this paper in analyzing the real drivers of profitability of the banks they are contemplating to invest and managing on a daily basis.
    Date: 2021–05
  28. By: Hambel, Christoph; Kraft, Holger; van der Ploeg, Frederick
    Abstract: Asset pricing and climate policy are analyzed in a global economy where consumption goods are produced by both a green and a carbon-intensive sector. We allow for endogenous growth and three types of damages from global warming. It is shown that, initially, the desire to diversify assets complements the attempt to mitigate economic damages from climate change. In the longer run, however, a trade-off between diversification and climate action emerges. We derive the optimal carbon price, the equilibrium risk-free rate, and risk premia. Climate disasters, which are more likely to occur sooner as temperature rises, significantly affect asset prices.
    Keywords: asset prices; carbon price; Climate finance; decarbonization; disaster risk; Diversification; green assets
    JEL: D81 G01 G12 Q5 Q54
    Date: 2020–06
  29. By: Francesco Giovanardi (University of Cologne, Center for Macroeconomic Research); Matthias Kaldorf (University of Cologne, Center for Macroeconomic Research. Sibille-Hartmann-Str. 2-8, 50969 Cologne, Germany); Lucas Radke (University of Cologne, Center for Macroeconomic Research); Florian Wicknig (University of Cologne, Center for Macroeconomic Research)
    Abstract: We study the preferential treatment of green bonds in the Central Bank collateral framework as an environmental policy instrument. We propose a macroeconomic model with environmental and financial frictions, in which green and conventional entrepreneurs issue defaultable bonds to banks that use them as collateral. Collateral policy solves a financial stability trade-off between increasing bond issuance and subsidizing entrepreneur default risk. In a calibration to the Euro Area, optimal collateral policy features substantial preferential treatment, implying a green-conventional bond spread of 73bp. This increases the green bond share by 0.69 percentage points, while the green capital share increases by 0.32 percentage points, which in turn reduces pollution. The limited response of green investment is caused by higher risk taking of green entrepreneurs. When optimal Pigouvian taxation is available, collateral policy does not feature preferential treatment, but still improves welfare by addressing adverse effects of taxation on financial stability.
    Keywords: Green Investment, Central Bank Policy, Collateral Framework, Corporate De-fault Risk, Environmental Policy
    JEL: E44 E58 E63 Q58
    Date: 2021–06

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