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on Financial Development and Growth |
| By: | Aaron Amburgey; Michael W. McCracken |
| Abstract: | We provide evidence on the real-time predictive content of the National Financial Conditions Index (NFCI), for conditional quantiles of U.S. real GDP growth. Our work is distinct from the literature in two specific ways. First, we construct (unofficial) real-time vintages of the NFCI. This allows us to conduct out-of-sample analysis without introducing the kind of look-ahead biases that are naturally introduced when using a single current vintage. We then develop methods for conducting asymptotic inference on tests of equal tick loss between nested quantile regression models when the data are subject to revision. We conclude by evaluating the real-time predictive content of NFCI vintages for quantiles of real GDP growth. While our results largely reinforce the literature, we find gains to using real-time vintages leading up to recessions — precisely when policymakers need such a monitoring device. |
| Keywords: | out-of-sample forecasts; real-time data; quantiles |
| JEL: | C12 C32 C38 C52 |
| Date: | 2022–01–18 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:93642&r= |
| By: | Abdalla, Ahmed; Carabias, Jose M. |
| Abstract: | We propose and find that aggregate special items conveys more information about future real GDP growth than aggregate earnings before special items because the former contains advance news about future economic outcomes. A two-stage rational expectations test reveals that professional forecasters fully understand the information content of aggregate earnings before special items, but underestimate that of aggregate special items when revising their GDP forecasts. Using vector autoregressions, we show that aggregate earnings before special items has predictive ability for GDP because, as suggested by previous literature, it acts as a proxy for corporate profits included in national income. In contrast, aggregate special items captures changes in the behavior of economic agents on a timely basis, which, in turn, have real effects on firms' investment and hiring, as well as consumers' wealth and spending. Consistent with news-driven business cycles, we find that aggregate special items produces synchronized movements across macroeconomic aggregates. |
| Keywords: | aggregate earnings; aggregate special items; GDP growth; asymmetric timeliness; rational expectations; news-driven business cycles |
| JEL: | E01 E32 E60 M41 |
| Date: | 2022–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:108540&r= |
| By: | Lhuissier Stéphane |
| Abstract: | Motivated by empirically characterizing the relationship between financial conditions and downside macroeconomic risks in the euro area, I develop a regime-switching skew-normal model with time-varying probabilities of transitions. Using Bayesian methods, the model estimates show that a strong cyclical pattern emerges from the conditional skewness (a measure of the asymmetry of the predictive distribution), which has a tendency to rapidly decline to negative territory prior and during recessions. However, the inclusion of financial-specific information in time-varying probabilities does not help to anticipate such skewness nor more generally to provide advance warnings of tail risks. |
| Keywords: | Financial Conditions, Downside Risks, Predictability, Regime-Switching Models |
| JEL: | C11 C2 E32 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:863&r= |
| By: | Nurdaulet Abilov (NAC Analytica, Nazarbayev University); Aizhan Bolatbayeva (NAC Analytica, Nazarbayev University) |
| Abstract: | In this paper, we use the modified expectation-maximization algorithm of Banbura and Modugno (2014) to estimate a factor model using an incomplete and mixed-frequency dataset for Russia. We estimate and check the forecast accuracy of factor models that differ in the number of factors, the lag structure of the factors, and the presence of autocorrelation in the idiosyncratic component. We choose the best model using the root mean squared forecast error and use the model to compute news contributions to forecast revisions of GDP growth in Russia around crisis periods. We find that the benchmark model with a medium-size dataset and four factors outperforms all other versions of the factor model, simple AR(1) and random walk models. The news contributions to GDP growth revisions around economic downturns in Russia show that the benchmark factor model is extremely good at capturing the impact of new data releases on GDP growth revisions. |
| Keywords: | Factor model; EM-algorithm; Nowcasting; Business cycle index; Russia. |
| JEL: | C53 C55 E32 E37 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:ajx:wpaper:18&r= |
| By: | Martin Hodula; Jan Janku; Lukas Pfeifer |
| Abstract: | We investigate the extent to which various structural risks exacerbate the materialization of cyclical risk. We use a large database covering all sorts of cyclical and structural features of the financial sector and the real economy for a panel of 30 countries over the period 2006Q1–2019Q4. We show that elevated levels of structural risks may have an important role in explaining the severity of cyclical and credit risk materialization during financial cycle contractions. Among these risks, private and public sector indebtedness, banking sector resilience and concentration of real estate exposures stand out. Moreover, we show that the elevated levels of some of the structural risks identified may be related to long-standing accommodative economic policy. Our evidence implies a stronger role for macroprudential policy, especially in countries with higher levels of structural risks |
| Keywords: | Cyclical risk, event study, financial cycle, panel regression, structural risks, systemic risk |
| JEL: | E32 G15 G21 G28 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:rpnrpn:2021/03&r= |
| By: | Marco Bassetto (Institute for Fiscal Studies and Federal Reserve Bank of Minneapolis); Wei Cui (Institute for Fiscal Studies) |
| Abstract: | We study optimal taxation in an economy with financial frictions, in which the government cannot directly redistribute towards the agents in need of liquidity but otherwise has access to a complete set of linear tax instruments. We establish a stark result. Provided this is feasible, optimal policy calls for the government to increase its debt, up to the point at which it provides sufficient liquidity to avoid financial constraints. In this case, capital-income taxes are zero in the long run, and the returns on government debt and capital are equalized. However, if the fiscal space is insufficient, a wedge opens between the rates of return on government debt and capital. In this case, optimal long-run tax policy is driven by a trade-off between the desire to mitigate financial frictions by subsidizing capital and the incentive to exploit the quasi-rents accruing to producers of capital by taxing capital instead. This latter incentive magnifies the wedge between rates of return on government debt and capital. It also makes it optimal to distort downward the interest rate on government debt in periods of high government spending. |
| Date: | 2021–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:ifsewp:21/05&r= |
| By: | Tetteh, Godsway Korku (UNU-MERIT, Maastricht University); Goedhuys, Micheline (UNU-MERIT, Maastricht University); Konte, Maty (UNU-MERIT, Maastricht University, and Barnard College, Columbia University); Mohnen, Pierre (UNU-MERIT, Maastricht University) |
| Abstract: | Despite the contribution of previous studies to unravel the implications of mobile money in the developing world, the effect of this innovation on an important source of external finance, trade credit, has not been properly accounted for particularly in the informal sector. Using the 2016 FinAccess Household Survey, we investigate the relationship between mobile money adoption and the probability to receive goods and services on credit from suppliers based on a sample of entrepreneurs who operate informal businesses. We further explore the effect of mobile money adoption on the likelihood to offer goods and services on credit to customers. Our estimations suggest that entrepreneurs with mobile money are more likely to receive goods and sesrvices on credit from suppliers. We also find a positive and significant relationship between mobile money adoption and the likelihood to offer goods and services on credit to customers. The evidence supports the promotion of mobile money adoption among entrepreneurs in the informal sector to facilitate access to credit. |
| Keywords: | Entrepreneurship, Financial Innovation, Mobile Money, Trade Credit |
| JEL: | D14 G21 L26 O16 O33 |
| Date: | 2021–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:unm:unumer:2021043&r= |
| By: | Balde, Racky (UNU-MERIT, Maastricht University) |
| Abstract: | Lack of fiscal space in sub-Saharan Africa is a major preoccupation, particularly in the context of shocks. The majority of firms in the region are primarily in the informal sector and consequently do not pay taxes. This paper explores the effect of financial development on small firms’ compliance with value-added tax, profit tax and local tax. It equally explores the mitigating impact of informal finance on financial development’s role in driving small firms’ tax compliance. To demonstrate this, we estimate a recursive trivariate probit model. The results show that financial development increases the likelihood of firms being tax compliant. In contrast, access to informal finance decreases that likelihood. It also emerges that the lower the taxes, the greater the effects of low costs of banks on tax compliance. Another finding is that informal finance mitigates the effect of financial development on small firms’ tax compliance. |
| Keywords: | taxation, Africa, financial development, informal finance, informal economy |
| JEL: | D22 E26 H26 |
| Date: | 2021–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:unm:unumer:2021041&r= |
| By: | Chan Mono Oum (University of Waikato); Gazi M. Hassan (University of Waikato); Mark J. Holmes (University of Waikato) |
| Abstract: | This paper examines the direct impact of remittances on household debt performance and levels of indebtedness using survey data from 422 households in the northern part of Cambodia. We employ the Two-Step Heckman selection model to alleviate concerns regarding the endogeneity issues derived from self-selection bias, reverse causation, and omitted variable bias. The Tobit model is then employed to estimate household debt performance and the indebtedness impact of remittances. We first show that remittances are viewed as transitory incomes tending to decay as a migrant's length of stay outside the household increases. In the second stage of estimation, remittances positively affect household debt performance, particularly in low debt performance households. Remittances are also found to reduce household indebtedness in the recipient households. Because remittances contribute to reducing household indebtedness, which is a critical component in the financial system, policy responses should be targeted toward lowering the actual cost of sending remittances and thereby enabling migrant workers, and their left-behind household the ability to access formal and digitalized platforms in order to sending and receiving remittances. |
| Keywords: | remittances; household indebtedness; debt performance; Cambodia |
| JEL: | F24 R23 G51 D15 |
| Date: | 2022–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:wai:econwp:22/02&r= |
| By: | Chan Mono Oum (University of Waikato); Gazi M. Hassan (University of Waikato); Mark J. Holmes (University of Waikato) |
| Abstract: | The new economics of labour migration (NELM) suggests that migration substitutes for inaccessible credit markets. However, in a paradigm shift towards profit orientation, microfinance organizations in developing countries offer greater access to credit to potential migrants. That casts doubt on the prior understanding of the link between access to microcredit and migration. Exploiting survey data from 422 households in the northern part of Cambodia, this study examines the relationship between microcredit borrowing and migration decisions through the NELM theory in the South-South Migration (SSM) perspective. We employ the Endogenous Switching Probit model (ESP) to control for selection bias in borrowing decisions and the structural differences between borrowing and non-borrowing decisions that influence migration decisions. After instrumenting, the findings suggest that households with access to credit are more likely to have migrated family members than their non-borrowing counterparts, refuting the notion of migration as a substitute for credit. Household with borrowings from financial institution increase the likelihood of migrating by 5.6 percent while households with informal borrowing have a propensity to migrate about 3.2 percent. Our results have a number of policy implications, including guiding policymakers in rethinking the role of microcredit provision and redesigning microfinance programmes to maximise the return on labour migration. |
| Keywords: | formal credit; informal credit; microcredit; migration decisions; Cambodia |
| JEL: | F22 G51 R23 |
| Date: | 2022–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:wai:econwp:22/01&r= |
| By: | Karsten Kohler; Engelbert Stockhammer |
| Abstract: | While flexible exchange rates are commonly regarded as shock absorbers, heterodox views suggest that they can play a pro-cyclical role in emerging markets. This article provides theoretical and empirical support for this view. Drawing on post-Keynesian and structuralist theory, we propose a simple model in which flexible exchange rates in conjunction with external shocks become endogenous drivers of boom-bust cycles, once financial effects from foreign-currency debt are accounted for. We present empirical evidence for regular cycles in nominal US-dollar exchange rates in several emerging markets that are closely aligned with cycles in economic activity. An econometric analysis suggests the presence of a cyclical interaction mechanism between exchange rates and output, in line with the theoretical model, in Chile, South Africa, and partly the Philippines. Further evidence indicates that such exchange rate cycles cannot exclusively be attributed to external factors, such as commodity prices, US monetary policy or the global financial cycle. We therefore argue that exchange rate cycles in emerging markets are driven by the interplay of external shocks and endogenous cycle mechanisms. Our argument implies that exchange rate management may be beneficial for macroeconomic stability. |
| Keywords: | Exchange rates, emerging markets, boom-bust cycles, structuralism, global financial cycle, commodity prices |
| JEL: | C32 E12 E32 F31 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2205&r= |
| By: | Petr Janský; Tereza Palanská; Miroslav Palanský |
| Abstract: | Excessive financial secrecy facilitates illicit financial flows, which constitute a major developmental challenge for low-income economies and cause significant tax revenue losses for governments around the world. In this paper we estimate the semi-elasticity of cross-border financial assets to changes in financial secrecy and how it differs for countries at various income levels. We develop a new financial secrecy dataset for the 2011-20 period, which covers many specific policies in addition to the previously studied automatic information exchange. |
| Keywords: | Financial secrecy, Transparency, Secrecy jurisdictions, Tax havens, Offshore financial centres |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp-2022-9&r= |
| By: | John Caramichael; Gordon Y. Liao |
| Abstract: | Stablecoins have experienced tremendous growth in the past year, serving as a possible breakthrough innovation in the future of payments. In this paper, we discuss the current use cases and growth opportunities of stablecoins, and we analyze the potential for stablecoins to broadly impact the banking system. The impact of stablecoin adoption on traditional banking and credit provision can vary depending on the sources of inflow and the composition of stablecoin reserves. Among the various scenarios, a two-tiered banking system can both support stablecoin issuance and maintain traditional forms of credit creation. In contrast, a narrow bank approach for digital currencies can lead to disintermediation of traditional banking, but may provide the most stable peg to fiat currencies. Additionally, dollar-pegged stablecoins backed by adequately safe and liquid collateral can potentially serve as a digital safe haven currency during periods of crypto market distress. |
| Keywords: | Stablecoins; Digital currencies; Credit intermediation; Banking; Systemic risk; Fintech; Financial innovation; Payment system |
| JEL: | E40 E50 F33 G10 G20 O30 |
| Date: | 2022–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1334&r= |
| By: | Maya El Hourani (UCA - Université Côte d'Azur); Gerard Mondello (UCA - Université Côte d'Azur) |
| Abstract: | Les opinions exprimées dans la série des Documents de travail GREDEG sont celles des auteurs et ne reflèlent pas nécessairement celles de l'institution. Les documents n'ont pas été soumis à un rapport formel et sont donc inclus dans cette série pour obtenir des commentaires et encourager la discussion. Les droits sur les documents appartiennent aux auteurs. The views expressed in the GREDEG Working Paper Series are those of the author(s) and do not necessarily reflect those of the institution. The Working Papers have not undergone formal review and approval. Such papers are included in this series to elicit feedback and to encourage debate. Copyright belongs to the author(s). |
| Keywords: | Bank capital,institutional quality,credit supply,and MENA region |
| Date: | 2021–12–26 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-03502606&r= |
| By: | Martien Lamers; Thomas Present; Rudi Vander Vennet (-) |
| Abstract: | Have Euro Area banks restored viability in the post-crisis era? We investigate profitability convergence for Euro Area banks over the period 2009-2020 using the concepts of ß and s convergence and a club clustering algorithm. Our evidence is consistent with a slow catch up of the weaker banks, but we also document that better performing banks converge towards a lower profit level, suggesting a ‘great convergence’ towards the middle. Moreover, we identify a cluster of banks exhibiting dismal profit dynamics, indicating the need for a restructuring of part of the Euro Area banking sector. |
| Keywords: | Euro Area banks, bank profitability, ß convergence, s convergence, club clustering analysis |
| JEL: | C38 G20 G21 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:22/1039&r= |
| By: | Mustapha Douch (Bank of Lithuania, The University of Edinburgh); Huw Edwards (Loughborough University); Sushanta Mallick (Queen Mary University) |
| Abstract: | This paper provides empirical evidence on how the aftermath of the 2008 crisis affected firm productivity in the UK, taking account of the cohort effect of firms established after 2008. We test this using firmspecific and time-varying credit scores to capture firms’ ability to access credit. To overcome the identification problem, a matched sample based on firm’s credit score, firm age, size and ownership status is used by undertaking the propensity score matching approach. While we find evidence that smaller firm size and changes in credit conditions affect productivity, about half of the difference in productivity remains unexplained. We extend the matching analysis to examine sectors and cohorts, and find that, during 2011-2016, the low productivity is driven primarily by newer firms operating in the services sector, rather than in manufacturing. Within services, the underlying productivity puzzle is driven by a cessation of growth in high-productivity financial services, while abundant labour supply has led to a ‘levelling down’ of performance of newer firms in the rest of services, in line with relatively lowproductivity manufacturing. |
| Keywords: | : Total Factor Productivity, Cohort, Crisis, Firm Survival, Credit Score. |
| JEL: | E00 D24 E30 G21 |
| Date: | 2022–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:lie:wpaper:101&r= |
| By: | Baliamoune-Lutz, Mina; Basuony, Mohamed A. K.; Lutz, Stefan; Mohamed, Ehab K. A. |
| Abstract: | Empirical evidence suggests that international ownership of local firms supports firm performance and growth through various channels such as financing, technology transfer, and improved access to international markets. This is particularly true for small and medium-sized enterprises (SMEs) that otherwise may lack access to a variety of vital resources. At the same time small and medium-sized enterprise (SME) formation may promote economic development. The relationship between firm performance and international ownership has been well explored for firms in developed economies but this is not the case for firms - including SMEs - in Africa and the Middle East. Largely due to lack of relevant cross-country financial data, existing literature on African and Middle-Eastern firms has presented survey-based evidence on firm performance while evidence based on detailed financial information remains lacking. The present paper aims at filling this research gap. We identify African and Middle-Eastern SMEs operating in the formal sector and examine the impact of ownership structure on firm performance. We use cross-sectional financial data covering about 25,500 companies - including about 30% SMEs - in 69 African and Middle-Eastern countries for the years 2006 to 2015. Our results indicate that international ownership has significant positive association with firm performance. For internationally-owned SMEs this appears to be true despite lower levels of equity and debt capital, implying that internationally-owned firms use international resources - other than capital - more efficiently! |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fhfwps:22&r= |
| By: | Olivier de Bandt; Bora Durdu; Hibiki Ichiue; Yasin Mimir; Jolan Mohimont; Kalin Nikolov; Sigrid Roehrs; Jean-Guillaume Sahuc; Valerio Scalone; Michael Straughan |
| Abstract: | This paper reviews the different channels of transmission of prudential policy highlighted in the literature and provides a quantitative assessment of the impact of Basel III reforms using “off-the-shelf” DSGE models. It shows that the effects of regulation are positive on GDP whenever the costs and benefits of regulation are both introduced. However, this result may be associated with a temporary economic slowdown in the transition to Basel III, which can be accommodated by monetary policy. The assessment of liquidity requirements is still an area for research, as most models focus on costs, rather than on benefits, in particular in terms of lower contagion risk. |
| Keywords: | Basel III Reforms, DSGE Models, Solvency Requirements, Liquidity Requirements |
| JEL: | E3 E44 G01 G21 G28 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:864&r= |
| By: | Simona Malovana; Martin Hodula; Josef Bajzik; Zuzana Gric |
| Abstract: | For almost two decades, quantifying the effect of changes in bank capital and capital regulation on lending has been one of the most important research questions. Yet, the empirical literature has remained largely fragmented in terms of the estimated parameters. In this paper, we collect more than 1,600 estimates on the relationship between bank capital and lending and construct 40 variables that reflect the context in which researchers obtain such estimates. After accounting for potential publication bias, the effect of a 1 percentage point (pp) change to the capital (regulatory) ratio on annual credit growth is set at around 0.3 pp, while the effect of changes to capital requirements is about -0.7 pp. Using Bayesian and frequentist model averaging, we expose the additional layers of fragmentation observed in our results. First, we show that the relationship between bank capital and lending changes over time, reflecting the post-crisis period of increasingly demanding bank capital regulation and subdued profitability. Second, we find the reported estimates of elasticities to be significantly affected by the researchers’ choice of empirical approach. |
| Keywords: | Bank capital, bank lending, capital regulation, meta-analysis, publication bias |
| JEL: | C83 E58 G21 G28 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2021/8&r= |
| By: | Giancarlo Bertocco; Andrea Kalajzić |
| Abstract: | To hypothesize the existence of a relationship between money and savings means questioning a fundamental pillar of the mainstream economic theory: the concept of neutrality of money. According to the traditional theory economic phenomena such as savings can be defined independently from money. The objective of this work is to show that savings cannot be defined independently from money and that savings must be considered as a monetary phenomenon. The paper consists of two parts. Starting from Adam Smith’s analysis and continuing up to the approaches developed by contemporary economists, in the first part we summarize the most significant aspects and the limitations of the mainstream theory. In the second part we specify the reasons of the non-neutrality of money and of the monetary nature of savings. |
| Keywords: | Savings, money, development, Keynes, Schumpeter |
| JEL: | B12 B13 B52 E12 E44 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2206&r= |
| By: | Allen Head (Queen's University); Timothy Kam (Australian National University); Sam Ng (Australian National University); Isaac Pan (University of Sydney) |
| Abstract: | Using micro-level data for the U.S., we provide new evidence—at national and state levels—of a positive (negative) relationship between the standard deviation (coefficient of variation)and the average in bank lending-rate markups. In a quantitative theory consistent with theseempirical observations, banks’ lending market power is determined in equilibrium and is a novelchannel of monetary policy. At low inflation, banks tend to extract higher markups from existingloan customers rather than competing for additional loans. As a result, banking activity neednot be welfare-improving if inflation is sufficiently low. This result speaks to concerns regardingmarket power in the banking sectors of low-inflation countries. Normatively, under a giveninflation target, welfare gains arise if a central bank can use additional liquidity-provision (ortax-and-transfer) instruments to offset banks’ market-power incentives |
| Keywords: | Banking; Credit; Markup Dispersion; Market Power; Stabilization Policy; Liquidity |
| JEL: | E41 E44 E51 E63 G21 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1481&r= |
| By: | Jacopo Bonchi (Department of Economics and Finance and School of European Political Economy, LUISS Guido Carli); Salvatore Nisticò (Department of Social Sciences and Economics, Sapienza University of Rome) |
| Abstract: | Using a tractable New Keynesian model with heterogeneous agents, we analyze the interplay between households' heterogeneity and rational bubbles, and their normative implications for monetary policy. Households are infinitely-lived and heterogeneous because of two sources of idiosyncratic uncertainty, which makes them stochastically cycle in and out of segmented asset markets, and in and out of employment. We show that bubbles can emerge in equilibrium despite the fact that households are infinitely lived, because of the structural heterogeneity that affects their activity in asset and labor markets. The elasticity of an endogenous labor supply, the heterogeneity in asset-market participation and the level of long-run monopolistic distortions are shown to affect the size of equilibrium bubbles and their cyclical implications. We also show that a central bank concerned with social welfare faces an additional tradeoff implied by bubbly fluctuations which makes, in general, strict inflation targeting a suboptimal monetary-policy regime. |
| Keywords: | Inequality, Rational bubbles, Optimal monetary policy, HANK |
| JEL: | E21 E32 E44 E58 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:saq:wpaper:5/22&r= |