nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2021‒11‒01
thirty papers chosen by
Georg Man

  1. Solidarity finance and economic growth: Case of financial intermediation (A theoretical approach) By Abdellah Haida; Mustapha Jaad
  2. 신용공급 변동이 경제성장 및 금융위기에 미치는 영향 (A Study on Credit Supply, Economic Growth and Financial Crisis) By Kim, Hyosang; Choi, Sangyup; Yang, Da Young; Kim, Yuri
  3. How deep are the deep parameters? By Andrea Passalacqua; Paolo Angelini; Francesca Lotti; Giovanni Soggia
  4. Bank Runs, Fragility, and Credit Easing By Manuel Amador; Javier Bianchi
  5. Firm Dynamics and SOE Transformation During China's Economic Reform By Shijun Gu; Chengcheng Jia
  6. The Economic Consequences of the Opium War By Wolfgang Keller; Carol H. Shiue
  7. FDI as an Opportunity for Economic growth of Bangladesh: A VECM Analysis. By Asaduzzaman, Md
  8. Foreign Aid and Intergenerational Mobility in Africa By Ali Compaore; Roukiatou Nikièma; Rasmané Ouédraogo
  9. Public Debt - Economic Growth: Evidence of a Non-linear Relationship By Blessy Augustine; O.P.C. Muhammed Rafi
  10. Born in the land of milk and honey: The impact of economic growth on individual wealth accumulation By Bartels, Charlotte; König, Johannes; Schröder, Carsten
  11. Three Liquid Assets By Nicola Amendola; Lorenzo Carbonari; Leo Ferraris
  12. Speculative and Precautionary Demand for Liquidity in Competitive Banking Markets By Dietrich, Diemo; Gehrig, Thomas
  13. Regulating Big Tech and Non-bank Financial Services in the Digital Era By Thammarak Moenjak; Veerathai Santiprabhob
  14. Falling Rates and Rising Superstars By Thomas Kroen; Ernest Liu; Atif R. Mian; Amir Sufi
  15. Interest Rates, Sanitation Infrastructure, and Mortality Decline in Nineteenth-Century England and Wales By Jonathan Chapman
  16. Relationship between threshold level of inflation and economic growth in Bangladesh- a multivariate quadratic regression analysis. By Asaduzzaman, Md
  17. The relationship between Financial Inclusion and Monetary Stability in Mozambique: Analysis based on an Error Correction Model (VECM) By Carla Fernandes; Maria Rosa Borges; Esselina Macome; Jorge Caiado
  18. Forecasting Inflation and Output Growth with Credit-Card-Augmented Divisia Monetary Aggregates By William Barnett; Sohee Park
  19. An Economy of Neural Networks: Learning from Heterogeneous Experiences By Artem Kuriksha
  20. Measuring Systemic Financial Stress and its Impact on the Macroeconomy By Kremer, Manfred; Chavleishvili, Sulkhan
  21. The Financial Accelerator in the Euro Area: New Evidence Using a Mixture VAR Model By Bennani, Hamza; Burgard, Jan Pablo; Neuenkirch, Matthias
  22. Tighter Credit and Consumer Bankruptcy Insurance By Mendicino, Caterina; Cavalcanti, Tiago; Antunes, Antonio; Peruffo, Marcel; Villamil, Anne
  23. Household Credit as Stimulus? Evidence from Brazil By Gabriel Garber; Atif R. Mian; Jacopo Ponticelli; Amir Sufi
  24. Sovereign-Bank Diabolic Loop: The Government Procurement Channel By Diana Bonfim; Sujiao Zhao; Miguel A. Ferreira; Francisco Queiró
  25. The Role of Sovereign Wealth Funds in Commodity-Exporting Economies When Commodity Prices Affect Interest Spreads By Shigeto Kitano; Kenya Takaku
  26. When Does Finance Help Trade? Banking Structures and Export in the Macroeconomy By Minetti, Raoul; Murro, Pierluigi; Rowe, Nicholas
  27. The Real Consequences of Macroprudential FX Regulations By Hyeyoon Jung
  28. Effect of Microinsurance on Child Work and Schooling: Evidence from Northern Kenya and Southern Ethiopia By Son, Hyuk
  29. Can capital controls promote green investments in developing countries? By Alessandro Moro
  30. A micro-founded climate stress test on the financial vulnerability of Italian households and firms By Ivan Faiella; Luciano Lavecchia; Alessandro Mistretta; Valentina Michelangeli

  1. By: Abdellah Haida (Laboratoire Études et recherches appliquées en sciences économiques (LERASE) - Équipe de recherche en économie de développement (ERED) - Université Ibn Zohr [Agadir]); Mustapha Jaad
    Abstract: Déclaration de divulgation : Les auteurs n'ont pas connaissance de quelconque financement qui pourrait affecter l'objectivité de cette étude. Conflit d'intérêts : Les auteurs ne signalent aucun conflit d'intérêts.
    Keywords: Faculté des sciences économiques,sociales et juridiques B.P Financial intermediation,economic growth,solidarity finance,bank relationship financing. JEL Classification : C61,C62,R51,G332 Paper type: Theoretical Research
    Date: 2021–09–03
    Abstract: 본 연구는 신용공급이 경제성장 및 금융위기에 미치는 영향을 포괄적으로 분석한다. 2020년은 코로나19의 경제충격에 대응하는 과정에서 막대한 재정이 투입되었고 초확장적인 통화정책 기조에 기인하여 전 세계적으로 민간신용 및 정부신용 수준이 급격하게 증가하였다. 이러한 배경하에서 가계, 기업 그리고 정부 신용의 증가가 가져올 수 있는 거시 경제에 대한 영향은 각각 다를 수 있으므로 정책 입안자들은 단순히 총신용의 수준뿐만 아니라 각각의 신용 구성변화에도 관심을 가지고 모니터링을 해야 한다. 특히, 총수요의 단기적 진작을 통한 경기 호황이 중장기적으로는 생산성 하락을 동반한 깊은 경제 침체를 가져올 수 있음에 유의해야 한다. This study investigates the impacts of credit supply on economic growth and financial crisis. While credit supply helps boost economic growth through resource reallocation, excess credit supply can make the economy and financial market more vulnerable. In the event of a negative shock to the financial or real sector in a situation where credit is excessively supplied, asset prices sharply fall as the deleveraging proceeds. Moreover, economic activity can be sharply shrunk, thereby expanding the width and duration of the recession. The rapid credit crunch and stock price plunge that appeared in the early stages of the COVID-19 pandemic highlight the phenomenon in March 2020. (the rest omitted)
    Keywords: credit supply; economic growth; financial crisis; COVID-19; pandemic; economy
    Date: 2020–12–30
  3. By: Andrea Passalacqua (Board of Governors of the Federal Reserve System); Paolo Angelini (Bank of Italy); Francesca Lotti (Bank of Italy); Giovanni Soggia (Bank of Italy)
    Abstract: We show that bank supervision reduces distortions in credit markets and generates positive spillovers for the real economy. Exploiting the quasi-random selection of inspected banks in Italy, we show that financial intermediaries are more likely to reclassify loans as non-performing after an audit. Moreover, they change their lending policies as the composition of new lending shifts toward more productive firms. As a result, productive firms invest more in labor and capital, while underperforming firms are more likely to exit the market. Taken together, our results show that bank supervision is an important complement to regulation in improving credit allocation.
    Keywords: bank supervision, inspections, credit allocation, real effects.
    JEL: G22 G28
    Date: 2021–10
  4. By: Manuel Amador; Javier Bianchi
    Abstract: We present a tractable dynamic macroeconomic model of self-fulfilling bank runs. A bank is vulnerable to a run when a loss of investors' confidence triggers deposit withdrawals and leads the bank to default on its obligations. We analytically characterize how the vulnerability of an individual bank depends on macroeconomic aggregates and how the number of banks facing a run affects macroeconomic aggregates in turn. In general equilibrium, runs can be partial or complete, depending on aggregate leverage and the dynamics of asset prices. Our normative analysis shows that the effectiveness of credit easing and its welfare implications depend on whether a financial crisis is driven by fundamentals or by self-fulfilling runs.
    JEL: E44 E58 F34 G01 G21 G33
    Date: 2021–10
  5. By: Shijun Gu; Chengcheng Jia
    Abstract: We study China’s state-owned enterprises (SOE) reform with a focus on the corporatization of SOEs. We first empirically document that small SOEs are more likely to exit or become privatized, whereas big SOEs are more likely to be corporatized while remaining under state ownership. We then build a heterogeneous-firm model featuring financial frictions, endogenous entry and exit, and optimal firm-type choices. Our calibrated model suggests that in the long run, the SOE reform increases the aggregate output by facilitating resource reallocation to the private sector. Along the transition, the corporatization option leads to higher aggregate output than the privatization-only policy by giving a higher financing capacity to more productive incumbent SOEs.
    Keywords: firm dynamics; economic reform; Chinese economy
    JEL: E23 E44 O16 O41 O43
    Date: 2021–10–19
  6. By: Wolfgang Keller; Carol H. Shiue
    Abstract: This paper studies the economic consequences of the West’s foray into China after the Opium War (1839-42), when Western colonial influence was introduced in dozens of so-called treaty ports. We document a turnaround during the 19th century in the nature of China’s capital markets. Whereas before the Opium War, coastal cities were of relatively minor importance, the treaty port system of the West transformed China into an economy focused on coastal areas and on international trade that aligned with the trading interests of the West. We show, first, that the West had a positive impact on China’s economy during the 19th century. It brought down local interest rates, and regions under Western influence exhibited both higher rates of industry growth and technology adoption. Second, the geographic scope of influence went far beyond the ports, impacting most of China. Interest rates fell by more than a quarter in the immediate vicinity of the ports and still by almost ten percent at distances of 450 kilometers from treaty ports. The development of China was not simply propelled by its own pre-1800 history, or by post-1978 reforms. The nearly 100 years of semi-colonization have shaped China’s economy today as one focused on the coastal areas.
    JEL: F63 G10 N25 O11
    Date: 2021–10
  7. By: Asaduzzaman, Md
    Abstract: This study investigates the empirical relationship between economic growth (GDP) and Foreign Direct Investment (FDI) as well as the Real Effective Exchange Rate (REER) and Trade Openness (TOP) of Bangladesh over the period from 1973 to 2017 by using Johansen cointegration test and VECM analysis. The empirical findings exhibit that there are a distinctive short-run and long-run relationship that exists between economic growth and foreign direct investment in Bangladesh. While the Error Correction Term (ECT) result exhibits that real effective exchange rate and trade openness are causing economic growth in the long-run. This study highly suggests that fully utilizing foreign direct investment and trade openness is one of the best chances of Bangladesh to develop its economy. Therefore, the policymaker should have more foresight to influence foreign direct investment and trade openness on the long term basis, especially to facilitate investment in the special economic zone (such as EPZ) and export more manufacturing goods and services and importing capital goods through maintaining the trade balance.
    Keywords: Gross Domestic Product (GDP) growth; Foreign Direct Investment (FDI), Real Effective Exchange Rate (REER); Trade Openness (TOP); Vector Error Correction Model (VECM) Model; Bangladesh Economy
    JEL: C1 C15 C3 C32 C4 C49 C5 C51 E6 F1 F3
    Date: 2019–12–05
  8. By: Ali Compaore (UCA - Université Clermont Auvergne, CERDI - Centre d'Études et de Recherches sur le Développement International - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne); Roukiatou Nikièma (Université Norbert ZONGO de Koudougou); Rasmané Ouédraogo (IMF - "Research Department International Monetary Fund (IMF)" - International Monetary Fund (IMF))
    Abstract: While there is extensive literature examining the growth and development effects of foreign aid, very little attention has been paid to its potential impact on social mobility. Thus, this paper provides the first empirical evidence on the effect of foreign aid on intergenerational educational mobility in Africa. Drawing on a sample of 28 countries over the period 1970-2010 and using the popular and wellknown probit estimator, we find strong evidence that foreign aid raises the likelihood of experiencing upward educational mobility in the region, while the probability of downward educational mobility tends to be lower in countries that receive a high level of foreign aid. These effects mainly operate through the increased financing for education, the improved education system, and policy, as well as improved education conditions. More interestingly, focusing on the sectoral decomposition of total aid receivedi.e., education sector versus the rest of the economy-, the study highlights that foreign aid to the education sector tends to increase the likelihood of upward educational mobility, contrary to aid allocated to the rest of the economy. Our finding suggests that foreign aid has contributed to improving social mobility in African countries.
    Keywords: F35,055,I24,C35,J62,Foreign Aid,Intergenerational Mobility,Africa
    Date: 2021–10–17
  9. By: Blessy Augustine (CHRIST (Deemed to be University),Hosur Road, Bengaluru); O.P.C. Muhammed Rafi (BASE University, Bengaluru)
    Abstract: The impact of public debt on economic growth has been widely examined in the literature. The discussions shifted towards examining the possibility of a nonlinear relationship after the seminal work of Reinhart and Rogoff (2010) who proposed a threshold of 90 percent debt to GDP ratio beyond which debt is said to have a detrimental effect on economic growth. Many studies came thereafter found a common threshold for a group of countries and a negative impact of debt on growth beyond this threshold. In this context, we examine the presence of a threshold in the debt-growth nexus and the difference in the impact of debt on growth below and above this threshold in case of 39 emerging and developing economies for the period 1980 – 2019. Unlike most of the existing panel studies, we explore the debt growth relationship using country specific threshold regression models. Our findings show that in countries those confirmed a nonlinearity, the thresholds vary drastically, ranging between 24 and 116 percent. The results dismiss the possibility of a common threshold that fit for all countries and highlights the importance of finding country specific thresholds. Further, we could not find an inverted U-shape relationship between debt and growth in our sample. Apart from having different sets of countries with a positive impact below the threshold and a negative impact above, we could also find evidence for debt supporting growth beyond the threshold in case of ten countries. Also, there are countries in which the detrimental impact debt kicking in even below the threshold value of debt. Our result shows that the impact of public debt on economic growth is different across countries both below and above the threshold.
    Keywords: Public debt, Economic growth, Nonlinearity, Threshold
    Date: 2021–10
  10. By: Bartels, Charlotte; König, Johannes; Schröder, Carsten
    JEL: D31 D64 O47
    Date: 2021
  11. By: Nicola Amendola (DEF, Università di Roma "Tor Vergata"); Lorenzo Carbonari (CEIS & DEF, Università di Roma "Tor Vergata"); Leo Ferraris (Università di Milano-Bicocca)
    Abstract: We examine a theoretical model of liquidity with three assets {money, government bonds and equity- that are used for transaction purposes. Money and bonds complement each other in the payment system. The liquidity of equity is derived as an equilibrium outcome. Liquidity cycles arise from the loss of confidence of the traders in the liquidity of the system. Both open market operations and credit easing play a beneficial role for different purposes.
    Keywords: Money, Bonds, Equity, Liquidity, Credit Easing.
    JEL: E40
    Date: 2021–10–14
  12. By: Dietrich, Diemo; Gehrig, Thomas
    JEL: D11 D83 E21 E22 G21 L22
    Date: 2021
  13. By: Thammarak Moenjak; Veerathai Santiprabhob
    Abstract: In the digital era, new forms of non-bank entities have emerged and gained increasingly prominent roles in providing financial services. These non-bank entities, particularly those associated with non-financial conglomerates and large technology companies (BigTech) pose new challenges for financial regulators whether in terms of financial stability, level-playing field competition, or customer protection. This article discusses emerging trends in the rise of non-bank entities in the digital era, the challenges they pose, and what financial regulatory approaches can help to address those challenges. This article proposes that a holding company structure could be applied to regulate non-financial conglomerates or BigTech firms providing financial services through subsidiaries. This proposal is expected to help address regulatory concerns where existing regulatory approaches cannot adequately cope with.
    Keywords: Regulation; Global Economy; Industrial Organization
    JEL: G23 K21 K23 O16
    Date: 2021–06
  14. By: Thomas Kroen; Ernest Liu; Atif R. Mian; Amir Sufi
    Abstract: Do low interest rates contribute to the rise in market concentration? Using data on firm financials and high frequency monetary policy shocks, we find that falling interest rates disproportionately benefit industry leaders, especially when the initial interest rate is already low. Falling rates raise the valuation of industry leaders relative to industry followers and this effect snowballs as the interest rate approaches zero. There are multiple channels through which falling rates disproportionately benefit industry leaders: (i) the cost of borrowing falls more for industry leaders, (ii) industry leaders are able to raise more debt, increase leverage, and buyback more shares, and (iii) capital investment and acquisitions increase more for industry leaders. All three of these effects also snowball as the interest rate approaches zero. The findings provide empirical support to the idea that extremely low interest rates and the rise of superstar firms are connected.
    JEL: E0
    Date: 2021–10
  15. By: Jonathan Chapman (New York University Abu Dhabi)
    Abstract: This paper investigates whether high borrowing costs deterred investment in sanitation infrastructure in late nineteenth-century Britain. Town councils had to borrow to fund investment, with considerable variation in interest rates across towns and over time. Panel regressions, using annual data from over eight hundred town councils, indicate that higher interest rates were associated with lower levels of infrastructure investment between 1887 and 1903. Instrumental variable regressions show that falling interest rates after 1887 stimulated investment and led to lower infant mortality. These findings suggest that Parliament could have expedited mortality decline by subsidizing loans or facilitating private borrowing.
    Keywords: interest rates, public investment, sanitation, Britain, urban infrastructure, mortality decline
    JEL: N23 N33 N43 N93
    Date: 2021–10
  16. By: Asaduzzaman, Md
    Abstract: The main objective of this study is to empirically examine the relationship between inflation and economic growth in Bangladesh and to investigate the ongoing possible threshold effect. This study draws on diverse tables and charts, correlation matrices, pair-wise Granger Causality tests, ADRL (General to Specific Approach) test, and a quadratic regression equation estimated by OLS using time series annual data covering the sample period from 1980 to 2017. The results demonstrate that the relationship between inflation and GDP growth is non-linear with a subsistence of a breakpoint, which means the inverted U-shape curve. Moreover, the Granger Causality shows that economic growth does granger cause inflation. The empirical result indicates that when the inflation level reaches the threshold level at 7.84 percent then the economic growth is in peak position. This study proposed that the Bangladesh Bank should maintain the precautious and growth-friendly monetary policy structure by keeping inflation targeting below 7.84 percent, or else the growth might be held back.
    Keywords: Threshold Inflation, GDP Growth, Quadratic Regression Model, Bangladesh Economy
    JEL: C1 C15 C3 C32 E0 E5 E52 E58 E6 O4 O42 O47
    Date: 2021–02–02
  17. By: Carla Fernandes; Maria Rosa Borges; Esselina Macome; Jorge Caiado
    Abstract: The present work aims to assess the existence of the relationship between financial inclusion and monetary stability in Mozambique based on the analysis of the vector correction error model (VECM) for the period from 2005 to 2020. The indicators used in the study follow the approach taken by Mbutor and Uba (2013), Lapukent (2015), Lenka and Bairwa (2016) and Hung (2016). In addition to indicators of traditional banking institutions, this article goes further by also incorporating indicators relating to services of electronic money institutions with the objective of capturing the impact of digital financial services on financial inclusion and their role in financial stability. The study presents results consistent with economic theory. The long-term VEC model proved to be statistically significant and confirmed the existence of a long-term relationship between financial inclusion and monetary stability. It also revealed that the deviation of the CPI from its long-term equilibrium is adjusted at a speed of 10.19%. The coefficients of the short-term VEC model were negative for the variables of branches and bank accounts. The coefficients of agents and EMI accounts were not positive, and their shocks are removed after 6 quarters, after which the expected negative sign is observed achieving monetary stability.
    Keywords: Financial Inclusion; Monetary Stability; VEC Model; Digital Financial Services JEL Classification: G20, G21, G28.
    Date: 2021–01
  18. By: William Barnett (Department of Economics, University of Kansas and Center for Financial Stability, New York City); Sohee Park (Department of Economics, University of Kansas)
    Abstract: This paper investigates the performance of the Credit-Card-Augmented Divisia monetary aggregates in forecasting U.S. inflation and output growth at the 12-month horizon. We compute recursive and rolling out-of-sample forecasts using an Autoregressive Distributed Lag (ADL) model based on Divisia monetary aggregates. We use the three available versions of those monetary aggregate indices, including the original Divisia aggregates, the credit card-augmented Divisia, and the credit-card-augmented Divisia inside money aggregates. The source of each is the Center for Financial Stability (CFS). We find that the smallest Root Mean Square Forecast Errors (RMSFE) are attained with the credit-card-augmented Divisia indices used as the forecast indicators. We also consider Bayesian vector autoregression (BVAR) for forecasting annual inflation and output growth.
    Keywords: Divisia, Credit-Card-Augmented Divisia, Monetary Aggregates, Forecasting, Bayesian vector autoregression, Inflation, Output Growth.
    JEL: C32 C53 E31 E47 E51
    Date: 2021–10
  19. By: Artem Kuriksha
    Abstract: This paper proposes a new way to model behavioral agents in dynamic macro-financial environments. Agents are described as neural networks and learn policies from idiosyncratic past experiences. I investigate the feedback between irrationality and past outcomes in an economy with heterogeneous shocks similar to Aiyagari (1994). In the model, the rational expectations assumption is seriously violated because learning of a decision rule for savings is unstable. Agents who fall into learning traps save either excessively or save nothing, which provides a candidate explanation for several empirical puzzles about wealth distribution. Neural network agents have a higher average MPC and exhibit excess sensitivity of consumption. Learning can negatively affect intergenerational mobility.
    Date: 2021–10
  20. By: Kremer, Manfred; Chavleishvili, Sulkhan
    JEL: C14 C31 C43 C53 E44 G01
    Date: 2021
  21. By: Bennani, Hamza; Burgard, Jan Pablo; Neuenkirch, Matthias
    JEL: E44 E52 E58 G21
    Date: 2021
  22. By: Mendicino, Caterina; Cavalcanti, Tiago; Antunes, Antonio; Peruffo, Marcel; Villamil, Anne
    JEL: E2 E5 G1
    Date: 2021
  23. By: Gabriel Garber; Atif R. Mian; Jacopo Ponticelli; Amir Sufi
    Abstract: From 2011 to 2014, the Brazilian government conducted a heavily advertised major credit expansion program through government banks as part of its effort to stimulate the economy. Using administrative data on individual-level borrowing and spending, we find that the program led to a substantial rise in borrowing by government employees, especially those with low financial literacy. We trace the impact of credit stimulus on borrowers' consumption through the 2011-16 business cycle, and find that the credit stimulus resulted in higher consumption volatility and lower average consumption over the cycle. Our results suggest a potential downside of using household credit as stimulus in emerging markets.
    JEL: D12 D14 E21 E32 G21 G28 G53 O16
    Date: 2021–10
  24. By: Diana Bonfim; Sujiao Zhao; Miguel A. Ferreira; Francisco Queiró
    Abstract: We show that banks’ lending exposure to firms with government procurement contracts can amplify the diabolic loop between sovereigns and banks. Using the fiscal austerity measures implemented during the 2010-2011 European sovereign debt crisis as a shock to government procurement, we find that banks with higher exposure to these firms reduced lending significantly more than banks with lower exposure, controlling for firm-specific credit demand. The reduction in credit supply is economically as important as the effect of banks’ sovereign debt holdings, and affected both firms with and without government contracts. Firms with lending relationships with affected banks experienced lower sales growth, assets growth, employment growth, and investment. This decrease in real economic activity is likely to reduce tax revenue, further amplifying the diabolic loop.
    JEL: G01 G20 G31 H57
    Date: 2021
  25. By: Shigeto Kitano (Research Institute for Economics and Business Administration, Kobe University, JAPAN); Kenya Takaku (Faculty of International Studies, Hiroshima City University, JAPAN)
    Abstract: We reconsider the role of a sovereign wealth fund in commodity-exporting economies facing recent volatile fluctuations of commodity prices due to the COVID-19 shock. We examine the welfare-improving effect of a sovereign wealth fund from the new perspective of the link between commodity prices and interest rate spreads, which is unique to emerging economies. We show that a sovereign wealth fund becomes more effective in improving welfare for commodity-exporting economies with a stronger link between their com-modity prices and interest rate spreads.
    Keywords: Sovereign wealth fund; Commodity prices; Interest rate spreads; DSGE model; Financial frictions; Emerging economies
    JEL: E32 E44 F32 O20 Q48
    Date: 2021–10
  26. By: Minetti, Raoul (Michigan State University, Department of Economics); Murro, Pierluigi (Luiss University); Rowe, Nicholas (Michigan State University, Department of Economics)
    Abstract: This paper investigates the effects of local nancial development on rms' internationalization in the presence of a heterogeneous banking sector. Using rm-level data from Italy, we document that, when driven by banks with a local focus, nancial development boosts export participation but can depress the export sales of incumbent exporters. We explain these patterns through an industry equilibrium model of international trade with heterogeneous rms and banks. Local nancial deepening enhances banks' ability to monitor domestic and export activities, easing the entry of credit rationed rms into export, but induces credit satiated exporters to partly redirect their production capacity to domestic markets. Calibrating the model to match the data reveals that, when nancial development is too local, increased domestic output and export participation can come at the cost of reduced aggregate exports.
    Keywords: Financial Development; Internationalization; Banking Structure; Aggregate Trade Flows
    JEL: E44 G21 O16
    Date: 2021–10–20
  27. By: Hyeyoon Jung
    Abstract: I exploit a natural experiment in South Korea to examine the real effects of macroprudential foreign exchange (FX) regulations designed to reduce risk-taking by financial intermediaries. By using crossbank variation in the regulation's tightness, I show that it causes a reduction in the supply of FX derivatives (FXD) and results in a substantial decline in exports for the firms that were heavily relying on FXD hedging. I offer a mechanism in which imbalances in hedging demand, banks' costly equity financing, and firms' costly switching of banking relationships play a central role in explaining the empirical findings.
    Keywords: real effects; macroprudential policy; international finance; derivatives hedging; FX risk management
    JEL: D14 E44 G15 G28 G32
    Date: 2021–10–01
  28. By: Son, Hyuk
    Keywords: Labor and Human Capital, Risk and Uncertainty, Agricultural and Food Policy
    Date: 2021–08
  29. By: Alessandro Moro (Bank of Italy)
    Abstract: Climate change poses severe challenges to economic growth and financial stability, especially in developing countries with a more carbon-intensive economy and a greater exposure to climate-related damages. This paper proposes a simple model in which an emerging open economy, characterised by the presence of a carbon-intensive and green industry, imposes a tax on the interest paid by brown corporate bonds to foreign investors with the aim of redirecting capital to the green industry and reducing the negative environmental externality of brown firms. In this framework, capital controls have two opposite effects. On one hand, a higher tax rate has a direct negative impact on production, since it discourages capital inflows to carbon-intensive firms, thereby reducing their output. On the other hand, capital controls have an indirect positive effect through the reduction of the negative environmental externality of the carbon-intensive sector. Moreover, the analysis reveals that the optimal inflow tax is an increasing function of climate-related damage and a decreasing function of foreign and domestic investors’ environmental preferences.
    Keywords: open economy, capital controls, green investments, climate change economics.
    JEL: F21 F32 F50 F64 Q50
    Date: 2021–10
  30. By: Ivan Faiella (Bank of Italy); Luciano Lavecchia (Bank of Italy); Alessandro Mistretta (Bank of Italy); Valentina Michelangeli (Bank of Italy)
    Abstract: This study presents a novel methodological framework for assessing the exposure of the Italian financial system to climate policy risks, using a micro-founded approach. By combining survey and administrative data with energy accounts and energy prices, we estimate the energy demand elasticity of Italian households and firms at the micro-level and we use this information to simulate the effects of four one-off carbon taxes (corresponding to €50, €100, €200 and €800 per ton of CO2) on their income and profits. To compute if (and how) carbon taxes might affect the share of financially vulnerable agents and the debt at risk, these estimates are used as an input for the microsimulation models used to monitor financial stability at the Bank of Italy. According to our results, a level of carbon taxation within the range of €50-200 per ton does not have a sizeable effect on the share of financially vulnerable agents. The micro approach allows us to take into account the heterogeneous transmission channels of climate risks and indicates that the financial risks stemming from climate shocks are limited overall and specific to individual households and industries.
    Keywords: climate change, carbon tax, climate stress test, financial vulnerability
    JEL: Q41 Q54 Q58
    Date: 2021–10

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