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on Financial Development and Growth |
| By: | Taiwo, Kayode |
| Abstract: | Remittance flows to developing countries are now triple official development assistance and larger than foreign direct investment. The surge in remittances now occupies important position in development equation as remittances are seen as cheap resources for development. African governments are no exception among developing nations chasing remittances. Policymakers are making efforts to attract remittances to provide needed resources for economic transformation. In this study, an attempt is made to explore the impact of remittance flows on economic growth in Africa, considering efforts at attracting remittances. The impact of remittances is estimated using static and dynamic panel methods with data spanning 1975 to 2015. The study finds that remittances do not have an impact on economic growth in Africa. This conclusion is hinged on measurement issues, internal conditions, labour market implications, and the effect of remittances on tradable sectors. |
| Keywords: | Migration, Remittances, Economic growth, Panel data, Africa |
| JEL: | C33 F22 F43 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:111029&r= |
| By: | Mauricio Carabarín Aguirre; Carlos D. Peláez Gómez |
| Abstract: | We investigate the relationship between financial market frictions and economic activity in Mexico by constructing and decomposing a credit spread index from bonds issued by non-financial corporations in domestic markets, following Gilchrist and Zakrajsek (2012). We show that the credit spread is significantly informative about the evolution of economic activity and financial aggregates in Mexico. Moreover, the excess bond premium (EBP), which tracks the relationship between firms'' default risk and their credit spread, is found to be the main driver of this relationship. We show evidence that negative shocks on financial conditions, identified as a sudden increase of EBP, prompt a contraction in economic activity and credit aggregates. Finally, we find evidence of non-linear effects on the responses of economic activity in response to the shock. |
| JEL: | E32 E44 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2021-20&r= |
| By: | International Monetary Fund |
| Abstract: | Selected Issues |
| Date: | 2021–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfscr:2021/274&r= |
| By: | Aissatou Diallo |
| Abstract: | Many Sub-Saharan African (SSA) countries, like Benin, have scaled up public investment during the last decade. Such a strategy contributed to the improvement of infrastructure, but also to a build-up of debt vulnerabilities. Looking forward, the planned fiscal consolidation will result in some restraint of public spending, and, in particular, public investment. In this context, maintaining or even raising the region’s economic growth will require an offset by the private sector. The analysis draws lessons from countries that have successfully transitioned from public investment to private investment-led growth using a global sample starting in the mid-1980s. These lessons highlight policies that have been crucial in fostering a rebound of private investment in the wake of a contraction of public investment. The analytical framework proposed by Hausman, Rodrik and Velasco (2005) is used to identify and classify such policies. Finally, the paper analyses how the identified policies could help Benin achieving a smooth transition from public to private sector-led growth. |
| Keywords: | Private and public investment, growth, transition, fiscal consolidation, lessons |
| Date: | 2021–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/286&r= |
| By: | Huang, Zhengli; Behuria, Pritish |
| Abstract: | Zhengli Huang and Pritish Behuria examine projects financed by Indian and Chinese Exim Banks to analyze how the development financing of two 'emerging' donors – India and China – has evolved in Ethiopia. In India and China, Exim Banks work both as export credit agencies and other traditional development finance organizations, thereby blurring the boundary between development assistance and economic cooperation. The authors selected Ethiopia as it is a strategic partner for both countries, and existing literature has shown that the Ethiopian government is an outlier on the continent in employing its diplomatic relations to support strategic developmental goals. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:caripb:582021&r= |
| By: | Mr. Guilherme Pedras; Mrs. Esther Perez Ruiz; Jean François Clevy |
| Abstract: | The pandemic has urged countries around the globe to mobilize financing to support the recovery. This is even more relevant in Central America, where the policy response to cushion the pandemic’s economic and social impact has accentuated pre-existing debt vulnerabilities. This paper documents the potential for local currency bond markets to diversify and expand financing for the recovery, lowering bond yields, funding volatility, and exposure to global shocks. The paper further identifies priority actions, both national and regional, to support market development. |
| Keywords: | Bond Markets, Fiscal Deficit, Public Debt, Global Spillovers. |
| Date: | 2021–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/283&r= |
| By: | Arthur Blouin; Sayantan Ghosal; Sharun W. Mukand |
| Abstract: | We analyze whether or not the globalization of capital, 'disciplines' governments and improves governance. We demonstrate that globalization affects governance, by increasing a country's vulnerability to sudden capital flight. This increased threat of capital flight can discipline governments and improve governance and welfare by placing countries in a 'golden straitjacket'. However, globalization may also 'overdiscipline' governments - resulting in a perverse impact on governmental incentives that catalyzes (mis)governance. Accordingly, the paper suggests a novel (and qualified) role for capital controls. Finally, we provide some evidence consistent with the predictions from our theoretical framework. |
| Keywords: | Globalization, Governance, Capital Flight, Capital Controls, Discipline. |
| JEL: | F55 F36 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2022_01&r= |
| By: | Florencia S. Airaudo (Universidad Carlos III); Hernán D. Seoane (Universidad Carlos III) |
| Abstract: | Long-run growth in Latin America over the last 50 years has been low and volatile inthe presence of frequent Sudden Stops. We develop a theory that links long-run growth,financial frictions, and Sudden Stops in Emerging countries. Our theory exploits thefact that reversals in trade balance during Sudden Stops occur through sharp declinesin imports, particularly of imported investment, rather than increases in exports. Imported investment, in turn, has a permanent impact on economic growth. We find thattrend growth deteriorates during Sudden Stops and, even though trend shocks play acrucial role, financial frictions and shocks have a significant impact on its dynamics.We apply our model to the Sudden Stops in Argentina since the 1950s and find thatfinancial crises have a strong permanent effect on the trend. Hence, to a large extent,the trend is the cycle.Long-run growth in Latin America over the last 50 years has been low and volatile inthe presence of frequent Sudden Stops. We develop a theory that links long-run growth,financial frictions, and Sudden Stops in Emerging countries. Our theory exploits thefact that reversals in trade balance during Sudden Stops occur through sharp declinesin imports, particularly of imported investment, rather than increases in exports. Imported investment, in turn, has a permanent impact on economic growth. We find thattrend growth deteriorates during Sudden Stops and, even though trend shocks play acrucial role, financial frictions and shocks have a significant impact on its dynamics.We apply our model to the Sudden Stops in Argentina since the 1950s and find thatfinancial crises have a strong permanent effect on the trend. Hence, to a large extent,the trend is the cycle.Long-run growth in Latin America over the last 50 years has been low and volatile in the presence of frequent Sudden Stops. We develop a theory that links long-run growth, financial frictions, and Sudden Stops in Emerging countries. Our theory exploits the fact that reversals in trade balance during Sudden Stops occur through sharp declines in imports, particularly of imported investment, rather than increases in exports. Imported investment, in turn, has a permanent impact on economic growth. We find that trend growth deteriorates during Sudden Stops and, even though trend shocks play a crucial role, financial frictions and shocks have a significant impact on its dynamics. We apply our model to the Sudden Stops in Argentina since the 1950s and find that financial crises have a strong permanent effect on the trend. Hence, to a large extent, the trend is the cycle. |
| Keywords: | Emerging markets; Real business cycle; trend shocks; Financial Frictions. |
| JEL: | F32 F34 F41 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:aoz:wpaper:97&r= |
| By: | Nicolas Groshenny; Benedikt Heid; Tayushma Sewak |
| Abstract: | Uncertainty shocks have been shown to affect the real economy, but uncertainty remains about their trade effects and whether effects are similar across different types of uncertainty. We investigate how global economic, financial, and trade policy uncertainty affect the trade flows of the seven largest emerging economies (EM-7) using a panel structural vector autoregressive model. We find that: (1) Global economic and trade policy uncertainty shocks induce a protracted decline of about 4 to 5% in EM-7’s imports and exports. (2) Global economic and trade policy uncertainty act as trade barriers, reducing the EM-7’s degree of openness and their trade balance to GDP ratio. (3) Financial uncertainty only has a short-term impact on EM-7’s trade flows. (4) Trade policy uncertainty is the most important type of uncertainty affecting trade flows, explaining 11% of the variation in trade flows. |
| Keywords: | International trade, trade policy, uncertainty, emerging economies, panel VAR |
| JEL: | F13 F41 F62 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2021-84&r= |
| By: | Viral V. Acharya; Simone Lenzu; Olivier Wang |
| Abstract: | We build a model with heterogeneous firms and banks to analyze how policy affects credit allocation and long-term economic outcomes. When firms are hit by small negative shocks, conventional monetary policy can restore efficient bank lending and production by lowering interest rates. Large shocks, however, necessitate unconventional policy such as regulatory forbearance towards banks to stabilize the economy. Aggressive accommodation runs the risk of introducing zombie lending and a “diabolical sorting”, whereby low-capitalization banks extend new credit or evergreen existing loans to low-productivity firms. If shocks reduce the profitability gap between healthy and zombie firms, the optimal forbearance policy is non-monotone in the size of the shock. In a dynamic setting, policy aimed at avoiding short-term recessions can be trapped into protracted low rates and excessive forbearance, due to congestion externalities imposed by zombie lending on healthier firms. The resulting economic sclerosis delays the recovery from transitory shocks, and can even lead to permanent output losses. |
| JEL: | E44 E52 G01 G21 G28 G33 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29606&r= |
| By: | James Cloyne (University of California Davis/NBER/CEPR); Clodomiro Ferreira (Bank of Spain); Maren Froemel (Bank of England); Paolo Surico (London Business School/CEPR) |
| Abstract: | In response to a change in interest rates, younger firms not paying dividends adjust both their capital expenditure and borrowing significantly more than older firms paying dividends. The reason is that the debt of younger non-dividend payers is far more sensitive to fluctuations in collateral values, which are significantly affected by monetary policy. The results are robust to a wide range of possible confounding factors. Other channels, including movements in interest payments, product demand, profitability and mark-ups, are also significant but seem unlikely to explain the heterogeneity in the response of capital expenditure. Our findings suggest that financial frictions play a significant role in the transmission of monetary policy to investment. |
| Keywords: | monetary policy, investment, firm’s debt, collateral, financial frictions |
| JEL: | E22 E32 E52 |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:aoz:wpaper:92&r= |
| By: | Anthony Brassil (Reserve Bank of Australia); Mike Major (Reserve Bank of Australia); Peter Rickards (Reserve Bank of Australia) |
| Abstract: | We add a simplified banking sector to the RBA's macroeconometric model (MARTIN). How this banking sector interacts with the rest of the economy chiefly depends on the extent of loan losses. During small downturns, losses are absorbed by banks' profits and the resulting effect on the broader economy is limited to that caused by the lower shareholder returns (which is already part of MARTIN). During large downturns, loan losses reduce banks' capital, and banks respond by reducing their credit supply. This reduction in supply reduces housing prices, wealth and investment; thereby amplifying the downturn (which leads to further losses). Our state-dependent approach is a significant advance on the treatment of financial sectors within existing macroeconometric models. Having a banking sector in MARTIN allows us to explore important policy questions. In this paper, we show how the effectiveness of monetary policy depends on the state of the economy. During large downturns, monetary policy is more effective than usual because it can reduce loan losses and therefore moderate any reduction in credit supply. But at low interest rates, the zero lower bound on retail deposit interest rates reduces policy effectiveness. We also investigate how one of the more pessimistic economic scenarios that could have resulted from COVID-19 might have affected the banking sector, and subsequently amplified the resulting downturn. |
| Keywords: | banking; financial accelerator; macroeconomic model |
| JEL: | E17 E44 E51 G21 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2022-01&r= |
| By: | Martin Hodula; Ngoc Anh Ngo |
| Abstract: | We examine whether macroprudential policy actions affect shadow bank lending. We use a large dataset covering 23 European Union countries and synthesize a narrow measure of shadow banking focused on capturing credit intermediation by non-banks. To address the endogeneity bias inherent to modelling of the effects of macroprudential policy on the financial sector, we consider a novel index of the macroprudential authority's strength in pursuing its goals and use it to instrument for a macroprudential policy variable in an IV estimation framework. We robustly demonstrate that following a macroprudential policy tightening, shadow bank lending increases. We harness the cross-sectional dimension of our data to show that the effect applies especially to low-capitalized banking sectors, where macroprudential policy is expected to be more binding, leading to credit reallocation from banks to non-banks. |
| Keywords: | European Union, instrumental variables, macroprudential policy, non-bank lending, regulatory leakages |
| JEL: | G21 G23 G28 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2021/5&r= |
| By: | Beck, Thorsten; Cecchetti, Stephen G.; Grothe, Magdalena; Kemp, Malcolm; Pelizzon, Loriana; Sánchez Serrano, Antonio |
| Abstract: | This report discusses the impact of digitalization on the structure of the European banking system. The recent wave of financial innovation based on the opportunities digitalisation offers, however, has come mostly from outside the incumbent banking system in the form of new financial service providers, either in competition or cooperation with incumbent banks but with the potential for substantial disruption. After discussing how identified risks may evolve and the emergence of new sources of risks, the report introduces three different scenarios for the future European banking system: (i) incumbent banks continue their dominance; (ii) incumbent banks retrench; and (iii) central bank digital currencies (under certain specifications). It also derives macroprudential policy measures. |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkasc:202212&r= |
| By: | Cumming, Douglas J.; Sewaid, Ahmed |
| Abstract: | Leveraging data from a leading FinTech peer-to-peer lending platform in the United States, allowing us to capture both individuals' successful and unsuccessful loan applications, we test the effect of FinTech loans on subsequent employment choice and future financial performance of serial borrowers, those repeatedly soliciting loans on the platform. An analysis of 198,984 loan requests made by 92,382 individuals shows that a failed loan application increases the probability of switching employment status. Self-employed individuals are 22% more likely to switch to becoming an employee following an unsuccessful loan application. This probability increases to 31% for those in the lowest income decile and decreases to 13% for those in the highest income decile. We document an improvement in monthly income and credit access following a successful loan application. However, this enhancement is asymmetric. Monthly income enhancement is 3.11 times larger for self-employed individuals in the lowest income decile relative to individuals in the highest income decile. Access to credit enhancement is 1.85 times larger for self-employed individuals in the lowest credit access decile relative to individuals in the second highest credit access decile. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:667&r= |
| By: | Valentina Brailovskaya; Pascaline Dupas; Jonathan Robinson |
| Abstract: | Digital credit has expanded rapidly in Africa, mostly in the form of short-term, high-interest loans offered via mobile money. Loan terms are often opaque and consumer financial literacy is low, providing opportunities for predatory lending. A regression discontinuity analysis shows no negative effect of access to digital loans on financial well-being, but the majority of borrowers fail to repay on time and incur high late fees. We randomize exposure to a short phone-based financial literacy intervention. The intervention improved knowledge and marginally improved loan repayment but increased loan demand, increasing overall default risk. |
| JEL: | D14 O12 O16 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29573&r= |
| By: | Edmond Noubissi Domguia (University of Dschang, Cameroon); Simplice A. Asongu (Yaoundé, Cameroon) |
| Abstract: | This study contributes to the extant literature on the nexus between information and communication technologies (ICTs) and agriculture. Despite increasing attention on the subject, existing studies are sparse on the channels through which ICTs affect the agricultural sector. We use a stochastic impact model extended to the population, affluence and technology regression model to assess both the impact and transmission of ICTs on agriculture in 18 sub-Saharan African countries. The empirical results show that ICT use measured by Internet, mobile and fixed-line telephone penetration boosts the agricultural sector enormously. In addition, the mediation analysis reveals that ICTs not only have a direct positive effect on agriculture but also a positive indirect effect through its impact on financial development and trade openness and a negative indirect effect through energy consumption. However, the total effect is positive and shows that ICTs are supporting the development of the agricultural sector in sub-Saharan Africa. To enhance the positive effects of ICTs on agriculture, governments should design policies to improve access to credit for the private sector, promote liberalization, and provide financial incentives for the development of green and less expensive agricultural technologies. |
| Keywords: | ICT, agriculture, Sub-Saharan Africa, transmission channels, mediation |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:exs:wpaper:22/007&r= |
| By: | Röhl, Klaus-Heiner; Heuer, Leonie |
| Abstract: | Das Potenzialwachstum ist in den hochentwickelten Ländern in den letzten Jahren deutlich zurückgegangen. Ein wesentlicher Grund ist das rückläufige Wachstum der Produktivität, das aus dem technischen Fortschritt und dem Einsatz von Humankapital resultiert. Wichtig zur Aufrechterhaltung des Produktivitätswachstums sind wirtschaftliche Neuerungen, die von innovativen Gründungen ausgehen. Unternehmensgründungen können Innovationen oft schneller zum Durchbruch verhelfen und Humankapital produktiver einsetzen als es in etablierten Unternehmen der Fall ist, doch möglich ist ebenso ein Drehtüreffekt, bei dem neue Unternehmen vorhandene Firmen aus dem Markt drängen. Als besonders wichtig für disruptive Neuerungen und die Durchsetzung produktiver digitaler Technologien gelten Start-ups, die oft durch Venture Capital finanziert werden. Bisherige empirische Studien zur Wachstumswirkung von Gründungen liefern nicht ganz eindeutige, aber vorwiegend positive Zusammenhänge. Dieser IW-Report präsentiert nach einer Darstellung der wirtschaftstheoretischen Zusammenhänge und einem Literaturüberblick die Ergebnisse einerinternationalen Panelstudie, die die Wirkung von Gründungen und Venture Capital auf das Wachstum enthält. Es zeigt sich für die hoch entwickelten Länder eine positive Wachstumswirkung beider Variablen, die in Abhängigkeit von der gewählten Modellspezifikation überwiegend signifikant bis hoch signifikant ausfällt. Die in vielen Ländern praktizierte Förderpolitik für Gründungen und Start-ups erscheint daher auch aus empirischer Sicht gut begründet zu sein. |
| JEL: | C33 L26 O4 O47 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwkrep:442021&r= |
| By: | Julio A. Carrillo; Ana Laura García |
| Abstract: | The COVID-19 pandemic not only generated real shocks affecting economic activity severely, but also a broad uncertainty that unleashed an extreme shock to financial markets. In this paper, we focus on the financial dimension of the pandemic from the viewpoint of an emerging market economy. Accordingly, we estimate a financial conditions index for Mexico since 1993 and find that the acute turmoil generated by the pandemic stands among the four largest episodes of financial distress experienced by the country. In addition, we find evidence suggesting that real variables have responded differently to shocks that worsen financial conditions than to shocks that improve them. |
| JEL: | C11 C32 E44 G01 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2021-23&r= |
| By: | Pierpaolo Grippa; Mr. Dimitri G Demekas |
| Abstract: | There are demands on central banks and financial regulators to take on new responsibilities for supporting the transition to a low-carbon economy. Regulators can indeed facilitate the reorientation of financial flows necessary for the transition. But their powers should not be overestimated. Their diagnostic and policy toolkits are still in their infancy. They cannot (and should not) expand their mandate unilaterally. Taking on these new responsibilities can also have potential pitfalls and unintended consequences. Ultimately, financial regulators cannot deliver a low-carbon economy by themselves and should not risk being caught again in the role of ‘the only game in town.’ |
| Keywords: | Financial stability, financial regulation, climate change, climate mitigation policy, low-carbon economy, energy transition, carbon price, green finance |
| Date: | 2021–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/296&r= |