nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2021‒08‒30
thirty-one papers chosen by
Georg Man

  1. Corporate debt booms, financial constraints and the investment nexus By Albuquerque, Bruno
  2. Trust and Financial Development: Forms of Trust and Ethnic Fractionalization Matter By Ali Recayi Ogcem; Ruth Tacneng; Amine Tarazi
  3. Growth constraints and external vulnerability in Argentina By Catelén, Ana Laura
  4. Monetary Policy Shocks and Economic Growth in Morocco: A Factor-Augmented Vector Autoregression (FAVAR) Approach By Marouane Daoui; Bouchra Benyacoub
  5. Macroeconomic and Financial Risks: A Tale of Mean and Volatility By Dario Caldara; Chiara Scotti; Molin Zhong
  6. A Large Bayesian VAR of the United States Economy By Richard K. Crump; Stefano Eusepi; Domenico Giannone; Eric Qian; Argia M. Sbordone
  7. Firm-level Business Uncertainty and the Predictability of the Aggregate U.S. Stock Market Volatility during the COVID-19 Pandemic By Riza Demirer; Rangan Gupta; Afees A. Salisu; Renee van Eyden
  8. Spillover effects from China and the US to global emerging markets: a dynamic analysis By Mpoha, Salifya; Bonga-Bonga, Lumengo
  9. Financial crises: A survey By Amir Sufi; Alan M. Taylor
  10. Foundations of system-wide financial stress testing with heterogeneous institutions By Farmer, J. Doyne; Kleinnijenhuis, Alissa; Nahai-Williamson, Paul; Wetzer, Thom
  11. Comparing minds and machines: implications for financial stability By Buckmann, Marcus; Haldane, Andy; Hüser, Anne-Caroline
  12. How to Assess Country Risk: The Vulnerability Exercise Approach Using Machine Learning By International Monetary Fund
  13. Global lending conditions and international coordination of financial regulation policies By Enisse Kharroubi
  14. Global Banking and Firm Financing: A Double Adverse Selection Channel of International Transmission By Leslie Sheng Shen
  15. How do banks propagate economic shocks? By Yusuf Emre Akgunduz; Seyit Mumin Cilasun; H. Ozlem Dursun-de Neef; Yavuz Selim Hacihasanoglu; Ibrahim Yarba
  16. Competition and Selection in Credit Markets By Constantine Yannelis; Anthony Lee Zhang
  17. The economic effects of private equity buyouts By Steven J. Davis; John C. Haltiwanger; Kyle Handley; Ben Lipsius; Josh Lerner; Javier Miranda
  18. Corporate stress and bank nonperforming loans: Evidence from Pakistan By M. Ali Choudhary; Anil K. Jain
  19. Does financial inclusion reduce non-performing loans and loan loss provisions? By Ozili, Peterson Kitakogelu; Adamu, Ahmed
  20. The Indian manufacturing sector: finance, investment and performance of firms. By Agarwal, Manmohan; Azim, Rumi
  21. Financing Entrepreneurship and Innovation in China By Lin William Cong; Charles M. C. Lee; Yuanyu Qu; Tao Shen
  22. Chinese Investment in Ethiopia: Contribution, Challenges, Opportunities and Policy Recommendations By Gebrehiwot, Berihu Assefa; Gebreeyesus, Mulu; Weldesilassie, Alebel Bayrau
  23. Innovation Strategy and Economic Development By Matias Braun; Luis Felipe Cespedes; Sebastian Bustos
  24. Why is productivity slowing down? By Lafond, François; Goldin, Ian; Koutroumpis, Pantelis; Winkler, Julian
  25. The Cross of Gold: Brazilian Treasure and the Decline of Portugal By Kedrosky, Davis; Palma, Nuno
  26. Money Market Integration in Spain in the Ninetheen Century: The Role of the 1875-1885 Decade By Emma M., Iglesias; J. Carles, Maixé-Altés
  27. The Joint Dynamics of Money and Credit Multipliers Since the Gold Standard Era By Luca Benati
  28. Start-ups, Gender Disparities, and the Fintech Revolution in Latin America By Batiz-Lazo, Bernardo; González-Correa, Ignacio
  29. The Importance of Capital in Closing the Entrepreneurial Gender Gap: A Longitudinal Study of Lottery Wins By Sarah Flèche; Anthony Lepinteur; Nattavudh Powdthavee
  30. Analyzing Financial Literacy in the Southern United States By Carvalho, Mckenzie; Kim, Ayoung; Harri, Ardian; Smith, Rebecca C.; Turner, Steven C.
  31. Household financial vulnerabilities and physical climate risks By Thibaut Duprey; Colin Jones; Callie Symmers; Geneviève Vallée

  1. By: Albuquerque, Bruno (Bank of England)
    Abstract: Does corporate debt overhang affect investment over the medium term? To uncover this association, I measure debt overhang with a concept of debt accumulation or debt boom, and combine leverage with liquid assets to capture financial constraints. Using a large US firm-level panel over 1985 Q1–2019 Q1, I find that debt overhang leads financially vulnerable firms to cut permanently back on investment: a 10 percentage point increase in the three-year change in the leverage ratio is associated with lower investment growth of 5 percentage points after five years compared to the most resilient firms. I also find that vulnerable firms experience weaker intangible capital growth in the aftermath of debt booms. Finally, I find that general equilibrium effects dominate, stressing the risk that firm-specific debt booms in a subset of firms may spill over to the rest of the economy.
    Keywords: Corporate debt booms; firm investment; financial constraints; local projections
    JEL: D22 E22 E32 G32
    Date: 2021–08–13
  2. By: Ali Recayi Ogcem (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges); Ruth Tacneng (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)
    Abstract: We examine the relationship between trust and financial development using detailed regional data in Turkey. We distinguish different forms of trust (i.e., generalized, narrow, and wide) and investigate whether varying degrees of generalized and narrow trust, as well as wide and narrow trust imply different financial development outcomes. Moreover, we assess how different forms of trust and their combination affect financial development in the presence of ethnically fragmented populations. We use instrumental variable (IV) estimations to address endogeneity issues and the potential reverse causality between trust and financial development. Our main results indicate that wide trust has a significantly positive impact on financial development. Moreover, in regions where narrow trust is relatively high, we find financial development benefits from increasing generalized trust. Our findings also highlight that whereas wide trust leads to more developed financial markets in more ethnically fragmented regions, generalized trust plays a stronger role in less fragmented ones. Further, we also analyze the impact of trust on the proportion of credit backed by stable funds such as deposits. Our findings show that generalized trust plays an important role in mitigating the adverse effects that ethnic fractionalization have on the availability of deposits or stable sources to fund loans. On the whole, our study highlights the importance of distinguishing the impact of different forms and combinations of trust. Generalized trust, which is the focus of most studies, is not an all-encompassing one-size-fits-all solution to enhance economic performance.
    Keywords: Trust,Financial development,Regional development,Ethnic fractionalization
    Date: 2021–08–19
  3. By: Catelén, Ana Laura
    Abstract: This paper describes the balance-of-payments dominance as a growth constraint to the Argentinian economy and briefly characterizes the unbalanced productive structure of the country as its main cause. Also, understanding that under this constraint domestic economic cycles depend on external shocks, auto-regressive vectors are used to characterize the short-run impact of these shocks on GDP, trade balance, and real wages. Results confirm that there is a bottleneck in the trade balance that blocks future growth possibilities, that GDP and wages are highly sensitive to variations in the terms of trade, that the increase in external debt does not produce economic growth or improvements in the purchasing power of the population, and that there is a vicious dynamic between capital flight and foreign debt. At the same time, there is evidence of the increase in external vulnerability since the change in the accumulation model in the 1970s.
    Keywords: Crecimiento Económico; Balanza de Pagos; Vulnerabilidad Externa;
    Date: 2020
  4. By: Marouane Daoui; Bouchra Benyacoub (FSJES-Fès - Faculté des Sciences Juridiques, Economiques et Sociales de Fès)
    Abstract: In response to the empirical anomalies relating to the use of VAR models in analysing the impact of monetary policy shocks, the Factor-Augmented VAR (FAVAR) models attempt to provide a practical solution. Moreover, these models, based on dynamic factor models (DFM), make it possible to summarize the information present in a large database into a small number of factors common to all the variables. In this paper, we analyse the effects of monetary policy shocks on economic growth using the FAVAR model on a large number of Moroccan macroeconomic time series (117 quarterly time series from 1985Q1 to 2018Q4). First, we present the econometric framework of the FAVAR model, then the data used and their necessary transformations. Next, we determine the number of factors before estimating the model. Then, we focus on the analysis of the impulse response functions of some indicators of economic growth in Morocco. The results of the analysis indicate that, the overall decline in GDP in response to monetary policy shocks suggests that they have a clearly negative impact on economic growth.
    Abstract: En réponse aux anomalies empiriques liées à l'utilisation des modèles VAR dans l'analyse de l'impact des chocs de politique monétaire, les modèles VAR augmentés de facteurs (FAVAR) tentent d'apporter une solution pratique. De plus, ces modèles, basés sur des modèles factoriels dynamiques (DFM), permettent de résumer l'information présente dans une grande base de données en un petit nombre de facteurs communs à toutes les variables. Dans ce papier, nous analysons les effets des chocs de politique monétaire sur la croissance économique en utilisant le modèle FAVAR sur un grand nombre de séries temporelles macroéconomiques marocaines (117 séries temporelles trimestrielles de 1985Q1 à 2018Q4). Dans un premier temps, nous présentons le cadre économétrique du modèle FAVAR, puis les données utilisées et leurs transformations nécessaires. Ensuite, nous déterminons le nombre de facteurs avant d'estimer le modèle. Ensuite, nous nous concentrons sur l'analyse des fonctions de réponse impulsionnelle de certains indicateurs de la croissance économique au Maroc. Les résultats de l'analyse indiquent que, la baisse globale du PIB en réponse aux chocs de politique monétaire suggère que ceux-ci ont un impact clairement négatif sur la croissance économique.
    Keywords: Monetary policy shocks,Economic growth,Dynamic factor model,FAVAR,Morocco
    Date: 2021–03–04
  5. By: Dario Caldara; Chiara Scotti; Molin Zhong
    Abstract: We study the joint conditional distribution of GDP growth and corporate credit spreads using a stochastic volatility VAR. Our estimates display significant cyclical co-movement in uncertainty (the volatility implied by the conditional distributions), and risk (the probability of tail events) between the two variables. We also find that the interaction between two shocks--a main business cycle shock as in Angeletos et al. (2020) and a main financial shock--is crucial to account for the variation in uncertainty and risk, especially around crises. Our results highlight the importance of using multivariate nonlinear models to understand the determinants of uncertainty and risk.
    Keywords: Uncertainty; Tail risk; Joint conditional distributions; Main shocks
    JEL: C53 E23 E32 E44
    Date: 2021–08–19
  6. By: Richard K. Crump; Stefano Eusepi; Domenico Giannone; Eric Qian; Argia M. Sbordone
    Abstract: We model the United States macroeconomic and financial sectors using a formal and unified econometric model. Through shrinkage, our Bayesian VAR provides a flexible framework for modeling the dynamics of thirty-one variables, many of which are tracked by the Federal Reserve. We show how the model can be used for understanding key features of the data, constructing counterfactual scenarios, and evaluating the macroeconomic environment both retrospectively and prospectively. Considering its breadth and versatility for policy applications, our modeling approach gives a reliable, reduced form alternative to structural models.
    Keywords: bayesian vector autoregressions; conditional forecasts; scenario analyses; financial conditions index
    JEL: C11 C32 C53 C54 E32 E37
    Date: 2021–08–01
  7. By: Riza Demirer (Department of Economics and Finance, Southern Illinois University Edwardsville, Edwardsville, IL 62026- 1102, USA); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Afees A. Salisu (Centre for Econometric & Allied Research, University of Ibadan, Ibadan, Nigeria; Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Renee van Eyden (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)
    Abstract: In this paper, we analyze the predictive role of firm-level business expectations and uncertainties derived from a panel survey of U.S. 1,750 business executives from 50 states for the realized variance (sum of daily squared log-returns over a month) of the S&P500 over the monthly period of September, 2016 to July, 2021. Unlike standard models, our predictive framework adopts a time-varying approach due to the existence of multiple structural breaks in the relationship between volatility and the predictors in the model, which in turn leads to statistically insignificant causal effects in a constant parameter set-up. Our time-varying results reveal the predictive power of firm-level business uncertainty is concentrated during the early part of the sample associated with the U.S.-China trade war, and towards the end of our data coverage in the wake of the outbreak of the COVID-19 pandemic. Since, in-sample predictability does not guarantee the same over an out-sample, we also conducted a full-fledged forecasting exercise to show that subjective expectations and uncertainties associated with sales growth rates and employment produces statistically significant predictability gains over January, 2020 to July, 2021, given an in-sample of September, 2016 to December, 2019. Our results suggest that subjective measures of business uncertainty at the firm-level indeed captures predictive information regarding aggregate stock market uncertainty which has important implications for investors and economic projections at the policy level.
    Keywords: S&P500 Realized Variance, Firm-Level Expectations and Uncertainties, Time-Varying Predictability
    JEL: C32 C53 D80 G10
  8. By: Mpoha, Salifya; Bonga-Bonga, Lumengo
    Abstract: The 2008/2009 Global Financial Crisis has accentuated the number of studies on contagion among researchers seeking to unravel the factors behind its impacts, effects and mechanisms. Several methodologies have been proposed to differentiate between contagion and other phenomenon related to the cross transmission of shocks. However, few studies distinguish between the sources of transmission of shocks and their effects on different emerging markets when analysing contagion phenomenon. This paper contributes to the literature by assessing dynamic spillover effects from two key markets (China and the U.S) to six major emerging economies from different regions making use of the wavelet analysis. The results support the presence of contagion during selected crisis periods and suggest variation in market response for each emerging market as well as shock source. The results of the paper show the heterogenous reactions of emerging markets from spillover shocks of different sources and provide useful insight to investors and asset managers seeking to diversify portfolios within the selected emerging markets as well as policy makers in establishing stronger regulations.
    Keywords: Shift Contagion, Interdependence, Wavelet Analysis, Emerging Economies, China, U.S, Maximal Overlap Discrete Wavelet Transform (MODWT), Continuous Wavelet-Transform (CWT), Wavelet Coherence, Wavelet Correlation.
    JEL: C13 C58 G15
    Date: 2021–08–24
  9. By: Amir Sufi; Alan M. Taylor
    Abstract: Financial crises have large deleterious effects on economic activity, and as such have been the focus of a large body of research. This study surveys the existing literature on financial crises, exploring how crises are measured, whether they are predictable, and why they are associated with economic contractions. Historical narrative techniques continue to form the backbone for measuring crises, but there have been exciting developments in using quantitative data as well. Crises are predictable with growth in credit and elevated asset prices playing an especially important role; recent research points convincingly to the importance of behavioral biases in explaining such predictability. The negative consequences of a crisis are due to both the crisis itself but also to the imbalances that precede a crisis. Crises do not occur randomly, and, as a result, an understanding of financial crises requires an investigation into the booms that precede them.
    JEL: E32 E44 E7 G01 G10 N20
    Date: 2021–08
  10. By: Farmer, J. Doyne; Kleinnijenhuis, Alissa; Nahai-Williamson, Paul; Wetzer, Thom
    Abstract: We propose a structural framework for the development of system-wide financial stress tests with multiple interacting contagion, amplification channels and heterogeneous financial institutions. This framework conceptualises financial systems through the lens of five building blocks: financial institutions, contracts, markets, constraints, and behaviour. Using this framework, we implement a system-wide stress test for the European financial system. We obtain three key findings. First, the financial system may be stable or unstable for a given microprudential stress test outcome, depending on the system's shock-amplifying tendency. Second, the 'usability' of banks' capital buffers (the willingness of banks to use buffers to absorb losses) is of great consequence to systemic resilience. Third, there is a risk that the size of capital buffers needed to limit systemic risk could be severely underestimated if calibrated in the absence of system-wide approaches.
    Keywords: Systemic risk, stress testing, financial contagion, financial institutions, capital requirements, macroprudential policy
    JEL: G17 G21 G23 G28 C63
    Date: 2020–05
  11. By: Buckmann, Marcus (Bank of England); Haldane, Andy (Bank of England); Hüser, Anne-Caroline (Bank of England)
    Abstract: Is human or artificial intelligence more conducive to a stable financial system? To answer this question, we compare human and artificial intelligence with respect to several facets of their decision-making behaviour. On that basis, we characterise possibilities and challenges in designing partnerships that combine the strengths of both minds and machines. Leveraging on those insights, we explain how the differences in human and artificial intelligence have driven the usage of new techniques in financial markets, regulation, supervision, and policy making and discuss their potential impact on financial stability. Finally, we describe how effective mind-machine partnerships might be able to reduce systemic risks.
    Keywords: Artificial intelligence; machine learning; financial stability; innovation; systemic risk
    JEL: C45 C55 C63 C81
    Date: 2021–08–20
  12. By: International Monetary Fund
    Abstract: The IMF’s Vulnerability Exercise (VE) is a cross-country exercise that identifies country-specific near-term macroeconomic risks. As a key element of the Fund’s broader risk architecture, the VE is a bottom-up, multi-sectoral approach to risk assessments for all IMF member countries. The VE modeling toolkit is regularly updated in response to global economic developments and the latest modeling innovations. The new generation of VE models presented here leverages machine-learning algorithms. The models can better capture interactions between different parts of the economy and non-linear relationships that are not well measured in ”normal times.” The performance of machine-learning-based models is evaluated against more conventional models in a horse-race format. The paper also presents direct, transparent methods for communicating model results.
    Keywords: Risk Assessment, Supervised Machine Learning, Prediction, Sudden Stop, Exchange Market Pressure, Fiscal Crisis, Debt, Financial Crisis, Economic Crisis, Economic Growth
    Date: 2021–05–07
  13. By: Enisse Kharroubi
    Abstract: Using a model of strategic interactions between two countries, I investigate the gains to international coordination of financial regulation policies, and how these gains depend on global lending conditions. When global lending conditions are determined non-cooperatively, I show that coordinating regulatory policies leads to a Pareto improvement relative to the case of no cooperation. In the non-cooperative equilibrium, one region - the core - determines global lending conditions, leaving the other region - the periphery - in a sub-optimal situation. The periphery then tightens regulatory policy to reduce the cost of sub-optimal lending conditions. Yet, in doing so, it fails to internalise a cross-border externality: tightening regulatory policy in one region limits ex ante borrowing in the other region, which increases the cost of sub-optimal lending conditions for the periphery. The equilibrium with cooperative regulatory policies can then improve on this outcome as both regions take into account the cross-border externality and allow for larger ex ante borrowing, ending in a lower cost of suboptimal lending conditions for the periphery.
    Keywords: regulatory policy, global financial conditions, international coordination
    JEL: D53 D62 F38 F42 G18
    Date: 2021–08
  14. By: Leslie Sheng Shen
    Abstract: This paper proposes a "double adverse selection channel" of international transmission. It shows, theoretically and empirically, that financial systems with both global and local banks exhibit double adverse selection in credit allocation across firms. Global (local) banks have a comparative advantage in extracting information on global (local) risk, and this double information asymmetry creates a segmented credit market where each bank lends to the worst firms in terms of the unobserved risk factor. Given a bank funding (e.g., monetary policy) shock, double adverse selection affects firm financing at the extensive and price margins, generating spillover and amplification effects across countries.
    Keywords: Adverse selection; Global banking; Information asymmetry; International transmission; Monetary policy
    JEL: G21 F30
    Date: 2021–08–10
  15. By: Yusuf Emre Akgunduz; Seyit Mumin Cilasun; H. Ozlem Dursun-de Neef; Yavuz Selim Hacihasanoglu; Ibrahim Yarba
    Abstract: This paper exploits the COVID-19 pandemic as a negative shock on firm revenues in affected industries and studies the transmission of this shock via banks. We use the ex-ante heterogeneity in the amount of loans issued to affected industries to measure the variation in banks' exposure to the negative shock. Using bank-firm level credit register data from Turkey, we show that banks transmitted the negative shock with a reduction in their loan supply not only to affected but also unaffected industries. The effect persists at the firm level, but is reduced for large firms and firms with existing relationships to state-owned banks.
    Keywords: Bank loan supply, Economic shocks propagation, COVID-19 pandemic, Bank lending channel, Firm borrowing channel
    JEL: G01 G21 G28 G32
    Date: 2021
  16. By: Constantine Yannelis; Anthony Lee Zhang
    Abstract: We present both theory and evidence that increased competition may decrease rather than increase consumer welfare in subprime credit markets. We present a model of lending markets with imperfect competition, adverse selection and costly lender screening. In more competitive markets, lenders have lower market shares, and thus lower incentives to monitor borrowers. Thus, when markets are competitive, all lenders face a riskier pool of borrowers, which can lead interest rates to be higher, and consumer welfare to be lower. We provide evidence for the model’s predictions in the auto loan market using administrative credit panel data.
    JEL: D14 D4 G20 G21 G5 L62
    Date: 2021–08
  17. By: Steven J. Davis (University of Chicago, and NBER); John C. Haltiwanger (University of Maryland, and NBER); Kyle Handley (University of Michigan, and NBER); Ben Lipsius (University of Michigan); Josh Lerner (Harvard Business School, and NBER); Javier Miranda (Friedrich-Schiller University Jena and Halle Institute for Economic Research (IWH))
    Abstract: We examine thousands of U.S. private equity (PE) buyouts from 1980 to 2013, a period that saw huge swings in credit market tightness and GDP growth. Our results show striking, syste matic differences in the real-side effects of PE buyouts, depending on buyout type and external conditions. Employment at target firms shrinks 13% over two years in buyouts of publicly listed firms but expands 13% in buyouts of privately held firms, both relative to contemporaneous outcomes at control firms. Labor productivity rises 8% at targets over two years post buyout (again, relative to controls), with large gains for both public-to-private and private-to-private buyouts. Target productivity gains are larger yet for deals executed amidst tight credit conditions. A post-buyout widening of credit spreads or slowdown in GDP growth lowers employment growth at targets and sharply curtails productivity gains in public-to-private and divisional buyouts. Average earnings per worker fall by 1.7% at target firms after buyouts, largely erasing a pre-buyout wage premium relative to controls. Wage effects are also heterogeneous. In these and other respects, the economic effects of private equity vary greatly by buyout type and with external conditions.
    Keywords: Private equity buyouts, business cycle, business dynamics, real effects, job creation, productivity, wages, administrative data, large matched sample
    JEL: D22 D24 G24 G34 J63 L25
    Date: 2021–08–23
  18. By: M. Ali Choudhary; Anil K. Jain
    Abstract: Using detailed administrative Pakistani credit registry data, we show that banks with low leverage ratios are both significantly slower and less likely to recognize a loan as nonperforming than other banks that lend to the same firm. Moreover, we find suggestive evidence that this lack of recognition impedes loan curing, with banks with low leverage ratios reporting significantly higher final default rates than other banks for the same borrower (even after controlling for differences in loan terms). Our empirical findings are consistent with the theoretical prediction that classifying a nonperforming loan is more expensive for banks with less capital.
    Keywords: Credit markets; Banks; Corporate debt; Evergreening; Nonperforming loans
    JEL: G21 G33
    Date: 2021–08–20
  19. By: Ozili, Peterson Kitakogelu; Adamu, Ahmed
    Abstract: We examine whether countries that have high levels of financial inclusion have fewer non-performing loans and loan loss provisions in their banking sectors. The fixed effect panel regression methodology was used to analyse the effect of financial inclusion on bank non-performing loans and loan loss provisions. Using data from 48 countries, we find that greater formal account ownership is associated with high non-performing loans. Bank loan loss provisions are fewer in countries that have high levels of financial inclusion only when financial inclusion is achieved through the combined use of formal account ownership, bank branch supply and ATM supply. Also, non-performing loans are fewer in countries that experience economic boom and high levels of financial inclusion.
    Keywords: financial inclusion, non-performing loans, loan loss provisions, financial stability, bank stability, ATM, formal account ownership, credit risk, access to finance.
    JEL: G00 G20 G21 G23 G28 G29 O31
    Date: 2021–08
  20. By: Agarwal, Manmohan (Centre for International Trade and Development, Jawaharlal Nehru University); Azim, Rumi (Centre for International Trade and Development, Jawaharlal Nehru University)
    Abstract: The paper tests the hypothesis that financial stress caused the stagnation in the manufacturing sector, using firm level data on a sample of 804 large, mid, and small cap manufacturing firms for 15 years from 2005 to 2019. We analyse the trend in the financial indicators and estimate dynamic panel data regression using a two-step GMM method. We do not find substantial for financial stress to be a major determinant of the investment slowdown in these firms. Our results support the Pecking order theory, particularly for larger firms. In addition, we find that the declining growth in sales is a major determinant in explaining the slowdown in fixed investments and profits. For small cap firms, the size of the firms also matters. We therefore suggest that measures to increase demand can help in reviving the sales growth of firms and thereby private investments and profits.
    Keywords: Capital structure ; Investment ; Profitability ; Manufacturing ; India
    Date: 2021–08
  21. By: Lin William Cong; Charles M. C. Lee; Yuanyu Qu; Tao Shen
    Abstract: This study reports on the current state-of-affairs in the funding of entrepreneurship and innovations in China and provides a broad survey of academic findings on the subject. We also discuss the implications of these findings for public policies governing the Chinese financial system, particularly regulations governing the initial public offering (IPO) process. We also identify and discuss promising areas for future research.
    Date: 2021–08
  22. By: Gebrehiwot, Berihu Assefa; Gebreeyesus, Mulu; Weldesilassie, Alebel Bayrau
    Abstract: Recognizing the immense potential for greater Chinese investment promotion and its contribution to Ethiopia’s industrialization and acknowledging the gaps, this paper aims to conduct a rigorous research through analysis of secondary sources and qualitative survey of Chinese enterprise doing business in Ethiopia in various sectors. In this regard, the key policy questions that this study tries to answer are ‘the involvement in and the contribution to Ethiopia’s industrialization and the challenges and opportunities they face. Hence, the overall objective of this research will be to (i) assess the trends in Chinese enterprises involvement in Ethiopia’s industrialization for the last decade, (ii) inform both the Chinese government and Ethiopian government on key business barriers and market failures that are constraining Chinese business entry and growth in Ethiopia; (iii) investigate the immense untapped investment potential from China that can be attracted and opportunities that Ethiopia could offer to Chinese investors; and (iv) propose policy options on how to address the challenges and thereby maximize the opportunities to enhance Chinese investment towards Ethiopia’s industrialization.
    Keywords: Enterprise, Investment, China, Ethiopia, FDI
    JEL: E22
    Date: 2020–03–05
  23. By: Matias Braun; Luis Felipe Cespedes; Sebastian Bustos
    Abstract: Productivity differentials have been documented as the main determinant of the variation of income per capita across countries. In this paper, we investigate whether the implementation of innovation-intensive or adoption-intensive business strategies by firms can explain differences in productivity levels and productivity growth across industries and countries. We compute a novel innovation-intensity strategy index for firms, based on textual analysis of financial reports issued in the US by firms from developed and developing countries and from a wide range of industries. We show that the index captures dimensions of the innovation process implemented by firms that go beyond R&D efforts. Our empirical results indicate that firms that pursue an innovation-based strategy exhibit higher productivity levels compared to firms that follow an adoption-based strategy. Nonetheless, the optimal business strategy depends on the distance to the world technology frontier. Firms far from the frontier grow faster when implementing an adoption-based strategy, but an innovation-based strategy better suits firms closer to the technological frontier. We provide evidence indicating that a country’s financial market sophistication, competition policy and innovation capabilities –such as educational level, availability of scientists and engineers, and intellectual property protection– are key determinants of the strategy implemented by firms. The empirical evidence suggests that middle-income traps may occur if competition policy, innovation capabilities and financial market sophistication are not enhanced as a country moves closer to the technology frontier.
    Date: 2021–08
  24. By: Lafond, François; Goldin, Ian; Koutroumpis, Pantelis; Winkler, Julian
    Abstract: We review recent research on the slowdown of labor productivity and examine the contribution of different explanations to this decline. Comparing the post-2005 period with the preceding decade for 5 advanced economies, we seek to explain a slowdown of 0.8 to 1.8pp. We trace most of this to lower contributions of TFP and capital deepening, with manufacturing accounting for the biggest sectoral share of the slowdown. No single explanation accounts for the slowdown, but we have identified a combination of factors which taken together account for much of what has been observed. In the countries we have studied, these are mismeasurement, a decline in the contribution of capital per worker, lower spillovers from the growth of intangible capital, the slowdown in trade, and a lower growth of allocative efficiency. Sectoral reallocation and a lower contribution of human capital may also have played a role in some countries. In addition to our quantitative assessment of explanations for the slowdown, we qualitatively assess other explanations, including whether productivity growth may be declining due to innovation slowing down.
    JEL: O40 E66 D24
    Date: 2021–05
  25. By: Kedrosky, Davis; Palma, Nuno
    Abstract: As late as 1750, Portugal had an output per head considerably higher than those of France or Spain. Yet just a century later, Portugal was Western Europe’s poorest country. In this paper we show that the discovery of massive quantities of gold in Brazil over the eighteenth century played a key role for the long-run development of Portugal’s economy. We focus on the economic resource curse: the loss of competitiveness of the tradables sector manifested in the rise of the price of non-traded goods relative to traded imports. Using original price data from archives for four Portuguese regions between 1650 and 1800, we show that a real exchange rate appreciation of about 30 percent occurred during the eighteenth century, which led to a loss of the competitiveness of national industry from which the country did not recover until considerably later.
    Keywords: Dutch Disease; resource curse; early modern Portugal; the Little Divergence JEL Classification: N10, N13, N50, N53, N73
    Date: 2021
  26. By: Emma M., Iglesias; J. Carles, Maixé-Altés
    Abstract: Are transaction costs and half-lives between two cities the same in both directions in traditional city-based monetary systems? Market conditions and political circumstances may not justify this assumption; and we provide evidence that it does not hold in the 1825-1885 period in Spain. Moreover, we show empirical evidence that market integration in Spain from 1875 to 1885 was a slow process of monetary unification with decreasing transaction costs, and a very inefficient convergence. Therefore, full integration did not happen in the period 1875-1885 and had to wait until mid-1880s, when the Spanish money-market was unified due to financial innovations.
    Keywords: Integration of monetary markets; Nineteenth century; Monetary and financial history; Market Convergence and Efficiency; Western Europe; Private Finance, Capital Markets
    JEL: E02 E42 F02 F15 F31 F36 L10 N13 N73
    Date: 2021–08–22
  27. By: Luca Benati
    Abstract: Since the XIX century, technological progress has allowed commercial banks to create ever greater amounts of broad money and credit starting from a unit of monetary base. Crucially, however, at the very low frequencies the relative amounts of the two aggregates created out of a unit of base money have remained unchanged over time in each of the 42 countries I analyze. This finding questions the widespread notion that, since WWII, credit has become disconnected from broad money, and suggests that, except for their greater productivity at creating broad money and credit out of base money, today’s commercial banks are not fundamentally different from their XIX century’s counterparts. The implication is that only the ascent of shadow banks has introduced a disconnect between broad money and credit.
    Keywords: Money; credit; Lucas critique; financial crises.
    Date: 2021–08
  28. By: Batiz-Lazo, Bernardo; González-Correa, Ignacio
    Abstract: This chapter considers the process of entrepreneurial activity to deploy financial technologies (fintech) through mandate-specific new companies in Latin America. We deal with important historical issues such as defining the term, establishing temporal and industrial activity boundaries, positioning this particular process within other organizational forms typical of the region, the role of women and other relevant issues such as the modernization of retail payments and personal lending. A central question is whether fintech start-ups have had a 'scissor' effect in the entrepreneurial process of Latin America: at the base of the pyramid (that is, reducing frictions to support overall entrepreneurial activity, increasing financial inclusion, etc.) and near the top (by creating new business leaders). As a result, this chapter provides an initial assessment of gender disparities and barriers enabling women entrepreneurs in the fintech ecosystem.
    Keywords: fintech, gender, women, entrepreneurship, startups, Latin America
    JEL: G2 J16 M13 N26
    Date: 2021–08
  29. By: Sarah Flèche (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, CEP - LSE - Centre for Economic Performance - LSE - London School of Economics and Political Science); Anthony Lepinteur (Department of Behavioural and Cognitive Sciences); Nattavudh Powdthavee (WBS - Warwick Business School - University of Warwick [Coventry], IZA - Forschungsinstitut zur Zukunft der Arbeit - Institute of Labor Economics)
    Abstract: Would improving women's access to capital reduce the gender entrepreneurial gap? We study this issue by exploiting longitudinal data on lottery winners. Comparing between large to small winners, we find that an increase in lottery win in period t-1 significantly increases the likelihood of becoming self-employed in period t. This windfall effect is statistically the same in magnitude for men and women; the top 25% winners (an average win = £831.16) in year t-1 report a significant increase in the probability of self-employment in year t by approximately 2 percentage points, which is approximately 20-30% of the gender entrepreneurial gap. These results suggest that we can causally reduce the gender entrepreneurial gap by improving women's access to capital that might not be as readily available to the aspiring female entrepreneurs as it is to male entrepreneurs
    Keywords: gender inequality,self-employment,lottery wins,BHPS
    Date: 2021–05
  30. By: Carvalho, Mckenzie; Kim, Ayoung; Harri, Ardian; Smith, Rebecca C.; Turner, Steven C.
    Keywords: Community/Rural/Urban Development, Institutional and Behavioral Economics, Consumer/Household Economics
    Date: 2021–08
  31. By: Thibaut Duprey; Colin Jones; Callie Symmers; Geneviève Vallée
    Abstract: Natural disasters occur more often than before, potentially exposing households to financial distress. We study the intersection between household financial vulnerabilities and severe weather events.
    Keywords: Climate change; Credit and credit aggregates; Financial stability; Housing; Recent economic and financial developments
    JEL: C38 D14 Q54
    Date: 2021–08

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