nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2022‒02‒28
thirty-one papers chosen by
Georg Man

  1. Inclusive Growth in Sub-Saharan Africa: Exploring the Interaction Between ICT Diffusion and Financial Development By Ofori, Isaac K.; Osei, Dennis B.; Alagidede, Imhotep P.
  2. Does financial innovation enhance financial deepening and growth in Kenya? By Misati, Roseline Nyakerario; Osoro, Jared; Odongo, Maureen
  3. Boom-bust Cycles Revisited: The Role of Credit Supply By Kim, Hyo Sang; Choi, Sangyup; Yang, Da Young; Kim, Yuri
  4. Zombies at Large? Corporate Debt Overhang and the Macroeconomy By Oscar Jorda; Martin Kornejew; Moritz Schularick; Alan M. Taylor
  5. Macroeconomic shocks and cedit risk in the Kenyan banking sector By Atiti, Faith; Kimani, Stephanie; Agung, Raphael
  6. What ails bank deposit mobilization and credit creation in Kenya? By Maturu, Benjamin
  7. Impact of official development assistance and migrant remittances on economic growth and income inequality in Senegal By Lassana Toure; M Diagne; M Sagbo
  8. Macroprudential regulation and bank stability: The credit market signal By Kiemo, Samuel; Kamau, Anne; Rugiri, Irene W.; Talam, Camilla
  9. Bank capital, credit risk and financial stability in Kenya By Kiemo, Samuel; Talam, Camilla; Rugiri, Irene W.
  10. Taxing Banks Leverage and Syndicated Lending: A Cross-Country Comparison By Aurore Burietz; Steven Ongena; Matthieu Picault
  11. Lessons from the Early Establishment of Banking Supervision in Italy (1926-1936) By Dario Pellegrino; Marco Molteni
  12. Competition and credit allocation in Kenya By Kimani, Stephanie; Atiti, Faith; Agung, Raphael
  13. State-owned banks and credit allocation in India: Evidence from an asset quality review By Das, Abhiman; Mohapatra, Sanket; Nigania, Akshita
  14. Cycles Réel et Financier au Maroc : Une Analyse par les Wavelets By Slaoui, Yassine
  15. A Multicountry Model of the Term Structures of Interest Rates with a GVAR By Candelon, Bertrand; Moura, Rubens
  16. A Medium-Scale DSGE Model for the Integrated Policy Framework By Mr. Francis Vitek; Vitor Gaspar; Mr. Tobias Adrian
  17. Machine Learning Time Series Regressions With an Application to Nowcasting By Babii, Andrii; Ghysels, Eric; Striaukas, Jonas
  18. Public Debt and Welfare in a Quantitative Schumpeterian Growth Model With Incomplete Markets By Marco Cozzi
  19. Extreme inflation and time-varying expected consumption growth By Dergunov, Ilya; Meinerding, Christoph; Schlag, Christian
  20. The Structure of Financial Systems and Top Incomes in Advanced Economies: A Comparative Distributional Analysis of the Financial Wage Premium By Anthony Roberts; Roy Kwon
  21. Why Are Returns to Private Business Wealth So Dispersed? By Corina Boar; Denis Gorea; Virgiliu Midrigan
  22. Foreign Direct Investment under Uncertainty: Evidence from a Large Panel of Countries By Caroline Jardet; Cristina Jude; Menzie D. Chinn
  23. Waiting for Capital: Dynamic Intermediation in Illiquid Markets By Barney Hartman-Glaser; Simon Mayer; Konstantin Milbradt
  24. International Pecking Order By Egemen Eren; Semyon Malamud; Haonan Zhou
  25. Suppliers as financial intermediaries: Trade credit for undervalued firms By Patrice Fontaine; Sujiao Zhao
  26. Understanding the Ownership Structure of Corporate Bonds By Ralph S. J. Koijen; Motohiro Yogo
  27. The Rising Interconnectedness of the Insurance Sector By Tristan Jourde
  28. Dynamics of Bitcoin mining By Nemo Semret
  29. The Changing Role of Banks in the Financial System: Social versus Conventional Banks By Simon Cornée; Anastasia Cozarenco; Ariane Szafarz
  30. The real effects of bank lobbying: Evidence from the corporate loan market By Delis, Manthos; Hasan, Iftekhar; To, Thomas; Wu, Eliza
  31. What drives MSME's credit choices? Business versus personal loan account utilization in Kenya By Mulindi, Hillary; Josea, Kiplangat; Tiriongo, Samuel

  1. By: Ofori, Isaac K.; Osei, Dennis B.; Alagidede, Imhotep P.
    Abstract: Despite the momentous rise in ICT diffusion, and financial development in sub-Saharan Africa (SSA), their plausible joint effect on inclusive growth have not been explored, leaving a lacuna in the literature. This study, therefore, examines the direct and indirect effects of ICT diffusion on inclusive growth in 42 SSA countries over the period 1980–2019. We provide evidence robust to several specifications from the dynamic system GMM to show that: (i) ICT skills, access and usage induce inclusive growth in SSA, and (ii) the effects of ICT skills, access and usage are enhanced in the presence of financial development. These findings remain the same when we focussed on financial institution access. Policy recommendations are provided in line with the region’s green growth agenda and striving efforts at improving socioeconomic development.
    Keywords: Financial Development; Financial Inclusion; ICT Diffusion; Inequality; Inclusive Growth; Poverty; Sub-Saharan Africa
    JEL: D63 E5 G2 I3 L96 O11 O55
    Date: 2022–02–07
  2. By: Misati, Roseline Nyakerario; Osoro, Jared; Odongo, Maureen
    Abstract: This study examined the implication of financial innovation on financial depth and economic growth in Kenya using quarterly data covering the period 2009 to 2020. Based on autoregressive distributive lag models, we demonstrate a positive relationship between financial innovation and financial depth with the strongest impact emanating from internet usage and mobile financial services and the lowest impact from the number of bank branches and automated teller machines. The results also further reveal a significant positive impact of financial depth on economic growth consistent with the supply-leading finance theory. The study recommends investment in technology-enabling infrastructure for digital financial services, design strategies to ensure affordability of mobile devices and prioritisation of financial literacy to bridge the gap between people and technology.
    Keywords: Financial Innovation,Financial Depth,Growth
    Date: 2021
    Abstract: This study investigates the impacts of credit supply on economic growth and financial crisis. Excess credit supply can make the economy and financial markets more vulnerable. While credit supply can drive economic growth by reallocating resources, it can also make the economy and financial markets more fragile. Asset prices sharply fall when deleveraging occurs in the case of a negative shock to the financial or real sector in a system where credit is excessively supplied. Furthermore, economic activity might be substantially reduced, extending the length and breadth of the recession.
    Keywords: credit supply; economic growth; financial crisis; economy; shock
    Date: 2022–02–03
  4. By: Oscar Jorda (University of California, Davis); Martin Kornejew (University of Bonn); Moritz Schularick (Federal Reserve Bank of New York); Alan M. Taylor (University of California, Davis)
    Abstract: What are the macroeconomic consequences of business credit booms? Are they as dangerous as household credit booms? If not, why not? We answer these questions by collecting data on non-financial business liabilities (primarily bank loans and corporate bonds) for 17 advanced economies over the past 150 years. Unlike household credit, business credit booms are rarely followed by macroeconomic hangovers. Data on debt renegotiation costs—instrumented by a country’s legal tradition—show that frictions to debt resolution make recessions deeper and longer—an important factor in explaining the differences with household credit booms.
    Keywords: corporate debt, business cycles, local projections.
    JEL: E44 G32 G33 N20
    Date: 2021–10–15
  5. By: Atiti, Faith; Kimani, Stephanie; Agung, Raphael
    Abstract: This paper examines how macroeconomic shocks affect credit risk in the Kenyan banking sector. Using an autoregressive distributed lag (ARDL) model within a time-series framework, we establish the existence of both a short-run and long-run nexus between macroeconomic variables and bank-credit risk. We establish a negative relationship between credit risk and GDP growth although not significant. We also find that the relationship between bank profitability and asset quality is negative in the short-run but positive in the long-run. The paper also documents a positive short-run relation between asset quality and private sector credit growth, which turns negative in the longrun. Furthermore, the bank asset quality-capital nexus is positive in the short-run but turns negative in the long-run. The concave relationship suggest that NPLs will rise with increases in capital to a certain threshold (moral hazard effect), after which more capital build ups decrease NPLs (disciplinary or regulatory effect). Finally, the speed of adjustment coefficient is negative and statistically significant. A shock in any period is self-correcting at a rate of 24.96%, implying that the long-run market equilibrium is restored within a period of four quarters.
    Date: 2022
  6. By: Maturu, Benjamin
    Abstract: We estimate a proposed core financial intermediation model built upon an extended classical quantity theory using Bayesian econometric techniques. The findings suggest that the persistent deceleration in bank deposits, bank credit and domestic final output during the most of the second half of the decade ending in Dec. 2019 is due to a downward spiral (or a vicious circle) of bank deposits, bank credit and domestic final output caused by a reversal of hitherto accommodative economic and financial policies meant to revitalise the economy following the 2007 post-election disturbances and to check adverse contagion effects from the global economic and financial crises. With accommodative economic and financial policies including relaxed compliance with provisioning for non-performing bank loans, the gross non-performing bank loans accumulated to unprecedented levels thereby adversely affecting effective demand for and supply of bank credit in the private sector. This situation was aggravated by tightening monetary policy stance using the central bank rate amid tighter requirements for compliance with provisioning for non-performing loans.
    Date: 2021
  7. By: Lassana Toure (Université de Ségou); M Diagne; M Sagbo
    Abstract: This paper is a comparative analysis of the direct and indirect effects of official development assistance (ODA) and migrant remittances (MRT) on economic growth and income inequality in Senegal. Using the instrumental variables method to address the endogeneity problem, the econometric results obtained show a very significant positive impact of MRT on economic growth (13 points increase in the economic growth rate in the long run). Income inequalities should decrease by 12% if the average level of migrant transfers as a % of GDP over the long term increases by 1%. Income gaps are also reduced thanks to price stabilisation (Gini coefficient falls by 7% as a result of price control). Following a 1% increase in the share of ODA in GDP, the economic growth rate would decrease by 2 points while income inequality would increase significantly by 27%.
    Abstract: Ce travail est une analyse comparée des effets directs et indirects de l'aide publique au développement (APD) et des transferts de fonds des migrants (TFM) sur la croissance économiqueet les inégalités de revenu au Sénégal.En utilisant la méthode par variables instrumentales pour régler le problème d'endogénéité, les résultats économétriques obtenus montrent un impact positif très significatif des TFM sur la croissance économique (13 points d'augmentation du taux de croissance économique sur le long terme). Les inégalités de revenu devraient chuter de 12% si le niveau moyen des transferts des migrants en % du PIB sur le long terme augmente de 1%. Les écarts de revenus sont aussi réduits grâce à la stabilisation des prix (diminution du coefficient de Gini de 7% suite à la maitrise des prix).Suite à une hausse de 1% de la part de l'APD dans le PIB, le taux de croissance économique diminuerait de 2 pointstandisque les inégalités de revenus augmenteraient significativement de 27%
    Keywords: economic growth,income inequality,foreign aid,migrant remittances,instrumental variables.
    Date: 2021–11–11
  8. By: Kiemo, Samuel; Kamau, Anne; Rugiri, Irene W.; Talam, Camilla
    Abstract: This paper examines the effectiveness of macroprudential regulations in promoting bank stability and credit in the Kenyan financial system. The study uses bank-level and nonbank credit data for the period 2001-2019 and applies a panel estimation methodology to achieve its objectives. The study finds that bank stability has remained high, though downward trending. The findings also reveal that capital-based and asset-side macroprudential regulations effectively promote bank stability, while the liquidity-related macroprudential regulation is ineffective. Additionally, there is evidence of dampened bank credit market and domestic leakage associated with macroprudential regulations. The paper cautions policymakers to implement macroprudential policies that balance the objectives of bank stability and credit conditions. Furthermore, policymakers should note that implementing the new macroprudential measures may cause financial intermediaries to adjust their behaviour and therefore, should be implemented systematically while observing their impact at each stage.
    Keywords: Macroprudential Regulation,Stability,Lending,Banks
    JEL: E44 E51 G21
    Date: 2021
  9. By: Kiemo, Samuel; Talam, Camilla; Rugiri, Irene W.
    Abstract: The paper sought to explore the role of bank capital in mitigating credit risk and promoting financial stability. To achieve this, we constructed a Financial Soundness Index to evaluate financial stability conditions. A Panel Vector Auto Regression Model was employed using annual bank-level data from 2001-2020 for 37 banks, to examine the effect of bank capital on credit risk and financial stability. Overall, financial stability index long-term trend shows banks remain resilient, despite the downward trend from 2011 and instability margins since 2016. The findings also reveal that bank capital, lowers credit risk and strengthens financial stability. The paper conclude that bank capital supports financial stability through mitigating credit risks, and recommends that authorities continue adopting and implementing appropriate capital policies to foster financial stability and promote bank lending.
    Keywords: Bank Capital,Credit Risk,Financial Stability,Panel Vector Auto Regression model
    Date: 2022
  10. By: Aurore Burietz (Catholic University of Lille - IÉSEG School of Management, Lille Campus; LEM CNRS 9221); Steven Ongena (NTNU Business School; Centre for Economic Policy Research (CEPR); Swiss Finance Institute; KU Leuven; University of Zurich - Department of Banking and Finance); Matthieu Picault (University of Orleans - Laboratoire d'économie d'Orléans)
    Abstract: Between 2010 and 2012 and with bank stability as the ultimate target, five European countries implemented a tax levy on banks’ liabilities thereby decreasing the cost of equity relative to the cost of debt. Using a difference-in-differences approach we assess the impact of this tax levy on banks’ participation in the syndicated loan market. We further investigate the impact of the tax levy along bank size and capital structure. We find that banks located in countries where the tax levy was implemented supply more credit. This increase is more significant for larger lenders and banks that are more capital constrained.
    Keywords: Banks, Tax Levy, Syndicated Loans
    JEL: F34 G21 G28
    Date: 2022–02
  11. By: Dario Pellegrino (Bank of Italy); Marco Molteni (Pembroke College, University of Oxford)
    Abstract: In this paper we describe the establishment and assess the relevance of banking supervision in Italy between 1926 and 1936. This case is particularly interesting from the international perspective, Italy having been the first European country to assign substantial supervision to its central bank, a few years before the 1929 crisis. Notwithstanding insufficient regulation and a light touch concerning the four major mixed banks, we document considerable enforcement of the law, which went beyond the initial provisions, thanks to the rather proactive supervisory approach adopted by the Bank of Italy. We point out a significant impact on the banking system: systematic archival analysis reveals that supervision fostered capital accumulation and mitigated lending concentration. Preliminary evidence suggests that supervision information enhanced effective lending of last resort during the crisis. Our educated guess is that, in the absence of the new supervisory set-up, the severity of the financial turmoil in the early 1930s in Italy would have been much fiercer, especially for small and medium-sized banks.
    Keywords: banking supervision, capital requirements, banking history, lending of last resort
    JEL: N20 N24
    Date: 2021–10
  12. By: Kimani, Stephanie; Atiti, Faith; Agung, Raphael
    Abstract: Literature has divergent views on the relationship between market structure and allocation of credit by banks. Using quarterly bank scope data from 23 banks operating in Kenya between 2006 and 2018, we find that, while an increase in competition may improve allocation of credit in the short run, in the long run, increased competition may be detrimental to the amount of credit supplied to the private sector by commercial banks. This finding provides policy makers with evidence of how the structure of the Kenyan banking industry affects banks' credit allocation decisions. The findings may help inform the ongoing banking sector consolidation narrative given that changes to the competition structure of the market may not materially alter banks' lending behavior in the short and long run.
    Date: 2021
  13. By: Das, Abhiman; Mohapatra, Sanket; Nigania, Akshita
    Abstract: This paper examines the role of state-owned banks’ presence in allocation of credit to different sectors in India using the central bank's Asset Quality Review (AQR) as a quasi-natural experiment. The AQR resulted in a larger increase in non-performing loans of state-owned banks as compared to other banks. We exploit the heterogeneity in the presence of state-owned and other banks across districts to identify the supply side channels for bank credit reallocation. Using a difference-in-differences analysis, we find that the top-third of districts based on presence of state-owned banks' branches experienced a higher fall in the share of credit to the industrial sector in the post-AQR period compared to other districts. Such districts also experienced a greater increase in retail loans, which are considered less risky compared to industrial loans. Further, an analysis using a panel vector autoregression finds that the AQR, through an increase in non-performing loans of state-owned banks, led to a decrease in economic growth at the district-level. The results of this study suggest that central bank policy reforms can influence bank credit allocation at the sub national level and have real economy effects.
    Date: 2022–02–23
  14. By: Slaoui, Yassine (Bank Al-Maghrib, Département de la Recherche)
    Abstract: Ce travail propose d’analyser les propriétés du cycle financier au Maroc ainsi que ses interdépendances avec le cycle réel. Nous utilisons la méthode Wavelet (Crowley (2007), Aguiar-Conraria et Soares (2011)) afin d’estimer la relation entre ces deux cycles à différents niveaux de fréquence, ainsi que l’évolution de cette relation au cours du temps. Notre analyse suggère que le cycle financier, mesuré à partir du crédit bancaire, est plus long que le cycle réel, estimé à partir du PIB. De manière générale, les mouvements du PIB précèdent ceux du crédit bancaire. Le cycle financier manifeste par ailleurs des interactions fortes, mais à caractère épisodique, avec le cycle réel.
    Keywords: Wavelets; Cyclefinancier; politiquemacroprudentielle; créditbancaire
    JEL: C22 E32 E44 E51 G21
    Date: 2021–12–30
  15. By: Candelon, Bertrand (Université catholique de Louvain, LIDAM/LFIN, Belgium); Moura, Rubens (Université catholique de Louvain, LIDAM/CORE, Belgium)
    Abstract: Global interdependencies have caused affine term structure models (AT SMs) to adopt a multicountry dimension. Nevertheless, recent referenced AT SMs face issues of tractability as the model dimension becomes larger. To close this gap, this paper proposes a AT SM in which the risk factor dynamics follow a global vector-autoregressive (GV AR). AT SM − GV AR renders a parsimonious yield curve parametrization, which allows for a fast estimation process, enables meaningful statistical inference of economic relationships, and produces accurate bond yields out-of-sample forecasting. To empirically illustrate our novel AT SM, we build a markedly integrated economic system composed of three Latin American economies and China. We find that, consequent to its prominent role in the worldwide economy, China’s economic stances have nonnegligible impacts on Latin American yield curve dynamics.
    Keywords: Term Structure of Interest Rates, Global Financial Market, GVAR
    JEL: C58 E44 G15
    Date: 2021–08–01
  16. By: Mr. Francis Vitek; Vitor Gaspar; Mr. Tobias Adrian
    Abstract: This paper jointly analyzes the optimal conduct of monetary policy, foreign exchange intervention, fiscal policy, macroprudential policy, and capital flow management. This policy analysis is based on an estimated medium-scale dynamic stochastic general equilibrium (DSGE) model of the world economy, featuring a range of nominal and real rigidities, extensive macrofinancial linkages with endogenous risk, and diverse spillover transmission channels. In the pursuit of inflation and output stabilization objectives, it is optimal to adjust all policies in response to domestic and global financial cycle upturns and downturns when feasible—including foreign exchange intervention and capital flow management under some conditions—to widely varying degrees depending on the structural characteristics of the economy. The framework is applied empirically to four small open advanced and emerging market economies.
    Keywords: Monetary Policy, Foreign Exchange Intervention, Fiscal Policy, Macroprudential Policy, Capital Flow Management, Dynamic Stochastic General Equilibrium Model, Small Open Economy
    Date: 2022–01–28
  17. By: Babii, Andrii; Ghysels, Eric (Université catholique de Louvain, LIDAM/CORE, Belgium); Striaukas, Jonas
    Abstract: This paper introduces structured machine learning regressions for high-dimensional time series data potentially sampled at different frequencies. The sparse-group LASSO estimator can take advantage of such time series data structures and outperforms the unstructured LASSO. We establish oracle inequalities for the sparse-group LASSO estimator within a framework that allows for the mixing processes and recognizes that the financial and the macroeconomic data may have heavier than exponential tails. An empirical application to nowcasting US GDP growth indicates that the estimator performs favorably compared to other alternatives and that text data can be a useful addition to more traditional numerical data. Our methodology is implemented in the R package midasml, available from CRAN.
    Keywords: high-dimensional time series, fat tails, tau-mixing, sparse-group LASSO, mixed frequency data, textual news data
    Date: 2021–01–01
  18. By: Marco Cozzi (Department of Economics, University of Victoria)
    Abstract: This paper quantifies the welfare effects of counterfactual public debt policies using an endogenous growth model with incomplete markets. The economy features public debt, Schumpeterian growth, infinitely-lived agents, uninsurable income risk, and discount factor heterogeneity. Two versions of the model are specified, one allowing for households to hold equity in the group of innovating firms. The model is calibrated to the U.S. economy to match the degree of wealth inequality, the share of R&D expenditure in GDP, the firms exit rate, the average growth rate, and other standard long-run targets. When comparing balanced growth paths, I find large long-run welfare gains in equilibria characterized by governments accumulating public wealth. In some parameterizations, the equilibrium response of the growth rate is modest. However, welfare effects decompositions show that the growth component is still an important determinant of the welfare gains in the equilibria characterized by public wealth. The version of the model without equity is easier to solve computationally, allowing to consider transitional dynamics. Taking into account the dynamic adjustment to the new long-run equilibrium shows that the transitional welfare costs are not large enough to change the sign of the welfare effects stemming from a change in public debt. I find that eliminating public debt would lead to a 1.7 increase in welfare, while moving to a debt/GDP ratio of 100% would entail a welfare loss of 0.8%
    Keywords: Public debt, Heterogeneous Agents, Incomplete Markets, Endogenous Growth, Welfare
    Date: 2022–02–15
  19. By: Dergunov, Ilya; Meinerding, Christoph; Schlag, Christian
    Abstract: In a parsimonious regime switching model, we find strong evidence that expected consumption growth varies over time. Adding inflation as a second variable, we uncover two states in which expected consumption growth is low, one with high and one with negative expected inflation. Embedded in a general equilibrium asset pricing model with learning, these dynamics replicate the observed time variation in stock return volatilities and stockbond return correlations. They also provide an alternative derivation for a measure of time-varying disaster risk suggested by Wachter (2013), implying that both the disaster and the long-run risk paradigm can be extended towards explaining movements in the stock-bond correlation.
    Keywords: Long-run risk,inflation,recursive utility,filtering,disaster risk
    JEL: E31 E44 G12
    Date: 2022
  20. By: Anthony Roberts; Roy Kwon
    Abstract: Prior country case studies show substantial wage premiums in the financial sector contributes to growth of top incomes and wage inequality in a select group of advanced economies. However, while comparative studies show financialization exerts heterogenous effects on wage inequality across advanced economies, it is unclear whether the magnitude and location of financial wage premium in the distribution of income varies across advanced economies. We address this gap in the empirical literature by examining the financial wage premium across the labor income distributions of 13 advanced economies since the 1980s using harmonized labor force data from multiple waves of the Luxembourg Income Study. Consistent with prior studies, we find the financial wage premium is concentrated at the upper end of the income distribution in most advanced economies, but the magnitude of the premium substantially varies across these economies. We account for this variation by showing the market structure of financial systems exacerbates the financial wage premium at the upper end of the distribution. Overall, this study shows the financial wage premium is an important distributional mechanism for understanding the growth of top incomes and wage inequality in advanced economies and the marketization of financial activity amplifies the wage dynamics of financialization.
    Date: 2021–12
  21. By: Corina Boar; Denis Gorea; Virgiliu Midrigan
    Abstract: We use micro data from Orbis on firm level balance sheets and income statements to document that accounting returns for privately held businesses are dispersed, persistent, and negatively correlated with firm equity. We also show that firms experience large, fat-tailed, and partly transitory changes in output that are not fully accompanied by changes in their capital stock and wage bill. This implies that capital and labor choices are risky, as fluctuations in output are accompanied by large changes in firm profits. We interpret this evidence using a model of entrepreneurial dynamics in which return heterogeneity can arise from both limited span of control, as well as from financial frictions which generate differences in financial returns to saving. The model matches the evidence on accounting returns and predicts that financial returns to saving are half as large and dispersed as accounting returns. Financial returns mostly reflect risk, as opposed to collateral constraints which play a negligible role due to firms' unwillingness to expand and take on more risk.
    JEL: E2 E44 G32
    Date: 2022–01
  22. By: Caroline Jardet; Cristina Jude; Menzie D. Chinn
    Abstract: We examine the effect of uncertainty on foreign direct investment inflows for a heterogeneous sample of advanced, emerging market and developing countries over a 25 year long (pre-Covid) sample. Using a push-pull framework, and controlling for both global and local factors, we find policy uncertainty has discernable and significant effects on inflows, but those effects vary in strength and direction between different groups of countries. Moreover, it is not host country uncertainty that seems to matter the most, but rather global uncertainty. Additionally, we find that high levels of uncertainty matter disproportionately. Finally, financial openness accentuates the impact of uncertainty for emerging market and developing countries.
    JEL: F21 F4
    Date: 2022–01
  23. By: Barney Hartman-Glaser; Simon Mayer; Konstantin Milbradt
    Abstract: We consider a firm with infrequent access to capital markets, continuous access to financing by a risk-averse intermediary, and a cost of holding cash. The intermediary absorbs a fraction of cash-flow risk that decreases with the firm’s liquidity reserves and acquires a stake in the firm under distress. Implementing the optimal contract suggests an overlapping pecking order. The firm simultaneously finances shortfalls with cash reserves and a credit line and sells equity to the intermediary when it runs out of cash. The model helps explain empirical facts and trends in financial intermediation, such as the rise of private equity.
    JEL: D86 G32 G35
    Date: 2022–01
  24. By: Egemen Eren (Bank for International Settlements (BIS) - Monetary and Economic Department); Semyon Malamud (Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Haonan Zhou (Princeton University - Department of Economics)
    Abstract: We document that corporates in emerging markets borrow more in foreign currency when the local currency provides a better hedge in downturns. We develop an international corporate finance model in which firms facing adverse selection choose the foreign currency share of their debt. In the unique separating equilibrium, good firms optimally expose themselves to currency risk to signal their type. The nature of this equilibrium crucially depends on the co-movement between cash flows and the exchange rate. We provide extensive empirical evidence for this signalling channel using micro data for firms in multiple emerging markets and event studies of local currency depreciation episodes.
    Keywords: Foreign currency debt, corporate debt, signalling, exchange rates, pecking order
    JEL: D82 F34 G01 G15 G32
    Date: 2022–02
  25. By: Patrice Fontaine (EUROFIDAI - EUROFIDAI, CNRS - Centre National de la Recherche Scientifique, PULV - Pôle Universitaire Léonard de Vinci); Sujiao Zhao (Banco de Portugal - Banco de Portugal, UCP Porto - Catholic University of Portugal / Porto - Faculdade de Economia e Gestão & CEGE - Catholic University of Portugal / Porto - Faculdade de Economia e Gestão & CEGE)
    Abstract: We examine the impact of undervaluation on a firm's use of trade credit. To address potential endogene- ity bias, we construct our instrumental variable based on mutual fund outflow-driven price pressure, and our undervaluation measure allows us to distinguish misvaluation from fair valuation. We find that a firm's suppliers play an important role in providing temporary bridge financing when the firm is under- valued. The effect varies with the firm's information environment and with its dependence on external finance. In addition, based on a manually matched supplier-customer sample, we show that small cus- tomers in long-term relationships with their suppliers are more likely to obtain trade credit when fac- ing stock market undervaluation, while small suppliers with a smaller customer pool extend more trade credit to their undervalued customers.
    Keywords: Undervaluation,Trade credit,Information advantage,Implicit equity stake
    Date: 2021–03
  26. By: Ralph S. J. Koijen; Motohiro Yogo
    Abstract: Insurers are the largest institutional investors of corporate bonds. However, a standard theory of insurance markets, in which insurers maximize firm value subject to regulatory or risk constraints, predicts no allocation to corporate bonds. We resolve this puzzle in an equilibrium asset pricing model with leverage-constrained households and institutional investors. Insurers have relatively cheap access to leverage through their underwriting activity. They hold a leveraged portfolio of low-beta assets in equilibrium, relaxing other investors' leverage constraints. The model explains recent empirical findings on insurers' portfolio choice and its impact on asset prices.
    JEL: G12 G22
    Date: 2022–01
  27. By: Tristan Jourde
    Abstract: This paper examines the long-term evolution of the linkages of the insurance sector with financial and non-financial companies. We develop a measure of connectedness using a multifactor model of weekly equity returns. The empirical analysis is conducted from 1973 to 2018, for 16 developed countries, at both the sectoral and institution levels. The results indicate that, unlike other sectors, the connectedness level of the insurance industry has strengthened over time. We also find that the linkages of the largest insurance companies with financial and non-financial firms are structurally different but as high as those of the largest banks.
    Keywords: Comovements, Insurance Sector, Interconnectedness, Macroprudential Regulation, Systemic Risk
    JEL: G22 G15
    Date: 2022
  28. By: Nemo Semret
    Abstract: What happens to mining when the Bitcoin price changes, when there are mining supply shocks, the price of energy changes, or hardware technology evolves? We give precise answers based on the technical forces and incentives in the system. We then build on these dynamics to consider value: what is the cost and purpose of mining, and is it worth it? Does it use too much energy, is it bad for the environment? Finally we extend our analysis to the long term: is mining economically feasible forever? What will the global hash rate be in 40 years? How is mining impacted by the limits of computation and energy? Is it physically sustainable in the long run? From first principles, we derive a fundamental scale-invariant feasibility constraint, which enables us to analyze the interlocking dynamics, find key invariants, and answer these questions mathematically.
    Date: 2022–01
  29. By: Simon Cornée; Anastasia Cozarenco; Ariane Szafarz
    Abstract: Social banks have emerged as a new group of banks that call themselves as “alternative”, “ethical”, “sustainable”, and “value-based”. Their small market share increases at a rapid pace and is still expected to grow in the future. Social banks are institutions with both (at least some) activities of financial intermediation and one or several non-financial missions, typically based on environmental and social values. By unpacking the observable, real-life differences between social banks and conventional banks, this chapter paves the way to theorizing the multidimensional characteristics of social banks within the global banking industry. Business models, governance issues, lending technologies; and social outcomes appear to be key aspects to understand how innovative, value-based, social banks work and how they might one day substantively affect mainstream banking business.
    Keywords: Social Banks; Ethical Banks; Social Mission; Financial Cooperatives; Microcredit
    JEL: G21 B55 H23 G32 G28 H81
    Date: 2022–02–22
  30. By: Delis, Manthos; Hasan, Iftekhar; To, Thomas; Wu, Eliza
    Abstract: Using a large sample of corporate loan facilities and hand-matched information on bank lobbying, we show that borrower performance improves after receiving credit from lobbying banks. This especially holds for opaque borrowers about which a bank possesses valuable information, as well as for borrowers with strong corporate governance. We also find that credit from lobbying banks funds corporate capital expenditures that increase the scope of firm operations, thereby leading to sales growth. Our findings are consistent with the information-transmission theory that political lobbying provides regulators with valuable borrower information, which results in improved bank-lending supervisory decisions and corporate borrower performance.
    Keywords: Bank lobbying; Firm performance; Syndicated loans; Information-transmission
    JEL: D72 G21 G30
    Date: 2022–01–23
  31. By: Mulindi, Hillary; Josea, Kiplangat; Tiriongo, Samuel
    Abstract: With most economies seeking to tap on MSMEs to navigate beyond the devastating impact of Covid-19, this paper seeks to create an understanding of the MSMEs demand-side credit perspectives. Using 279 MSMEs from the KBA Inuka Enterprise program, we anchor our analysis on a three-step probit model with sample selection to examine the choices on the utilization of business versus personal accounts among MSMEs. The results reveals that the level of MSMEs turnover affect the choice to borrow, who to borrow from and the type of loan to pursue (between personal and business loan). However, the tendency of MSMEs with turnovers of over Ksh 500,000 leaning more towards the utilization of personal over business accounts remains a puzzle. Further, the age of enterprise is important for the decision to take a bank loan or other loans, with the implication that MSMEs need to have a long-term view over their businesses to be attractive to long-term funders (banks). Heterogeneity across the industry is evident and it influences MSMEs credit choices. The gender of MSME owner influences the use of a business or personal account for loans, as the results indicate men use their business accounts more than women. Lastly, registration status of MSMEs matters in accessing business loans. From the policy perspective, discussions around lessening the credit accessibility constraints imposed by turnover levels, the age of enterprise, industry of operation, gender and registration status of enterprises are key.
    Date: 2022

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