nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2021‒10‒04
27 papers chosen by
Georg Man

  1. Financial Stress and Effect on Real Economy: The Turkish Experience By Yildirim, Yusuf; Sanyal, Anirban
  2. Estimating business and financial cycles in Slovenia By Lenarčič, Črt
  3. Economic Growth and the Rate of Profit in Colombia 1967-2019: A VAR Time-Series Analysis By Duque Garcia, Carlos Alberto
  4. Inward FDI, outward FDI, and firm-level performance in India By Koray Aktas; Valeria Gattai
  5. Impact of FDI on Income Inequality in Pakistan By Mahmood, Haider; Chuadhary, AR
  6. Republic of Tajikistan: Selected Issues By International Monetary Fund
  7. The geography of banks in the United States (1990-2020) By Angeloni, Ignazio; Kasinger, Johannes; Chantawit Tantasith
  8. Banking-Crisis Interventions, 1257-2019 By Andrew Metrick; Paul Schmelzing
  9. Dynamic Strategic Corporate Finance: A Tug of War with Financial Frictions By Ulrich Doraszelski; João F. Gomes; Felix Nockher
  10. Banks’ equity stakes in firms: A blessing or curse in credit markets? By Falko Fecht; José-Luis Peydró; Günseli Tümer-Alkan; Yuejuan Yu
  11. Big Loans to Small Businesses: Predicting Winners and Losers in an Entrepreneurial Lending Experiment By Gharad T. Bryan; Dean Karlan; Adam Osman
  12. Liquidity Provision and Co-insurance in Bank Syndicates By Kevin F. Kiernan; Vladimir Yankov; Filip Zikes
  13. Shortterm impacts and interaction of macroprudential policy tools By Shaun de Jager; Riaan Ehlers; Keabetswe Mojapelo; Pieter Pienaar
  14. Stability and determinants of the public debt-to-GDP ratio: an Input Output – Stock Flow Consistent approach By Di Domenico, Lorenzo
  15. Macroprudential policy and the sovereign-bank nexus in the euro area By Hristov, Nikolay; Hülsewig, Oliver; Kolb, Benedikt
  16. Sovereign Debt and Supersanctions in Emerging Markets: Evidence from Four Southeast European Countries, 1878-1913 By Andreea-Alexandra Maerean; Maja Pedersen; Paul Sharp
  17. Does Political Partisanship Cross Borders? Evidence from International Capital Flows By Elisabeth Kempf; Mancy Luo; Larissa Schäfer; Margarita Tsoutsoura
  18. International Reserve Management, Global Financial Shocks, and Firms’ Investment in Emerging Market Economies By Joshua Aizenman; Yin-Wong Cheung; Xingwang Qian
  19. Legislative Capacity and Credit Risk By Fortunato, David; Turner, Ian R
  20. Have European Banks left tax haven? Evidence from country-by-counry data By Giulia Aliprandi; Mona Baraké; Paul-Emmanuel Chouc
  21. Can the Federal Reserve Effectively Target Main Street? Evidence from the 1970s Recession By John Kandrac
  22. Macro-scaled Microcredit and Constraints on Household Business Development: Evidence from Northern Thailand By Archawa Paweenawat; Narapong Srivisal
  23. The welfare effects of financial inclusion in Ghana: An exploration based on a multidimensional measure of financial inclusion By Abdul Malik Iddrisu; Michael Danquah
  24. The Heterogeneous Relationship Between Financial Education and Investment Behavior in Japan By Hiroko Araki; Juan Nelson Martinez Dahbura
  25. Human Frictions in the Transmission of Economic Policies By Francesco D’Acunto; Daniel Hoang; Maritta Paloviita; Michael Weber
  26. Climate Stress Testing By Richard Berner; Robert Engle; Hyeyoon Jung
  27. Making sustainable finance sustainable By Ozili, Peterson K

  1. By: Yildirim, Yusuf; Sanyal, Anirban
    Abstract: In this paper, we aim to analyze empirically how economic activity reacts to the financial stress shocks depending on the stress regime in Turkey. Using quarterly data, the effect of financial stress is examined using two threshold vector autoregression model (TVAR) for consumption, investment and real GDP by using financial stress index, credit growth and inflation rate as endogenous variables. The paper proposes local projection approach for estimating threshold VAR model as robustness check to overcome the data limitations. The main result of this paper is that the effect of financial stress on consumption, investment, and real GDP, such as magnitude and significance, vary greatly depending on the financial stress regime. The paper finds that financial stress is found to affect economic growth when the stress level is already high. This corroborates with the effectiveness of credit channel in the financial friction mechanism. On the contrary, the financial stress does not affect real economic activities to significantly during low stress regime. The effect of financial stress impairs consumption and investment growth during high stress regime which leads to slow down of economic activities.
    Keywords: Financial stress index, Threshold VAR model, Markov Switching Model, Local Projection, Forecast Error Variance Decomposition
    JEL: C01 C32 G01
    Date: 2021–09–21
  2. By: Lenarčič, Črt
    Abstract: In this paper we utilize a multivariate STSM model in order to estimate trend and cyclical components on a set of business and financial economic variables for Slovenia. The results show that financial cycles are somewhat longer compared to business cycles. Comparing the standard deviations of financial and business cycles give inconclusive results on average, but excluding particular macroeconomic variables that are by definition more volatile, we see that also standard deviations of financial cycles tend to be larger. From the economic policy implications point of view the results might not come as a surprise, but are utterly important for additionally implementing financial stability goals alongside the monetary policy mandate, as financial cycles seem to be longer and deeper compared to business cycles.
    Keywords: Unobserved components models, financial cycles, housing cycles, business cycles, model-based filters
    JEL: C32 E32 E44
    Date: 2021–10
  3. By: Duque Garcia, Carlos Alberto
    Abstract: In recent decades there has been a growing literature dealing with the empirical estimation of the rate of profit and other Marxian variables in several countries. Nonetheless, there has been a paucity of econometric research about the impact of those Marxian variables on the growth rate in developing countries. This paper seeks to evaluate the rate of profit and the rate of accumulation as determinants of the growth rate in Colombia during 1967-2019, using a VAR model. We find that both variables are statistically significant and, in concordance with Marxian theory predictions, affect positively the growth rate. We also identify direct impacts of growth rate over the profit rate and the accumulation rate as well as an inverse relationship between these last variables.
    Keywords: Marxian political economy; rate of profit; time-series analysis; Colombia
    JEL: B51 C32 O54
    Date: 2021–09–23
  4. By: Koray Aktas; Valeria Gattai
    Abstract: In recent years, India has emerged as a leading foreign direct investment (FDI) player, featuring prominently as both an origin and a destination of FDI. This study takes a firm-level perspective to empirically address the relationship between inward FDI, outward FDI, and firm-level performance in India. Using the Orbis database, our estimates reveal that Indian firms that have at least one foreign shareholder and/or one foreign subsidiary outperform those that do not. Controlling for endogeneity through propensity score matching and difference-in-difference techniques, we show that the deeper the FDI involvement, the larger the performance differentials. Moreover, compared with investing abroad, receiving foreign capital can contribute more toward enhancing the performance of Indian firms.
    Keywords: India, Foreign Direct Investment (FDI), inward, outward, firm-level performance
    JEL: F23 L25 O53
    Date: 2021–09
  5. By: Mahmood, Haider; Chuadhary, AR
    Abstract: The study attempts to find out the impact of foreign direct investment on income inequality in Pakistan. It takes foreign direct investment, government expenditure on health and education and gross domestic product growth rate as independent variable and GINI coefficient as dependent variable. ADF, PP, Ng-Perron and Zivot-Andrews Unit root tests are used to find the unit root problem. ARDL and its error correction model are used to find the long run and short run relationships. The study finds the long run and short run relationships in the model. Foreign direct investment has a positive impact on GINI coefficient. So, foreign direct investment is responsible in increasing the income inequality in Pakistan. Government expenditure on health and education has a negative relationship with income inequality. Economic growth has an insignificant impact on income inequality.
    Keywords: FDI, Income Inequality, Economic Growth, Cointegration
    JEL: F2
    Date: 2021
  6. By: International Monetary Fund
    Abstract: Selected Issues
    Keywords: remittance inflow; Tajik remittance; growth-remittance spillover analysis; remittance determination; ruble-U.S. dollar exchange; Remittances; Oil prices; Exchange rates; Vector autoregression; Global
    Date: 2021–09–03
  7. By: Angeloni, Ignazio; Kasinger, Johannes; Chantawit Tantasith
    Abstract: We present new statistical indicators of the structure and performance of US banks from 1990 to today, geographically disaggregated at the level of individual counties. The constructed data set (20 indicators for some 3150 counties over 31 years, for a total of about 2 million data points) conveys a detailed picture of how the geography of US banking has evolved in the last three decades. We consider the data as a stepping stone to understand the role banks and banking policies may have played in mitigating, or exacerbating, the rise of poverty and inequality in certain US regions.
    Date: 2021
  8. By: Andrew Metrick; Paul Schmelzing
    Abstract: We present a new database of banking-crisis interventions since the 13th century. The database includes 1886 interventions in 20 categories across 138 countries, covering interventions during all of the crises identified in the main banking-crisis chronologies, while also cataloguing a large number of interventions outside of those crises. The data show a gradual shift over the past centuries from the traditional interventions of a lender-of-last-resort, suspensions of convertibility, and bank holidays, towards a much more prominent role for capital injections and sweeping guarantees of bank liabilities. Furthermore, intervention frequencies and sizes suggest that the crisis problem in the financial sector has indeed reached an apex during the post-Bretton Woods era – but that such trends are part of a more deeply entrenched development that saw global intervention frequencies and sizes gradually rise since at least the late 17th century.
    JEL: G01 G28
    Date: 2021–09
  9. By: Ulrich Doraszelski; João F. Gomes; Felix Nockher
    Abstract: Access to capital markets plays a key role for the evolution of an industry over time. We develop a benchmark theoretical setting that integrates core corporate finance insights about the impact of financial frictions on investment with those from industrial organization on dynamic competition and industry evolution under perfect capital markets. Using state of the art computational tools to systematically detect and evaluate multiple equilibria and to thoroughly explore the parameter space of our model, we show how, depending on key industry characteristics such as market size, financial frictions impact firms' pricing and investment strategies and the degree of industry concentration.
    JEL: G3 L1
    Date: 2021–09
  10. By: Falko Fecht; José-Luis Peydró; Günseli Tümer-Alkan; Yuejuan Yu
    Abstract: We analyze how banks' equity stakes in firms influence their credit supply in crisis times. For identification, we exploit the 2008 Global Financial Crisis and merge unique supervisory data from the German credit register on individual bank-firm credit exposures with the security register data that include banks' equity holdings. We find that a large and ex-ante persistent equity position held by a bank in a firm is associated with a larger credit provision from the respective bank to that firm. In crisis times, however, equity stakes only foster credit supply to ex-ante riskier firms especially from relatively weak banks. This ex-ante risk-taking may be due to better (insider) information by the bank, including a traditional lending relationship over the crisis. However, this ex-ante riskier lending translates also into higher ex-post loan defaults, worse firm-level stock market returns and even more firm bankruptcy or restructuring cases. Our results therefore suggest that banks' equity stakes in their borrowers do not mitigate debt overhang problems of distressed firms in crisis times, but rather foster evergreening of banks' outstanding credit to those (zombie) firms.
    Keywords: Universal banks; credit supply; bank equity holdings; debt overhang; evergreening
    JEL: G01 G21 G28 G30
    Date: 2021–09
  11. By: Gharad T. Bryan; Dean Karlan; Adam Osman
    Abstract: We experimentally study the impact of substantially larger enterprise loans, in collaboration with an Egyptian lender. Larger loans generate small average impacts, but machine learning using psychometric data reveals dramatic heterogeneity. Top-performers (i.e., those with the highest predicted treatment effects) substantially increase profits, whereas profits for poor-performers drop. The magnitude of this difference implies that an individual lender’s credit allocation choices matter for aggregate income. Evidence on two fronts suggests large loans would be misallocated: top-performers are predicted by loan officers to have higher default rates; and, top-performers grow less than others when given small loans, implying that allocating larger loans based on prior performance is not efficient. Our results have important implications for credit expansion policy and our understanding of entrepreneurial talent: on the former, the use of psychometric data to identify top-performers suggests a pathway towards better allocation that revolves around entrepreneurial type more than firm type; on the latter, the reversal of fortune for poor-performers, who do well with small loans but not large, indicates a type of entrepreneur that we call a “go-getter” who performs well when constrained but poorly when not.
    JEL: D22 D24 L26 M21 O12 O16
    Date: 2021–09
  12. By: Kevin F. Kiernan; Vladimir Yankov; Filip Zikes
    Abstract: We study the capacity of the banking system to provide liquidity to the corporate sector in times of stress and how changes in this capacity affect corporate liquidity management. We show that the contractual arrangements among banks in loan syndicates co-insure liquidity risks of credit line drawdowns and generate a network of interbank exposures. We develop a simple model and simulate the liquidity and insurance capacity of the banking network. We find that the liquidity capacity of large banks has significantly increased following the introduction of liquidity regulation, and that the liquidity co-insurance function in loan syndicates is economically important. We also find that borrowers with higher reliance on credit lines in their liquidity management have become more likely to obtain credit lines from syndicates with higher liquidity. The assortative matching on liquidity characteristics has strengthened the role of banks as liquidity providers to the corporate sector.
    Keywords: Liquidity insurance; Liquidity regulation; Interbank networks; Syndicated credit lines
    JEL: G21 G18 L14
    Date: 2021–09–24
  13. By: Shaun de Jager; Riaan Ehlers; Keabetswe Mojapelo; Pieter Pienaar
    Abstract: Short-term impacts and interaction of macroprudential policy tools
    Date: 2021–09–27
  14. By: Di Domenico, Lorenzo
    Abstract: The paper develops a dynamic Input Output - Stock Flow consistent model based on the Supermultiplier approach. This framework integrates the dimension of output determination with the system of relative prices. Through this model, we define the determinants of the public debt-to-GDP ratio and the conditions for its stability. The main results of the research show that: i) Given the interest rate, the saving rate, the tax rate, the industrial profit rate and the coefficients of production there exist a steady-state value of the public debt-to-GDP ratio ingrained in the economic system. This result calls into question the idea of imposing budgetary rules with threshold levels independently from the very specific features of each economic system; ii) Expansions in the level of public expenditure have a permanent effect on the public debt-to-GDP ratio only in the presence of the accelerator effect, that is, through an induced increase in the share of private indebtedness on GDP and aggregate debt. Because of the accelerator channel, the public debt-to-GDP ratio depends on the capital intensity of the aggregate production process and, thus, on the system of relative prices. With this respect, the capital intensity determines the elasticity of private indebtedness with respect to one-point change in public spending; iii) Conversely to the neoclassical argument, the relationship between the interest rate and public debt-to-GDP ratio goes from the first to the second. In particular, changes in the interest rate modify the public debt-to-GDP ratio through both variations in the quantitative and value dimension. Such variations have a puzzling effect on the steady-state value of the public debt-to-GDP ratio. For instance, the reverse capital deepening implies that an increase in the interest rate produces a decrease in the public debt-to-GDP ratio. Finally, we point out that, in contrast to the standard argument proposed by mainstream macroeconomics, the condition of fiscal balance jointly a positive differential between the growth rate of output and the interest rate has no relevance for the stability conditions of the public debt-to-GDP ratio. In this regard, we develop a taxonomy of the growth regimes depicted by the model deriving such conditions in each scenario. The necessary condition of stability is the absence of budgetary constraints, it becomes sufficient when one of the following is respected: the growth rate of primary public expenditure is higher than zero, the interest rate is higher than zero or the propensity to consume out of wealth is non-zero.
    Keywords: Fiscal policy, Monetary policy, Public debt-to-GDP ratio, SFC models, Input-Output
    JEL: E12 E17 E42 E43 E52 E62
    Date: 2021–09–29
  15. By: Hristov, Nikolay; Hülsewig, Oliver; Kolb, Benedikt
    Abstract: We explore how changes in capital-based macroprudential regulation affect theexposure of national banking sectors to domestic government debt in the euro area,thus strengthening or weakening the sovereign-bank nexus. To do so, we construct ameasure of macroprudential policy based on theMacroprudential Policy EvaluationDatabaseand estimate responses to theunsystematiccomponent of macroprudentialpolicy in panel vector autoregressive models for euro area 'core" and 'periphery"countries. Our main finding suggests that an unsystematic capital-based macro-prudential policy tightening increases banks' exposure to domestic sovereign bondsin the periphery countries and so deepens the sovereign-bank nexus. By contrast,banks in the core countries expand their loan portfolios rather than adjusting theirdomestic sovereign bond holdings in response to the shock. We show that this re-sult can be tied to the theoretical literature and investigate several transmissionchannels. Our results are highly robust to changes in the econometric setup and themacroprudential indicator used.
    Keywords: macroprudential policy,euro area,sovereign-bank nexus,panel vector autore-gressive model
    JEL: C33 G21 G28
    Date: 2021
  16. By: Andreea-Alexandra Maerean (European Commission (DG Economic and Financial Affairs)); Maja Pedersen (University of Southern Denmark); Paul Sharp (University of Southern Denmark)
    Abstract: Do emerging markets need to sacrifice economic sovereignty in order to borrow more cheaply on the international capital markets? To explore this, we exploit a natural experiment following the Treaty of Berlin in 1878 when four Balkan states - Bulgaria, Greece, Romania, and Serbia - received full or de facto independence. Using a novel dataset of monthly bond prices from the Berlin and London stock exchanges, we find that a sacrifice of national sovereignty or ‘supersanctions’ was one way for these emerging markets to receive more favourable borrowing conditions. Romania never submitted to such measures, however, but was usually able to borrow more cheaply than her neighbours.
    Keywords: Bulgaria, creditworthiness, emerging markets, Greece, Romania, Serbia, sovereign debt
    JEL: E4 E5 G1 N2
    Date: 2021–09
  17. By: Elisabeth Kempf; Mancy Luo; Larissa Schäfer; Margarita Tsoutsoura
    Abstract: Does partisan perception shape the flow of international capital? We provide evidence from two settings, syndicated corporate loans and equity mutual funds, to show that ideological alignment with foreign governments affects the cross-border capital allocation by U.S. institutional investors. Moreover, we find that ideological alignment with foreign countries also affects investments of non-U.S. investors and can explain patterns in bilateral FDI flows. Our empirical strategy ensures that direct economic effects of foreign elections or bilateral ties between countries are not driving the result. Combined, our findings imply that partisan perception is a global phenomenon and its economic effects transcend national borders.
    JEL: G11 G15 G21 G23
    Date: 2021–09
  18. By: Joshua Aizenman; Yin-Wong Cheung; Xingwang Qian
    Abstract: We examine the effects of active international reserve management (IRM) conducted by central banks of emerging market economies (EMEs) on firm investment in the presence of global financial shocks. Using firm level data from 46 EMEs from 2000 to 2018, we document four findings. First, active IRM positively affects firm investment - the effect strengthens with the magnitude of adverse external financial shocks. Second, financially constrained firms, compared with unconstrained ones, are less responsive to active IRM. Third, our results suggest that the country credit spread is a plausible causal channel of the positive IRM effect on firm investment. Fourth, the policies of capital controls and exchange rate managements are complementary to the IRM – it is beneficial to form a macro policy mix including active IRM to safeguard firm investment against global financial shocks. Further, our results indicate the IRM effect on firm investment is both statistical and economical significance and is relevant to the aggregate economy.
    JEL: F36 F42 F61 G31
    Date: 2021–09
  19. By: Fortunato, David; Turner, Ian R (Yale University)
    Abstract: Legislatures differ in their institutional capacity to draft and enact policy. While strong legislatures can increase the congruence of policy outcomes to the electorate's preferences, they can also inject uncertainty into markets with their ability to alter the political economic landscape. We argue that this uncertainty will manifest in a state's ability to borrow and hypothesize a negative relationship between legislative capacity and credit-worthiness. Using ratings of general obligation bonds issued by the American states over nearly two decades and data on the institutional capacity of state legislative assemblies, we find support for the claim that having a legislature that is better equipped to affect policy change increases credit risk evaluations. The results we present broaden our understanding of the importance of legislative institutions, the determinants of credit risk, and the economic implications of democratic responsiveness.
    Date: 2021–09–22
  20. By: Giulia Aliprandi (EU Tax - EU Tax Observatory, PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Mona Baraké (EU Tax - EU Tax Observatory); Paul-Emmanuel Chouc (EU Tax - EU Tax Observatory)
    Abstract: This study documents the activity of European banks in tax havens and how this activity has evolved since 2014. The analysis covers 36 systemic European banks that have been required to publicly report country-by-country data on their activities since 2015. We study the level and evolution of the profits booked by these banks in tax havens over the 2014-2020 period. We also compute their effective tax rates and their tax deficit—defined as the difference between what these banks currently pay in taxes and what they would pay if they were subject to a minimum effective tax rate in each country. We start by creating a list of tax haven jurisdictions used by the banking sector. We combine two indicators to identify tax havens: the effective tax rate on bank profit and the amount of bank profit per employee. Overall, 17 jurisdictions feature in our list: Bahamas, Bermuda, the British Virgin Islands, Cayman Islands, Guernsey, Gibraltar, Hong Kong, Ireland, Isle of Man, Jersey, Kuwait, Luxembourg, Macao, Malta, Mauritius, Panama, and Qatar. Using this list, we show that European banks use tax havens significantly, with no trend during the 2014–2020 period. The main European banks book EUR 20 billion (or 14% of their total profits) in tax havens each year. This percentage has been stable since 2014 despite the introduction of mandatory information disclosure. Bank profitability in tax havens is abnormally high: EUR 238 000 per employee, as opposed to around EUR 65 000 in non-haven countries. This suggests that the profits booked in tax havens are primarily shifted out of other countries where service production occurs. Around 25% of the profits made by the European banks in our sample are booked in countries with an effective tax rate lower than 15%. The use of tax havens varies considerably from bank to bank. The mean percentage of profits booked in tax havens is about 20% and ranges from 0% for nine banks to a maximum of 58%. The mean effective tax rate paid by the banks in our sample is 20%, with a minimum of 10% and a maximum of 30%. Seven banks exhibit a particularly low effective tax rate, below or equal to 15%. To better understand this heterogeneity, we analyse the use of tax havens by three banks with a relatively high presence in tax havens: HSBC, Deutsche Bank, and Société Générale. We observe a diversity of situations: for HSBC, the bulk of haven profits come from just one haven (Hong Kong), while in other cases multiple tax havens are involved. We estimate the amount of revenues that could be collected by applying a minimum tax rate on the profits of banks. We simulate a tax similar to the G20/OECD minimum tax proposal ,which the majority of the Inclusive Framework jurisdictions supported in July 2021. In this proposal each parent country would collect the tax deficit of its own banks. For instance, if the internationally agreed minimum tax rate is 15% and a German multinational bank has an effective tax rate of 10% on the profits it books in Singapore, Germany would impose an additional tax of 5% on these profits to arrive at an effective rate of 15%. We consider three minimum tax rates—15%, 21%, and 25%—and in each case compute the extra tax owed per bank and tabulate results by headquarter country. Our findings show that a minimum tax has significant revenue potential. With a 25% minimum tax rate, our sample of European banks would have to pay EUR 10-13 billion in additional taxes annually. Lower tax rates reduce the gains to EUR 6-9 billion for the 21% tax rate and EUR 3-5 billion for the 15% tax rate. Banks with low effective tax rates—which tend to make use of tax havens to shift profits and lower their tax liability—would be particularly affected. Our findings illustrate the usefulness of country-by-country reporting, a vital piece of information to track profit shifting and corporate tax avoidance. They also suggest that despite the growing salience of these issues in the public debate and in the policy world, European banks have not significantly curtailed their use of tax havens since 2014. More ambitious initiatives—such as a global minimum tax with a 25% rate—may be necessary to curb the use of tax havens by the banking sector.
    Date: 2021–09
  21. By: John Kandrac
    Abstract: Modern central bankers confront a challenge of providing economic stimulus even when the policy rate is constrained by a lower bound. This challenge has led to substantial innovation by policymakers and a proliferation of new policy tools. In this paper, I offer evidence on the efficacy of a new tool known as funding for lending, which provides banks with subsidized funding to make additional loans. I focus on a historical episode from the United States in which the Federal Reserve provided banks with steeply subsidized loans to promote the expansion of credit within their local communities. I show that the cheap funding succeeded in generating more lending by countering banks' excessive liquidity preference. The additional credit benefited the real economy. Local areas enjoyed higher rates of small business formation and more rapid employment growth. Finally, I show that the cost of the subsidy provided by the government was more than offset by the additional payroll taxes paid out of higher wages and salaries. These results suggest that funding for lending programs deserve consideration for the modern central banker's toolkit and demonstrate that certain unconventional tools can offer monetary policymakers the means to pursue more targeted objectives.
    Keywords: Monetary policy; Funding for lending; Bank lending; Countercyclical policy; Discount window
    JEL: G28 G21 E58 E52
    Date: 2021–09–24
  22. By: Archawa Paweenawat (Bank of Thailand); Narapong Srivisal (Chulalongkorn University)
    Abstract: This paper studies impacts of One-Million-Baht Village Fund program on entrepreneurial activities of households in northern Thailand. In addition to being one of the largest-scaled microfinance programs to date, the implementation of the Village Fund program provides us with an exogenous variation in the availability of microcredit per household that can be used to form an instrumental variable. We apply our unique dataset, containing the instrument and a precise measure of the extent to which household businesses are financially constrained, to estimate Probit models that are subject to the problem of endogenous borrowing decisions. We find evidence for the positive impacts of the Village Fund program on relieving financial constraints faced by household businesses, but the impacts on business startup rates are not significant. Our findings offer policy implications on improving effectiveness of microfinance programs in promoting household businesses.
    Keywords: Entrepreneurship, Financial Constraints, Microfinance, Village Funds
    JEL: G21 G51 O16
    Date: 2021–09
  23. By: Abdul Malik Iddrisu; Michael Danquah
    Abstract: Using a nationally representative household survey data set from Ghana, this paper provides empirical evidence regarding the role of financial inclusion or financial exclusion in household welfare. We first compute a multidimensional index of financial inclusion, and then we examine the effect of financial inclusion on household welfare. The study finds that households suffering financial deprivation have lower welfare compared with their financially included counterparts.
    Keywords: Financial inclusion, Household welfare, Ghana, Exclusion, Deprivation
    Date: 2021
  24. By: Hiroko Araki (Faculty of Economics Keio University); Juan Nelson Martinez Dahbura (Data Scientist)
    Abstract: This research employs data from Japan to study the relationship between the experience of financial education and the participation of Japanese persons on financial markets. We account for unobserved heterogeneity by employing a three-class Finite Mixture Model. The prior probability of class membership is a function of sociodemographic characteristics of the person. We examine the association between the investment experience probability conditional on class membership, and the experience of financial education at home, school and the workplace, controlling for a financial literacy score measured through Item Response Theory, and several behavioral traits. The results allow us to extract a segment of striving persons whose investment behavior differs in important ways from other groups. Education at school or work is significantly associated with higher investment probabilities across all classes of individuals. The impact of financial education at home is more heterogeneous, and may be negative for the most fragile groups. We believe that our results may offer important insights for policy-makers involved in the design of financial education programs.
    Keywords: Personal Financial Decision, Financial Education, Financial Literacy, Finite Mixture Model
    JEL: G02 D14
    Date: 2021–09–03
  25. By: Francesco D’Acunto; Daniel Hoang; Maritta Paloviita; Michael Weber
    Abstract: Many consumers below the top of the distribution of a representative population by cognitive abilities barely react to monetary and fiscal policies that aim to stimulate consumption and borrowing, even when they are financially unconstrained and despite substantial debt capacity. Differences in income, formal education levels, economic expectations, and a large set of registry-based demographics do not explain these facts. Heterogeneous cognitive abilities thus act as human frictions in the transmission of economic policies that operate through the household sector and might imply redistribution from low- to high-cognitive-ability agents. We conclude by discussing how our findings inform the microfoundation of behavioral macroeconomic theory.
    JEL: D12 D84 D91 E21 E31 E32 E52 E65 E70 E71
    Date: 2021–09
  26. By: Richard Berner; Robert Engle; Hyeyoon Jung
    Abstract: Climate change could impose systemic risks upon the financial sector, either via disruptions in economic activity resulting from the physical impacts of climate change or changes in policies as the economy transitions to a less carbon-intensive environment. We develop a stress testing procedure to test the resilience of financial institutions to climate-related risks. Specifically, we introduce a measure called CRISK, systemic climate risk, which is the expected capital shortfall of a financial institution in a climate stress scenario. We use the measure to study the climate-related risk exposure of large global banks in the collapse of fossil-fuel prices in 2020.
    Keywords: climate risk; financial stability; stress testing
    JEL: Q54 C53 G20
    Date: 2021–09–01
  27. By: Ozili, Peterson K
    Abstract: The purpose of this paper is to highlight some issues and proffer solutions that can make sustainable finance become sustainable. I present some solutions that can help to make sustainable finance become sustainable. One, there should be greater focus on how some aspect of finance can contribute to sustainability. Two, light-touch regulation may be needed to grow the relatively small sustainable finance sector. Three, there is need to adopt a bottom-up approach to grow the sustainable finance sector. Four, voluntary ESG disclosures and related sustainability reporting should be encouraged. Five, shortterm financial instruments can complement long term instruments in sustainable financing.
    Keywords: finance, sustainability, financial institutions, financial instruments, green finance, green bonds, light-touch regulation, bottom-up approach, sustainability reporting, sustainable development, ESG.
    JEL: G21 O31 Q01
    Date: 2021

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