nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2022‒01‒10
23 papers chosen by
Georg Man

  1. The Real Side of Financial Exuberance: Bubbles, Output and Productivity at the Industry Level By Francisco Queirós
  2. The role of the Australian financial sector in supporting a sustainable and inclusive recovery By Christine Lewis; Ben Westmore
  3. Repackaging FDI for Inclusive Growth: Nullifying Effects and Policy Relevant Thresholds of Governance By Isaac K. Ofori; Simplice A. Asongu
  4. Remittances and firm performance in sub-Saharan Africa: evidence from firm-level data By Kabinet Kaba; Mahamat Moustapha
  5. Macrofinancial Causes of Optimism in Growth Forecasts By Mr. Yan Carriere-Swallow; José Marzluf
  6. Stock market as a nowcasting indicator for real investment By Degiannakis, Stavros
  7. Safe Asset Demand, Global Capital Flows and Wealth Concentration By Mr. Taehoon Kim
  8. Capital Return Jumps and Wealth Distribution By Jess Benhabib; Wei Cui; Jianjun Miao
  9. Household Deleveraging and Saving Rates: A Cross-Country Analysis By Romain Bouis
  10. Public Investment, Convergence and Productivity Growth in European regions By Roberto Martino
  11. Growth and Inflation in Turkey By Alkan, Berkay
  12. An Extended Quarterly Projection Model: Credit Cycle, Macrofinancial Linkages and Macroprudential Measures: The Case of the Philippines By Mr. Philippe D Karam; Mr. Jan Vlcek; Mikhail Pranovich
  13. A Theoretical Foundation for Prudential Authorities Decision Making By Cristina Badarau; Corentin Roussel
  14. Let the Worst One Fail: A Credible Solution to the Too-Big-To-Fail Conundrum By Thomas Philippon; Olivier Wang
  15. The relationship between IMF broad based financial development index and international trade: Evidence from India By Ummuhabeeba Chaliyan; Mini P. Thomas
  16. Barriers to Trade in Financial and Insurance Services: Evidence from the United Kingdom By Jiri Podpiera
  17. Bank regulation, lending and patenting: Evidence from the EBA capital exercise By Krzyzanowski, Jan; Walz, Uwe
  18. Bank Loan Network in Turkey By Ayca Topaloglu Bozkurt; Suheyla Ozyildirim
  19. Examining the impact of debt on investment for Austrian non-financial sectors and firms By Dennis Dlugosch; Selçuk Gul
  20. Investor-driven corporate finance: Evidence from insurance markets By Kubitza, Christian
  21. A Model To Think About Crypto-Assets and Central Bank Digital Currency By Hernán D. Seoane
  22. Product market structure and monetary policy: evidence from the Euro Area By Ferrando, Annalisa; McAdam, Peter; Petroulakis, Filippos; Vives, Xavier
  23. Natural Disasters and Fianacial Stress Can Macroprudential Regulation Tame Green Swans? By Pauline Avril; Gregory Levieuge; Camelia Turcu

  1. By: Francisco Queirós (Università di Napoli Federico II and CSEF)
    Abstract: There has been a growing interest in the theory of rational bubbles. Recent theories predict that bubbles are expansionary, but differ in the underlying mechanisms. This paper provides empirical evidence that help us assess different theories, and documents four main findings: stock market overvaluation is associated with (i) faster output and input growth, (ii) declining TFP growth, (iii) a greater contribution of labor for output growth, with no change in the contribution of capital, (iv) an increase in the number of firms. Overall, these findings suggest that bubbly expansions are driven by increased factor accumulation (in particular labor), and not from higher productivity growth.
    Keywords: Stock prices, fundamentals, bubbles, productivity growth.
    JEL: E44 G12 G31 G32
    Date: 2021–12–20
  2. By: Christine Lewis; Ben Westmore
    Abstract: Australia’s financial sector entered the COVID-19 crisis in a strong position, enabling it to play a key role in cushioning the pandemic’s impact. Once the national economy reopens, policymakers will turn their focus to securing a robust, sustainable and inclusive recovery. However, low interest rates are boosting house prices and demand for credit in a banking sector that is already highly exposed to housing and highly indebted households. At the same time, many young and innovative firms – which are the drivers of job creation and productivity growth - struggle to access finance. And financial frictions impede the alignment of financial flows with environmental sustainability. Addressing these obstacles, through regulatory change, developing alternatives to bank finance and facilitating technological transformation, would raise productivity and set the recovery on a more sustainable path. Financial inclusion and financial literacy are comparatively high and financial education is entrenched at schools. Further efforts are still needed to address persistent gaps in outcomes for disadvantaged groups, accompanied by stronger consumer protections to ensure that the recovery is inclusive.
    Keywords: access to finance, Australian financial system, environmental risk exposure, financial inclusion, household debt
    JEL: G20 G21 G24 G28 G33 Q58
    Date: 2021–12–23
  3. By: Isaac K. Ofori (University of Insubria, Varese, Italy); Simplice A. Asongu (Yaoundé, Cameroon)
    Abstract: This study examines whether the remarkable inflow of resources in the form of foreign direct investment (FDI) to SSA contributes to inclusive growth in the region. The study further investigates whether SSA’s institutional fabric modulates the effect of FDI on inclusive growth in SSA. To this end, we draw data on 42 SSA countries for the period 1990 – 2020 for the analysis. The evidence, which are based on the GMM estimator shows that: (1) though FDI fosters inclusive growth in SSA, the effect is weak, and (2) the weak inclusive growth inducing-effects of FDI are weakened or nullified completely by SSA’ fragile governance quality. Nonetheless, the optimism, which we provide by way of threshold analysis shows that channelling resources into the development of these governance dynamics yield positive net effects from the short-term through to the long-term. Notably, the results show that the short-term to long-term FDI-induced inclusive growth gains of developing frameworks and structures for fighting corruption while addressing fragilities in regulatory quality and government effectiveness are outstanding. A few policy recommendations are discussed in the end.
    Keywords: AfCFTA; Africa; Economic Integration; FDI; Governance; Inclusive Growth
    JEL: F6 F15 O43 O55 R58
    Date: 2022–01
  4. By: Kabinet Kaba (CERDI, University Clermont Auvergne); Mahamat Moustapha (Paris Dauphine University-PSL)
    Abstract: Sub-Saharan African firms face enormous obstacles to their development. The main constraints to business performance identified are poor access to finance and a weak domestic market. In this paper, we examine how international remittances affect firms’ performance. Specifically, we investigate the role of remittances on capital accumulation, sales, and employment in 34,010 f irms operating in 42 Sub-Saharan African countries between 2006 and 2020. Using a fixed-effect instrumental variable approach to control for the endogeneity of remittances, we find that international remittances positively affect the share of capital held by nationals in manufacturing firms. Moreover, international remittances positively affect sales in non-manufacturing firms, while a negative effect on the sales of manufacturing firms is observed. Regarding the effect of remittances on employment, we find a positive impact on both manufacturing and non-manufacturing f irms. Heterogeneity tests suggest that the effect of remittances on firms’ performance is larger in less financially developed and non-resource-rich countries. As for the negative impact of remittances on sales in manufacturing firms, the results show that it is entirely due to small firms. Finally, using remittances per capita instead of remittances relative to GDP, similar result are found.
    Keywords: Remittances, Firm Performance, Entrepreneurship, Saving and Capital Investment, Firm Employment, Africa
    JEL: F24 L25 L26 M51 O16 O55
    Date: 2021–12
  5. By: Mr. Yan Carriere-Swallow; José Marzluf
    Abstract: We analyze the causes of the apparent bias towards optimism in growth forecasts underpinning the design of IMF-supported programs, which has been documented in the literature. We find that financial variables observable to forecasters are strong predictors of growth forecast errors. The greater the expansion of the credit-to-GDP gap in the years preceding a program, the greater its over-optimism about growth over the next two years. This result is strongest among forecasts that were most optimistic, where errors are also increasing in the economy’s degree of liability dollarization. We find that the inefficient use of financial information applies to growth forecasts more broadly, including the IMF’s forecasts in the World Economic Outlook and those produced by professional forecasters compiled by Consensus Economics. We conclude that improved macrofinancial analysis represents a promising avenue for reducing over-optimism in growth forecasts.
    Keywords: Macroeconomic forecasting; Financial markets and the macroeconomy; Credit growth
    Date: 2021–11–12
  6. By: Degiannakis, Stavros
    Abstract: The paper proposes a novel method to assess whether real investment can be nowcasted based on information that is available on the stock market. The stock market index on a daily sampling frequency is assessed as a predictor of gross fixed capital formation on a quarterly sampling frequency. For France, Germany, Greece and Spain (four representative countries of eurozone), we find significant empirical evidence that the information from the stock market does produce accurate nowcasting values of gross fixed capital formation.
    Keywords: Gross fixed capital formation, nowcasting, mixed frequency, predictor, real investment, stock market.
    JEL: C53 E22 E27 G17
    Date: 2021–12–31
  7. By: Mr. Taehoon Kim
    Abstract: The US economy is often referred to as the “banker to the world,” due to its unique role in supplying global reserve assets and funding foreign risky investment. This paper develops a general equilibrium model to analyze and quantify the contribution of this role to rising wealth concentration among American households. I highlight the following points: 1) financial globalization raises wealth inequality in a financially-developed economy initially due to foreign capital pressing up domestic asset prices; 2) much of this increase is transitory and can be reversed as future expected returns on domestic assets fall; and 3) despite the low-interest-rate environment, newly accessed foreign capital provides incentives for affluent households to reallocate wealth toward risky assets while impoverished households increase their debt. Wealth concentration ensues only if this rebalancing effect is large enough to counteract diminished return on domestic assets. Quantitative analysis suggests that global financial integration alone can account for a third to a half of the observed increase in the current top one percent wealth share in the US, but indicates a possible reversal in the future.
    Keywords: Global capital flows, Financial integration, Safe asset, Wealth inequality; wealth concentration; wealth inequality; security market liberalization; closed economy; risky asset; Income distribution; Income inequality; Return on investment; Foreign direct investment; Global
    Date: 2021–10–22
  8. By: Jess Benhabib; Wei Cui; Jianjun Miao
    Abstract: The distributions of wealth in the US and many other countries are strikingly concentrated on the top and skewed to the right. To explain the income and wealth inequality, we provide a tractable heterogeneous-agent model with incomplete markets in continuous time. We separate illiquid capital assets from liquid bond assets and introduce capital return jump risks. Under recursive utility, we derive optimal consumption and wealth in closed form and show that the stationary wealth distribution has an exponential right tail. Our calibrated model can match the income and wealth distributions in the US data including the extreme right tail. We also study the effect of taxes on the distribution of wealth.
    JEL: C61 D83 E21 E22 E31
    Date: 2021–12
  9. By: Romain Bouis
    Abstract: Historically high household debt in several economies is calling for a deleveraging, but according to some economists, this adjustment can slow GDP growth by weighing on consumption. Using a sample of advanced and emerging market economies, this paper finds evidence of a negative relationship between changes of household debt-to-income ratios and saving rates. This relationship is however asymmetric, being significant only for debt build-ups. Declining debt ratios and saving are significantly related in some economies, but the relationship is driven by consumer credit, not by mortgages. Results therefore suggest that the economic cost associated with household deleveraging may be overestimated and motivate a deleveraging via lower mortgages.
    Keywords: Household debt; saving rates; consumption growth; deleveraging; consumer credit; mortgages; housing equity withdrawal.; saving rate; rates from credit boom; homeownership rate; Consumption; Disposable income; Credit; Africa
    Date: 2021–10–29
  10. By: Roberto Martino
    Abstract: This paper estimates an augmented growth model to analyse the contribution of public investment to productivity growth for European regions. The empirical model accounts for the accumulation of public capital, the stock of infrastructure and the creation of knowledge by the government sector, alongside other growth determinants, as institutions, education, and business R&D. Convergence dynamics are also explored. Data include 273 NUTS2 European regions from 27 countries from 1999 to 2018. The empirical evidence presented suggests that public investment is positively associated with productivity growth and complementarities with business investment are in place. Furthermore, returns on both types of investments are larger in the regions of the Southern periphery, flagging policy space for further public and private productive spending. No significant effect is found for the stock of infrastructure. Public R&D has an indirect impact on productivity growth through the mediating effect of business R&D, while institutional quality is a horizontal determinant of growth.
    Date: 2021
  11. By: Alkan, Berkay
    Abstract: In this paper I investigate the empirical relationship between economic growth (as measured by growth in real GDP) and inflation in Turkey. We use a relatively large dataset spanning from 1960 to 2020. Our correlation analysis indicates that the nature of the relationship between inflation and unemployment in Turkey is substantially different before and after early 1980s.
    Keywords: growth; inflation; Turkish economy
    JEL: E31 N10 O40
    Date: 2021–12–25
  12. By: Mr. Philippe D Karam; Mr. Jan Vlcek; Mikhail Pranovich
    Abstract: We extend a modern practical Quarterly Projection Model to study credit cycle dynamics and risks, focusing on macrofinancial linkages and the role of macroprudential policy in achieving economic and financial stability. We tailor the model to the Philippines and evaluate the model’s properties along several dimensions. The model produces plausible dynamics and sensible forecasts. This along with its simplicity makes it useful for policy analysis. In particular, it should help policymakers understand the quantitative implications of responding to changes in domestic financial conditions, along with other shocks, through the joint use of macroprudential and monetary policies.
    Keywords: Philippines, Forecasting and Policy Analysis, Quarterly Projection Model, Monetary Policy, Macroprudential Policy, Credit Cycle, Leverage Ratio; credit cycle dynamics; policy analysis; projection model; model property; Quarterly Projection model; Credit; Macroprudential policy; Central bank policy rate; Credit gaps; Business cycles; Global
    Date: 2021–10–22
  13. By: Cristina Badarau (Université de Bordeaux); Corentin Roussel (Université de Bordeaux)
    Abstract: In the aftermath of the Global Financial Crisis, financial regulation uses micro- and macro-prudential rules, most of the time motivated by empirical studies. This article suggests a theoretical explanation for countercyclical and progressive capital requirements that incorporate micro- and macro-prudential stabilization objectives. The Capital Adequacy Ratio (CAR) imposed to individual banks by a Prudential Authority (PA) would thus represent an optimal regulation whose aim is to avoid individual and systemic risk accumulation by imposing minimal constraints to financial institutions. This corresponds to the implementation of optimal time-varying prudential capital requirements to banks, with non-linear structure, that allows PA to take progressive countercyclical actions in order to insure financial stability. We also test the mechanism in a DSGE model and show that it would be more suitable for the financial and real stability compared to the existing fixed prudential ratios.
    Keywords: prudential regulation model, optimal CAR, time-varying capital requirements, DSGE model
    JEL: E
    Date: 2021
  14. By: Thomas Philippon; Olivier Wang
    Abstract: We study time-consistent bank resolution mechanisms. When interventions are ex post efficient, a government cannot commit not to inject capital into the banking system. Contrary to common wisdom, we show that the government may still avoid moral hazard and implement the first best allocation by using the distribution of bailouts across banks to provide ex ante incentives. In particular, we analyze properties of credible tournament mechanisms that provide support to the best performing banks and resolve the worst performing ones, including through mergers. Our mechanism continues to perform well if banks are partially substitutable, and if they are heterogeneous in their size, interconnections, and thus systemic risk, as long as bailout funds can be targeted to particular banks.
    JEL: G01 G2 G33 G34 G38 H12
    Date: 2021–12
  15. By: Ummuhabeeba Chaliyan; Mini P. Thomas
    Abstract: This study investigates whether a uni-directional or bi-directional causal relationship exists between financial development and international trade for Indian economy, during the time period from 1980 to 2019. Three measures of financial development created by IMF, namely, financial institutional development index, financial market development index and a composite index of financial development is utilized for the empirical analysis. Johansen cointegration, vector error correction model and vector auto regressive model are estimated to examine the long run relationship and short run dynamics among the variables of interest. The econometric results indicate that there is indeed a long run association between the composite index of financial development and trade openness. Cointegration is also found to exist between trade openness and index of financial market development. However, there is no evidence of cointegration between financial institutional development and trade openness. Granger causality test results indicate the presence of uni-directional causality running from composite index of financial development to trade openness. Financial market development is also found to Granger cause trade openness. Empirical evidence thus underlines the importance of formulating policies which recognize the role of well-developed financial markets in promoting international trade.
    Date: 2021–12
  16. By: Jiri Podpiera
    Abstract: Distance, as a proxy for trade barriers, is found in many studies to matter even for weightless cross-border financial investments and lending, possibly due to the presence of information asymmetries. Its importance is tested in this paper using exports of all five broad categories of the U.K.’s financial and insurance services. No trade barriers are found for the bulk of the U.K.’s exports. Trade barriers are confirmed only for interest-bearing activities – being in line with available results in the literature. The positive effect of EU membership appears to be small. Notwithstanding the uncertainties, it suggests that post-Brexit disruptions of the U.K.’s export of financial and insurance services may be minor.
    Keywords: Export; Gravity Model; Financial Services; Insurance; Censored Regression; insurance service; A. financial services; U.K.'s export; evidence from the United Kingdom; U.K.'s export value; Exports; Trade barriers; Service exports; Global
    Date: 2021–10–29
  17. By: Krzyzanowski, Jan; Walz, Uwe
    Abstract: We analyze the impact of decreases in available lending resources on quantitative and qualitative dimensions of firms' patenting activities. We thereby make use of the European Banking Authority's capital exercise to carve out the causal effect of bank lending on firm innovation. In order to do so we combine various datasets to derive information on firms' financials, their patenting behaviors, as well as their relationships with their lenders. Building on this selfgenerated dataset, we provide support for the "less finance, less innovation" view. At the same time, we show that lower available financial resources for firms lead to improvement in the qualitative dimensions of their patents. Hence, we carve out a "less finance, less but better innovation" pattern.
    Keywords: financing,bank lending,patents
    JEL: D22 G30 G31 G38 N24 O31 O34
    Date: 2021
  18. By: Ayca Topaloglu Bozkurt; Suheyla Ozyildirim
    Abstract: In this study we document the topology of banks’ commercial loan network in Turkey using more than 44 million loan observations between 2007 and 2016 on a quarterly basis. To our knowledge, we study the largest financial network which includes all bank-firm loan transactions, i.e., population data that has not been studied up to now. First, we construct a network among banks resulting from their common borrowing firms. Second, we develop a novel weighted degree measure based on the share within the total banking sector of the loan volumes that banks lend to the same firms. Third, we empirically investigate the relationship between the credit riskiness of banks and their weighted degree centrality. Our empirical findings suggest that the credit riskiness of banks decreases with the weighted degree centrality of the banks emerging from lending to common borrowing firms. The impact remains significant after controlling for bank loan size, liquidity and even controlling for multiple lending. Finally, analysis based on micro-level stratifications where the loan size, collateral, multiple borrowings of firms and banks size are taken into account also supports our findings that there is a negative association between loan network centrality and credit risk.
    Keywords: Bank-loan network, Bipartite network, Projected network, Weighted degree centrality, Multiple lending, Credit riskiness
    JEL: G21 G01
    Date: 2021
  19. By: Dennis Dlugosch; Selçuk Gul
    Abstract: Using a micro-level model of investment, this paper finds that firm-debt and investment are negatively associated across firms in Austrian manufacturing industries. The finding is robust to various changes to the model specification. Moreover, in an extension of the basic model, different components of debt are examined, pointing out that debt owed to banks and long-term debt have a stronger negative effect than other forms of debt. Comparisons with investment models estimated for other European countries suggest that the impact of debt on investment is more negative in Austria than elsewhere. Results from interaction models of debt owed to banks with an index of credit easing show that firms in industries which are more bank-dependent invest relatively more than firms in industries that are less bank-dependent after an easing of credit conditions.
    Keywords: Austria, corporate debt, Corporate investment
    JEL: E22 E44
    Date: 2021–12–17
  20. By: Kubitza, Christian
    Abstract: This paper documents that the bond investments of insurance companies transmit shocks from insurance markets to the real economy. Liquidity windfalls from household insurance purchases increase insurers' demand for corporate bonds. Exploiting the fact that insurers persistently invest in a small subset of firms for identification, I show that these increases in bond demand raise bond prices and lower firms' funding costs. In response, firms issue more bonds, especially when their bond underwriters are well connected with investors. Firms use the proceeds to raise investment rather than equity payouts. The results emphasize the significant impact of investor demand on firms' financing and investment activities.
    Keywords: Corporate Finance,Corporate Bonds,Insurance,Real Effects
    Date: 2021
  21. By: Hernán D. Seoane
    Abstract: This paper introduces digital assets, crypto assets in general, and Central Bank Dig- ital Currency in particular, into an otherwise standard New-Keynesian closed economy model with Financial Frictions. We use this setting to study the impact of a change in preferences towards the use of digital assets and to address whether the emergence of this type of instruments affect the transmission of monetary policy shocks. In this context we study the introduction of Central Bank Digital Currencies. The model is stylized but it could be a baseline for the design of models for quantitative analysis.
    Date: 2021
  22. By: Ferrando, Annalisa; McAdam, Peter; Petroulakis, Filippos; Vives, Xavier
    Abstract: Monetary policy aims at affecting corporate borrowing by influencing the marginal costs of firms, but its potency can be conditioned by the degree of market competition. We first identify conditions under which changes in marginal costs may have different effects on credit constraints and output under different competitive environment, in a simple Cournot competition setting. We then exploit changes in monetary policy to examine whether the pass-through of borrowing costs is affected by market structure. First, we use as an experiment the announcement of the ECB Outright Monetary Transactions (OMT) program in a triple-differences specification. We show that small firms (which have low market power and higher credit constraints) in "stressed" countries (which benefited more from the policy) within less concentrated sectors experienced a larger reduction in credit constraints than similar firms in more concentrated sectors. Second, we exploit continuous state-of-the-art measures of monetary policy shocks to study how market structure affects pass-through to real variables, like investment and sales growth. We find evidence that firms with more market power respond less to monetary policy shocks. These results show that the interaction of borrowing capacity and market structure matters, and that concentration may have important effects on monetary policy transmission. JEL Classification: D4, E4, E5, L1
    Keywords: competition, credit constraints, marginal costs, monetary transmission, OMT
    Date: 2021–12
  23. By: Pauline Avril (Université d'Orléans); Gregory Levieuge (Banque de France, Université d'Orléans); Camelia Turcu (Université d'Orléans)
    Abstract: We empirically investigate the impact of natural disasters on the external finance premium (EFP), conditional on the stringency of macroprudential regulation. The intensity of natural disasters is measured through an original set of geophysical indicators for a sample of 88 countries over the period 1996-2016. Using local projections, we show that, following storms, the EFP significantly drops (rises) when macroprudential regulation is stringent (lax). This suggests that regulated financial systems could foster favorable financing conditions to replace destroyed capital with more productive capital. Macroprudential stringency seems less crucial in the case of floods, the predictability of which may prompt self-discipline.
    Keywords: Financial stress, External finance premium, Macroprudential policy, Natural disasters, Local projections.
    JEL: E
    Date: 2021

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