nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2022‒01‒03
27 papers chosen by
Georg Man

  1. Financial Development, Reforms and Growth By Spyridon Boikos; Theodore Panagiotidis; Georgios Voucharas
  2. Development loans, poverty trap, and economic dynamics By Cuong Le Van; Ngoc-Sang Pham; Thi Kim Cuong Pham
  3. Wealth Inequality, Uninsurable Entrepreneurial Risk and Firms Markup By Samuel Brien
  4. Sovereign Risk and Intangible Investment By Minjie Deng
  5. Corporate Secular Stagnation: Empirical Evidence on the Advanced Economy Investment Slowdown By Strauss, Ilan; Yang, Jangho
  6. Structural change, productive development and capital flows: Does financial “bonanza” cause premature de-industrialization? By Alberto Botta; Giuliano Toshiro Yajima; Gabriel Porcile
  7. Bridging Africa’s Income Inequality Gap: How Relevant Is China’s Outward FDI to Africa? By Isaac K. Ofori; Toyo A. M. Dossou; Simplice A. Asongu; Mark K. Armah
  8. The Effects of Restrictive Measures on Cross-Border Investment: Evidence from OECD and Emerging Countries By Amara Zongo
  9. Financial Constraints, Sectoral Heterogeneity, and the Cyclicality of Investment By Cooper Howes
  10. Asymmetries in Risk Premia, Macroeconomic Uncertainty and Business Cycles By Christoph Görtz; Mallory Yeromonahos
  11. Moderating Macroeconomic Bubbles Under Dispersed Information By Jonathan J Adams
  12. State-owned banks and international shock transmission By Marcin Borsuk; Oskar Kowalewski; Pawel Pisany
  13. Public debt dynamics and nonlinear effects on economic growth : evidence from Rwanda By Rutayisire, J.Musoni
  14. Varieties and interdependencies of demand and growth regimes in finance-dominated capitalism By Prante, Franz; Hein, Eckhard; Bramucci, Alessandro
  15. The financial origins of non-fundamental risk By Sushant Acharya; Keshav Dogra; Sanjay R. Singh
  16. A Comprehensive Look at the Empirical Performance of Equity Premium Prediction II By Amit Goyal; Ivo Welch; Athanasse Zafirov
  17. Online Appendix to "Stock Market Participation: The Role of Human Capital" By Karthik Athreya; Felicia Ionescu; Urvi Neelakantan
  18. Government Loan Guarantees during a Crisis: The Effect of the PPP on Bank Lending and Profitability By W. Blake Marsh; Padma Sharma
  19. Mis-Allocation within Firms: Internal Finance and International Trade By Sebastian Doerr; Dalia Marin; Davide Suverato; Thierry Verdier; Thierry Verdier
  20. Remittance Flows and U.S. Monetary Policy By Immaculate Machasio; Peter Tillmann
  21. Monetary policy and endogenous financial crises By F. Boissay; F. Collard; Jordi Galí; C. Manea
  22. Technology adoption and the bank lending channel of monetary policy transmission By Hasan, Iftekhar; Li, Xiang
  23. Addressing the challenges of digital lending for credit markets and the financial system in low- and middle-income countries By Sommer, Christoph
  24. Central Bank Digital Currency and Banking: Macroeconomic Benefits of a Cash-Like Design By Jonathan Chiu; Mohammad Davoodalhosseini
  25. Revisiting the Monetary Sovereignty Rationale for CBDCs By Skylar Brooks
  26. Estudos de História Empresarial de Portugal - Banca By Ana Tomás; Nuno Valério
  27. The distress of Italian commercial banks in 1926-1936: a new dataset from banking supervision archives By Marco Molteni

  1. By: Spyridon Boikos (Department of Economics, University of Macedonia, Greece); Theodore Panagiotidis (Department of Economics, University of Macedonia, Greece); Georgios Voucharas (Department of Economics, University of Macedonia, Greece)
    Abstract: Is there any specific structure of the financial system which promotes economic growth or does this structure depend on the level of economic growth itself? Financial development and financial reforms affect economic growth, but less is known on how this effect varies across different levels of the conditional distribution of the growth rates. We examine this by using panel data for 81 countries for more than 30 years. We account for unobserved heterogeneity and operate within alternative econometric approaches. The findings indicate that financial reforms are important determinants of growth, especially when a country faces relatively low levels of economic growth. Financial development does matter for growth, however, the size and significance of the effect vary. Financial reforms affect economic growth more than financial development. We reveal that the components of financial reforms, which are more important for economic growth, are the supervision of banks and the regulation of securities markets.
    Keywords: Financial Development, Financial Reforms, Economic Growth, Quantile Regression, Panel Data
    JEL: O16 O40 G10 G20 C21 C23
    Date: 2021–12
  2. By: Cuong Le Van (IPAG Business School, TIMAS, Thang Long University, 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); Ngoc-Sang Pham (Métis Lab EM Normandie - EM Normandie - École de Management de Normandie, EM Normandie - École de Management de Normandie); Thi Kim Cuong Pham (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique, University of Paris Nanterre)
    Abstract: This paper investigates the nexus between foreign aid (in the form of loans), poverty trap, and economic development in a recipient country by using a Solow model with two new ingredients: a development loan and a fixed cost in the production process. The presence of this fixed cost generates a poverty trap. Development loans may help the country to escape from the poverty trap and converge to a stable steady-state in the long run, but only if (i) the country's characteristics, such as saving rate, initial capital, governance quality, and in particular productivity, are good enough, (ii) the fixed cost is relatively low, and (iii) loans rule is generous enough. We also show that there is room for endogenous cycles in our model, unlike the standard Solow model.
    Keywords: Economic dynamics,economic growth,foreign aid,development loan,poverty trap
    Date: 2021–11–30
  3. By: Samuel Brien
    Abstract: This paper examines the effect of wealth concentration on firms’ market powerwhen firm entry is driven by entrepreneurs facing uninsurable idiosyncratic risks. Undergreater wealth concentration, households in the lower end of the wealth distribution aremore risk averse and less willing (or able) to bear the risk of entrepreneurial activities.This has implications for firm entry, competitiveness, and market power.I calibrate a Schumpeterian model of endogenous growth with heterogeneous riskaverse entrepreneurs competing to catch up with firms. This model is unique in thatboth household wealth distribution and a measure of firm markup are endogenouslydetermined on a balanced growth path. I find that a spread in the wealth distributiondecreases entrepreneurial firm creation, resulting in greater aggregate firm marketpower. This result is supported by time series evidence obtained from the estimationof a structural panel VAR with OECD data from eight countries.
    Keywords: Wealth inequality, market power, growth, Schumpeterian, endogenous growth, entrepreneur
    JEL: E22 E21 L12 O31 O33
    Date: 2021–11
  4. By: Minjie Deng (Simon Fraser University)
    Abstract: This paper measures the output and TFP costs of sovereign risk incorporating its impact on firm intangible investment. Using Italian firm-level data, we show that firms reallocated from intangible assets to tangible assets during the recent sovereign debt crisis. This asset reallocation is more pronounced among small firms and high-leverage firms. We build a sovereign default model incorporating both firm tangible and intangible investment to explain the empirical findings. In our model, sovereign risk deteriorates bank balance sheets, disrupting banks’ ability to finance firms. Firms with greater external financing needs are more exposed to sovereign risk. Facing tightening financial constraints, firms internalize that tangible assets can be used as collateral while intangibles cannot, thus reallocating resources towards tangible investment to offset tightening financial conditions. In a counterfactual analysis, we find that elevated sovereign risk explains 86% of the observed output losses and 72% of TFP losses during the 2011-2013 Italian sovereign debt crisis.
    Date: 2021–12
  5. By: Strauss, Ilan; Yang, Jangho
    Abstract: We detail a secular slowdown in investment rates using a large panel of advanced economy non-financial firms from 18 countries between 1994-2017. We test competing explanations for the investment slowdown using a Bayesian 'mixed effects' model, with time-varying and country-varying coefficients to fully explore variation in financing constraints and investment behaviour. Firms' estimated underlying impetus to invest falls precipitously between 1997-2017, with only a mild recovery between 2003-2008. The slope of the investment demand curve -- approximated by time-varying Q regressions coefficients -- remains roughly constant, indicating that `financialization' or growing monopoly power has not dulled firms' responsiveness to investment opportunities. Contrary to precautionary savings arguments, advanced economy firms are not meaningfully financially constrained. Instead, the corporate sector as a whole is increasingly a net external `releaser' of funds to shareholders, creditors, and bondholders, and this behaviour closely tracks declining investment rates between years.
    Keywords: Secular Stagnation, Investment Slowdown, Hierarchical Model, Finance Constrained, Tobin's Q, Investment Rates, Corporate Savings, Bayesian Econometrics.
    JEL: D22 D24 E12 E22 E23
    Date: 2020–07
  6. By: Alberto Botta; Giuliano Toshiro Yajima; Gabriel Porcile
    Abstract: The outbreak of Covid-19 brought back to the forefront the crucial importance of structural change and productive development for economic resilience to economic shocks. Several recent contributions have already stressed the perverse relation that may exist between productive backwardness and the intensity of the Covid-19 socio-economic crisis. In this paper, we analyze the factors that may have hindered productive development for over four decades before the pandemic. We investigate the role of (non-FDI) net capital inflows as a potential source of premature de-industrialization. We consider a sample of 36 developed and developing countries from 1980 to 2017, with major emphasis on the case of emerging and developing (EDE) economies in the context of increasing financial integration. We show that periods of abundant capital inflows may have caused the significant contraction of manufacturing share to employment and GDP, as well as the decrease of the economic complexity index. We also show that phenomena of “perverse” structural change are significantly more relevant in EDE countries than advanced ones. Based on such evidence, we conclude with some policy suggestions highlighting capital controls and external macroprudential measures taming international capital mobility as useful policy tools for promoting long-run productive development on top of strengthening (short-term) financial and macroeconomic stability.
    Keywords: Structural change; premature de-industrialization; capital Inflows; macroprudential policies
    JEL: F32 F38 O14 O30
    Date: 2021–12
  7. By: Isaac K. Ofori (University of Insubria, Varese, Italy); Toyo A. M. Dossou (Chengdu, China.); Simplice A. Asongu (Yaoundé, Cameroon); Mark K. Armah (University of Cape Coast, Cape Coast, Ghana)
    Abstract: In line with the SDG 10 and Aspiration 1 of Africa’s Agenda 2063, this study examines whether: (i) the remarkable inflow of Chinese FDI to Africa matters for bridging the continent’s marked income inequality gap, (ii) Africa’s institutional fabric is effective in propelling Chinese FDI towards the equalisation of incomes in Africa, and (iii) there exist relevant threshold levels required for the various governance dynamics to cause Chinese FDI to equalise incomes in Africa. Our results, which are based on the dynamic GMM estimator for the period 1996 – 2020, reveal that though: (1) Chinese FDI contributes to equitable income distribution in Africa, the effect is weak, and (2) Africa’s institutional fabric matters for propelling Chinese FDI towards the equalisation of incomes across the continent, governance mechanisms for ensuring political stability, low corruption, and voice and accountability are keys. Finally, critical masses required for these three key governance dynamics to propel Chinese FDI to reduce income inequality are 0.8, 0.5 and 0.1, respectively. These critical masses are thresholds at which governance is a necessary but no longer a sufficient condition to complement Chinese FDI in order to mitigate income inequality. Hence, at the attendant thresholds, complementary policies are worthwhile. Policy recommendations are provided in the end.
    Keywords: Africa, Agenda 2063, China, Corruption, Governance, FDI, Income Inequality
    JEL: F6 F15 O43 O55 R58
    Date: 2021–01
  8. By: Amara Zongo (GREThA - Groupe de Recherche en Economie Théorique et Appliquée - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique, Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux 4)
    Date: 2021
  9. By: Cooper Howes
    Abstract: While investment in most sectors declines in response to a contractionary monetary policy shock, investment in the manufacturing sector increases. Using manually digitized aggregate income and balance sheet data for the universe of U.S. manufacturing firms, I show this increase is driven by the types of firms that are least likely to be financially constrained. A two-sector New Keynesian model with financial frictions can match these facts; unconstrained firms are able to take advantage of the decline in the user cost of capital caused by the monetary contraction, while constrained firms are forced to cut back.
    Keywords: Monetary Policy; Investments; Financial Frictions
    JEL: E22 E32 E52
    Date: 2021–08–27
  10. By: Christoph Görtz (Department of Economics, University of Birmingham, UK; Rimini Centre for Economic Analysis); Mallory Yeromonahos (Department of Economics, University of Birmingham, UK)
    Abstract: A large literature suggests that the expected equity risk premium is countercyclical. Using a variety of different measures for this risk premium, we document that it also exhibits growth asymmetry, i.e. the risk premium rises sharply in recessions and declines much more gradually during the following recoveries. We show that a model with recursive preferences, in which agents cannot perfectly observe the state of current productivity, can generate the observed asymmetry in the risk premium. Key for this result are endogenous fluctuations in uncertainty which induce procyclical variations in agent's nowcast accuracy. In addition to matching moments of the risk premium, the model is also successful in generating the growth asymmetry in macroeconomic aggregates observed in the data, and in matching the cyclical relation between quantities and the risk premium.
    Keywords: Risk Premium, Business cycles, Bayesian Learning, Asymmetry, Uncertainty, Nowcasting
    JEL: E2 E3 G1
    Date: 2021–12
  11. By: Jonathan J Adams (Department of Economics, University of Florida)
    Abstract: Can waves of optimism and pessimism produce large macroeconomic bubbles, and if so, is there anything that policymakers can do about them? Yes and yes. I study a business cycle model where agents with rational expectations receive noisy signals about future productivity. The model features dispersed information, which allows aggregate noise shocks to produce frequent large bubbles in the capital stock. Because of the information friction, a policymaker with an informational advantage can improve outcomes. I consider policies that affect investment incentives by distorting the intertemporal wedge. I calculate the optimal policy rule, and find that policymakers should discourage investment booms after aggregate news shocks.
    JEL: D84 E21 E32
    Date: 2020–09
  12. By: Marcin Borsuk (European Central Bank, Germany Institute of Economics, Polish Academy of Sciences, Poland School of Economics, University of Cape Town, South Africa); Oskar Kowalewski (Institute of Economics, Polish Academy of Sciences, Poland IESEG School of Management, Univ. Lille, CNRS, UMR 9221 - LEM - Lille Économie Management, F-59000 Lille, France Univ. Lille, UMR 9221 - LEM - Lille Economie Management, France CNRS, UMR 9221 - LEM - Lille ´Economie Management, France); Pawel Pisany (Institute of Economics, Polish Academy of Sciences, Poland)
    Abstract: In this study, we employ a new dataset on bank ownership and reassess the links between domestic and foreign ownership and lending during the 1996– 2018 period. Additionally, we distinguish between privately-owned and state-controlled banks and nd that the lending activities of foreign state-controlled and privately-owned banks dier, particularly following the nancial crisis of 2008. Our analysis conrms that foreign state-controlled and privately-owned banks provided credit during domestic banking crises in host countries, whereas lending by domestic state-controlled banks contracted. Further, foreign state-controlled banks reduced their credit base during a home banking crisis, whereas foreign privately-owned banks expanded lending. Hence, we nd that the credit supply of foreign state-controlled and privately-owned banks differs in host countries because of exogenous shocks. We also nd weak evidence that foreign state control can be a transmission channel during a sovereign crisis in the home country. However, we nd no evidence that foreign banks, state-controlled or privately-owned, transmit a currency crisis to a host country. Overall, our results suggest a mixed banking sector comprising foreign and domestic state-controlled banks and privately-owned banks to contribute to nancial stability during domestic and international crises.
    Keywords: : foreign banks, state-controlled banks, private banks, credit growth, crisis
    JEL: G01 G21 G28
    Date: 2021–10
  13. By: Rutayisire, J.Musoni
    Abstract: The purpose of this paper is to contribute to existing literature by investigating the nonlinear impact of public debt on economic growth, as well as the long and short run relationship between economic growth and its determinants in Rwanda. To this end, a quadratic polynomial function in debt and the autoregressive distributed lag (ARDL) bounds testing approach to co-integration have been employed for econometric analysis using time series data covering the period 1970- 2018. Following many other empirical studies, this research assumed that at lower level, public debt may be growth-enhancing, while at higher level, it is deleterious to growth. Therefore, this study attempted to assess whether in the case of Rwanda, there exists a threshold level or a turning point above which the impact of public debt on economic growth shifts from positive to negative. The empirical results of this study strongly suggest the presence of a concave nonlinear or an inverted U-shape relationship between public debt and economic growth in Rwanda. The turning point above which additional public debt becomes harmful to growth has been evaluated at a public debt-to-GDP ratio equal to 50.2%. This finding provides an empirical support to the public debt convergence policy benchmark of 50% adopted in Rwanda as well in the East African Economic Community member countries. This result would be useful for policy makers in the design of a well-informed macroeconomic and public debt management strategy.
    Keywords: Economic growth, Public debt, Non-linear relationship, ARDL, Rwanda.
    JEL: C51 H63
    Date: 2021–12–03
  14. By: Prante, Franz; Hein, Eckhard; Bramucci, Alessandro
    Abstract: We outline and simulate a stylised post-Keynesian two country stock-flow consistent model to demonstrate the interconnection of three of the main features/outcomes of finance-dominated capitalism, namely worsening income distribution for the bottom 90% households, the rise of international imbalances and the build-up of financial fragility. In the model, twobasic regimesemerge, depending on the institutional setting of the respective model economy:the debt-led private demand boom regime (DLPD) and the export-led mercantilist regime(ELM). We demonstrate the complementarity and interdependence of these two regimesand show how this constellation transformed after the crisis into the domestic demand-led regime (DDL) stabilised by government deficits, on the one hand, andELMregimes, on the other, depending ontherequired deleveraging of private household debt, distributional developments and fiscal policy.
    Keywords: post-Keynesian macroeconomics,financialisation,growth regimes,institutions,inequality,debt,stock-flow consistent model
    JEL: B59 E02 E11 E12 E25 E65 F41 O41
    Date: 2021
  15. By: Sushant Acharya; Keshav Dogra; Sanjay R. Singh (Department of Economics, University of California Davis)
    Abstract: We formalize the idea that the financial sector can be a source of non-fundamental risk. Households’ desire to hedge against price volatility can generate price volatility in equilibrium, even absent fundamental risk. Fearing that asset prices may fall, risk-averse households demand safe assets from leveraged intermediaries, whose issuance of safe assets exposes the economy to self-fulfilling fire sales. Policy can eliminate non-fundamental risk by (i) increasing the supply of publicly backed safe assets, through issuing government debt or bailing out intermediaries, or (ii) reducing the demand for safe assets, through social insurance or by acting as a market maker of last resort.
    Keywords: safe assets, self-fulfilling asset market crashes, liquidity, fire sales
    JEL: D52 D84 E62 G10 G12
    Date: 2021–12–19
  16. By: Amit Goyal (University of Lausanne; Swiss Finance Institute); Ivo Welch (University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)); Athanasse Zafirov (University of California, Los Angeles)
    Abstract: Our paper reexamines whether 29 variables from 26 papers published after Goyal and Welch (2008), as well as the original 17 variables, were useful in predicting the equity premium in-sample and out-of-sample. Our samples include the original periods in which these variables were identified, but ends later (in 2020). Most variables have already lost their empirical support, but a handful still perform reasonably well. Overall, the predictive performance remains disappointing.
    Keywords: equity premium, prediction, out-of-sample, skepticism
    JEL: G1 G11 G12
    Date: 2021–09
  17. By: Karthik Athreya (Federal Reserve Bank of Richmond); Felicia Ionescu (Federal Reserve Board); Urvi Neelakantan (Federal Reserve Bank of Richmond)
    Abstract: Online appendix for the Review of Economic Dynamics article
    Date: 2021
  18. By: W. Blake Marsh; Padma Sharma
    Abstract: We study bank responses to the Paycheck Protection Program (PPP) and its effects on lender balance sheets and profitability. To address the endogeneity between bank decisions and balance sheet effects, we develop a Bayesian joint model that examines the decision to participate, the intensity of participation, and ultimate balance sheet outcomes. Overall, lenders were driven by risk-aversion and funding capacity rather than profitability in their decision to participate and the intensity of their participation. Indeed, with greater participation intensity, banks experienced sizable growth in their loan portfolios but a decline in their interest margins. In counterfactual exercises, we show that the PPP offset a large potential contraction in business lending, and that bank margins would have fallen even more precipitously if lenders had not participated in the program. Although the PPP was intended as a credit support program for small firms, the program indirectly supported the margins of banks that channeled these loans.
    JEL: C11 G21 G28 H12
    Date: 2021–07–14
  19. By: Sebastian Doerr; Dalia Marin; Davide Suverato; Thierry Verdier; Thierry Verdier
    Abstract: This paper develops a novel theory of capital mis-allocation within firms that stems from managers’ empire building and informational frictions within the organization. Introducing an internal capital market into a two-factor model of multi-segment firms, we show that international competition imposes discipline on managers and reduces capital mis-allocation across divisions, thereby lowering the conglomerate discount. The theory can explain why exporters exhibit a lower conglomerate discount than non-exporters (a new fact we establish). Testing the model’s predictions with data on US companies, results suggest that Chinese import competition significantly reduces managers' over-reporting of costs and improves the allocation of capital within firms.
    Keywords: multi-product firms, trade and organization, internal capital markets, conglomerate discount, China shock
    JEL: F12 G30 L22 D23
    Date: 2021
  20. By: Immaculate Machasio (World Bank); Peter Tillmann (University of Giessen)
    Abstract: Remittance inflows are driven by macroeconomic conditions in the home and the host economies, respectively. In this paper, we study the effect of U.S. monetary policy on remittance flows into economies in Latin American and the Caribbean. The role of Fed policy for remittances has not yet been studied. We estimate a series of panel local projections for remittance inflows into eight countries. A surprise change in U.S. monetary conditions has a strong and highly significant negative effect on inflows. Our finding remains robust if we change the sample period or include additional variables. Hence, our paper establishes a remittance-channel through which the Fed affects the business cycle abroad.
    Keywords: remittances, migration, business cycle, monetary policy, spillovers
    JEL: F24 F41 E52 O11
    Date: 2021
  21. By: F. Boissay; F. Collard; Jordi Galí; C. Manea
    Abstract: We study whether a central bank should deviate from its objective of price stability to promote financial stability. We tackle this question within a textbook New Keynesian model augmented with capital accumulation and microfounded endogenous financial crises. We compare several interest rate rules, under which the central bank responds more or less forcefully to inflation and aggregate output. Our main findings are threefold. First, monetary policy affects the probability of a crisis both in the short run (through aggregate demand) and in the medium run (through savings and capital accumulation). Second, a central bank can both reduce the probability of a crisis and increase welfare by departing from strict inflation targeting and responding systematically to fluctuations in output. Third, financial crises may occur after a long period of unexpectedly loose monetary policy as the central bank abruptly reverses course.
    Keywords: Financial crisis, monetary policy
    Date: 2021–12
  22. By: Hasan, Iftekhar; Li, Xiang
    Abstract: This paper studies whether and how banks' technology adoption affects the bank lending channel of monetary policy transmission. We construct a new measurement of bank-level technology adoption, which can tell whether the technology is related to the bank's lending business and which specific technology is adopted. We find that lending-related technology adoption significantly strengthens the transmission of the bank lending channel, meanwhile, adopting technologies that are not related to lending activities significantly mitigates that. By technology categories, the adoption of cloud computing technology displays the largest impact on strengthening the bank lending channel. Moreover, higher exposure to BigTech competition is significantly associated with a weaker reaction to monetary policy shocks.
    Keywords: bank lending channel,monetary policy transmission,technology adoption
    JEL: G21 G23
    Date: 2021
  23. By: Sommer, Christoph
    Abstract: The demand for digital financial services has risen significantly over recent years. The COVID-19 pandemic has accelerated this trend and since the focus has shifted towards economic recovery, digital lending has become central. Digital credit products exploit traditional and alternative financial and non-financial data to provide access to finance for households and micro, small and medium enterprises (MSMEs). While it makes lending more inclusive for underserved or unserved households and firms, its increasing influence also brings forth challenges that need to be addressed by policy-makers and regulators in order to guarantee well-functioning credit markets and broader financial systems that foster sustainable economic development. A central concern is the adverse effect of digital lending on the stability and integrity of credit markets (and potentially the wider financial systems). The rise in non-performing loans, even before the COVID-19 crisis, has been associated with an increase in digital credits. New players with little experience enter the market and exploit regulatory arbitrage, but often these players have no (or only a partial) obligation to report to respective systems for sharing credit information or to supervisory bodies, which introduces severe vulnerabilities. In addition, the low entry threshold of digital financial products, due to their convenience and simplicity for customers, provides fertile ground for exploitative financialisation. Underserved households and MSMEs with limited financial literacy may be lured into taking up unsuitable and unaffordable digital credits, leading to over-indebtedness and bankruptcy. The last challenge arises from significantly shorter loan maturities in MSME lending if current forms of digital lending are scaled up. This is problematic, as firms need loans with longer maturities to realise productivity-enhancing medium- and long-term investments, many of which include complementary investments in labour, thereby contributing to an improvement in job quality. Governments and regulators need to strike a balance between leveraging the potential of digital lending for inclusive finance and economic recovery from the COVID-19 crisis, and mitigating associated risks. In particular, they should, together with providers of technical and financial development cooperation, consider the following: - Fostering the integrity of (digital) credit markets. Regulators should establish specific licenses and regulations for all digital financial service providers, and introduce obligatory reporting requirements to supervisory bodies and national systems for sharing credit information. - Preventing exploitative financialisation. Regulators need to require digital lenders to present the costs and risks of their loan products in a manner comprehensible to consumers with little financial literacy, and extend consumer protection policies to digital financial services. - Ensuring availability of loans with longer maturities. Development finance institutions and other national and international promoters of (M)SMEs should assist local banks in the provision of longer-term loans, e.g. by offering respective funds or partial credit guarantees. - Establishing regulatory sandboxes. Regulators should launch regulatory sandboxes to test legislation in a closed setting and to learn about risks without hindering innovation.
    Date: 2021
  24. By: Jonathan Chiu; Mohammad Davoodalhosseini
    Abstract: Should a central bank digital currency (CBDC) be issued? Should its design be cash- or deposit-like? To answer these questions, we theoretically and quantitatively assess the effects of a CBDC on consumption, banking and welfare. Our model introduces new general equilibrium linkages across different types of retail transactions as well as a novel feedback effect from transactions to deposit creation. The general equilibrium effects of a CBDC are decomposed into three channels: payment efficiency, price effects and bank funding costs. We show that a cash-like CBDC is more effective than a deposit-like CBDC in promoting consumption and welfare. Interestingly, a cash-like CBDC can also crowd in banking, even in the absence of bank market power. In a calibrated model, at the maximum, a cash-like CBDC can increase bank intermediation by 5.8% and capture up to 25% of the payment market. In contrast, a deposit-like CBDC can crowd out banking by up to 2.6%, thereby grabbing a market share of about 16.7%.
    Keywords: Digital currencies and fintech; Monetary policy; Monetary policy framework
    JEL: E58
    Date: 2021–12
  25. By: Skylar Brooks
    Abstract: As currently articulated, the monetary sovereignty argument for central bank digital currencies (CBDCs) rests on the idea that without them, private and foreign digital monies could displace domestic currencies (a process called currency substitution), threatening the central bank’s monetary policy and lender-of-last-resort (LLR) capabilities. This rationale provides a crucial but incomplete picture of what is at stake in terms of monetary sovereignty. This paper seeks to expand and enhance this picture in three ways. The first is by looking at the consequences of currency substitution that go beyond the functions of a central bank—important considerations that have received less attention in public CBDC discussions. The second is by exploring key differences in monetary policy and LLR capabilities across currency-issuing countries or regions. More specifically, the paper highlights the variation in the degree of monetary sovereignty and the consequences that different countries face should they lose it. The third way is by assessing not only the implications but also the risks of currency substitution and showing how these are also likely to vary across countries. Contrasting the consequences and risks of substitution, the paper concludes by noting a potential inverse relationship between the impact and probability of losing monetary sovereignty.
    Keywords: Debt management; Digital currencies and fintech; Exchange rate regimes; Financial stability; Monetary policy
    JEL: E41 E42 E52 E58 H12 H63
    Date: 2021–12
  26. By: Ana Tomás; Nuno Valério
    Abstract: This working paper summarizes the evolution of the banking sector in Portugal, both from the perspective of the regime established by the government, and from the perspective of the main firms that worked in the sector. This is the third working paper of a set that already includes working paper no. 68 on the railroad sector and working paper no. 69 on the tobacco sector, with the final purpose of preparing a Business History of Portugal.
    Keywords: Portugal, setor bancário, empresas bancárias JEL classification: G21 bancos — banks
    Date: 2021
  27. By: Marco Molteni
    Abstract: This paper documents a new dataset on the distress of Italian joint-stock banks in 1926-1936. It employs classified information from the archives of Italian banking supervision to identify both outright and hidden bank failures. Providing the first all-embracing account of the crisis of small and medium banks in Italy during the Great Depression, it shows that once hidden distress is considered, their crisis was more severe than previously thought. Measured by total assets of banks involved, the distress of joint-stock banks would be considered a 'systemic crisis' by today standards. While previous research has mainly focused on the distress of large universal banks, this research opens new questions on our interpretation of the impact of bank distress in interwar Italy. Important regional patterns emerge, and these should receive more attention in future research.
    Date: 2021–08–11

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