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on Financial Development and Growth |
| By: | Degryse, Hans (KU Leuven & CEPR); Kokas, Sotirios (University of Essex); Minetti, Raoul (Michigan State University, Department of Economics); Peruzzi, Valentina (Sapienza University of Rome) |
| Abstract: | We investigate the impact that banks’ information on borrowing firms has on firm-level growth using matched bank-firm data from the U.S. credit market. Exploiting the structure of lending syndicates to construct proxies for bank information, we find consistent evidence that banks’ information spurs firms’ tangible and intangible investments, as well as promoting better growth outcomes. We find limited evidence of banks’ exploitation of informational monopolies that could deter firms’ investment, even when banks hold significant credit market power. Banks’ information does not appear to bias firm growth towards capital-intensive investments, but rather fosters employment growth. |
| Keywords: | Firm Growth; Banks; Information; Syndicates |
| JEL: | G21 L25 |
| Date: | 2022–04–11 |
| URL: | http://d.repec.org/n?u=RePEc:ris:msuecw:2022_003&r= |
| By: | Diego A. Cerdeiro; Cian Ruane |
| Abstract: | After impressive growth in the 2000s, China's productivity has more recently stagnated. We use firm-level data to analyze productivity and firm dynamism trends from 2003 to 2018. We document six facts that together show a decline in China’s business dynamism. We show that (i) the revenue share of young firms has declined, (ii) the life-cycle growth of young firms relative to older incumbents has slowed, (iii) weaker life-cycle growth can be explained by slower productivity growth and weaker investment in intangibles, (iv) younger and smaller firms are more capital constrained than their older and larger counterparts, (v) the responsiveness of capital growth to the marginal product of capital has declined, and (vi) large productivity gaps between SOEs and private firms persist. We find that business dynamism is weaker in provinces where SOEs account for a larger share of the capital stock. Our results suggest that declining private business dynamism is an important factor in explaining China's sluggish TFP growth and that SOE reform could boost productivity growth indirectly by stimulating business dynamism. |
| Keywords: | China, total factor productivity, growth, business dynamism.; business dynamism; life-cycle growth; SOE reform; China's productivity; dynamism trend; Productivity; Public enterprises; Total factor productivity; Capital productivity; Aging |
| Date: | 2022–02–18 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2022/032&r= |
| By: | Pierre Mandon; Martha Tesfaye Woldemichael |
| Abstract: | This paper employs a meta-regression analysis of 473 estimates from 15 studies to take stock of the empirical literature on Chinese aid effectiveness. After accommodating publication selection bias, we find that, on average, Beijing’s foreign assistance has had a positive impact on economic and social outcomes in recipient countries but an opposite effect on governance, albeit negligible in size. We also show that (i) studies that fail to uncover statistically significant effects are less likely to be submitted to journals, or accepted for publication; and (ii) results are not driven by authors’ institutional affiliation. Differences in study characteristics such as the type of development outcome considered, how the Chinese aid variable is measured, the geographic region under study, and publication outlet explain the heterogeneity among Chinese aid effectiveness estimates reported in the literature. |
| Keywords: | China, foreign aid, meta-regression analysis |
| Date: | 2022–02–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2022/046&r= |
| By: | Wellner, Lukas; Dreher, Axel; Fuchs, Andreas; Parks, Bradley; Strange, Austin M. |
| Abstract: | Bilateral donors use foreign aid to pursue soft power. We test the effectiveness of aid in reaching this goal by leveraging a new dataset on the precise commitment, implementation, and completion dates of Chinese development projects. We use data from the Gallup World Poll for 126 countries over the 2006-2017 period and identify causal effects with (i) an event-study model that includes high-dimensional fixed effects, and (ii) instrumental-variables regressions that rely on exogenous variation in the supply of Chinese government financing over time. Our results are nuanced and depend on whether we focus on subnational jurisdictions, countries, or groupings of countries. |
| Keywords: | development finance,foreign aid,aid events,public opinion,government approval,soft power,China,Gallup World Poll |
| JEL: | F35 F59 H73 H77 O19 P33 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwkwp:2214&r= |
| By: | Aleksandar Vasilev (Lincoln International Business School, UK.) |
| Abstract: | Financial openness is introduced into a real-business-cycle setup augmented with a detailed government sector. The model is calibrated to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2020). The quantitative importance of financial openness is investigated for the stabilization of cyclical fluctuations in Bulgaria. The computational experiment performed in this paper reveals that greater financial openness increases the impact of technology shocks on output, investment, consumption, labor hours, and net exports. This amplification effect is due to the following mechanism: openness provides a cheap access to foreign funds. Unfortunately, the new results come at odds with a major empirical observation, i.e. that consumption and net exports are strongly pro-cyclical; the model, however, produces a countercyclical consumption, as well as net exports. Thus, such a setup is not yet ready to be used for policy analysis. |
| Keywords: | business cycles, progressive capital taxation, Bulgaria |
| JEL: | E24 E32 |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:sko:wpaper:bep-2022-03&r= |
| By: | Mr. Ken Miyajima; Mr. Heiko Hesse |
| Abstract: | Globally, financial institutions have increased their holdings of domestic sovereign debt, tightening the linkage between the health of the financial system and the level of sovereign debt, or the “financial sector-sovereign nexus,” during the ongoing COVID-19 pandemic. In South Africa, the nexus is still relatively moderate, albeit rising, and the increased focus of the Prudential Authority on the associated risks provide reassurance. Options to mitigate such risks through the use of regulatory measures can be explored. However, absent the necessary fiscal consolidation and structural reforms, risks from the nexus to both the financial system and the sovereign will increase. |
| Keywords: | South Africa, Financial Sector, Sovereign Debt, Bank-Sovereign Nexus, Home Bias, Financial Stability, Banking Risk, Sovereign Risk, Capital Flows, Bank Regulation |
| Date: | 2022–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2022/051&r= |
| By: | Bagsic, Cristeta |
| Abstract: | This paper is a replication and extension of Schaeck, Cihak, and Wolfe (2009). In contrast to results for a heterogeneous set of countries in Schaeck, Cihak, and Wolfe (2009), findings herein indicate that there is a chance that competition engenders systemic banking crisis for ASEAN EMEs, and that although concentration may not increase the probability of a banking crisis, at decreasing levels of competition, increasing concentration could damage financial stability. When controls for regulation and macroprudential tools are introduced, the opposite effects of competition and concentration on financial stability becomes more apparent. |
| Keywords: | financial stability; concentration; competition; banking crises |
| JEL: | E5 G1 |
| Date: | 2021–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:112397&r= |
| By: | Mr. Sakai Ando; Adrien Alvero; Kairong Xiao |
| Abstract: | We show that distortion in the size distribution of banks around regulatory thresholds can be used to identify costs of bank regulation. We build a structural model in which banks can strategically bunch their assets below regulatory thresholds to avoid regulations. The resulting distortion in the size distribution of banks reveals the magnitude of regulatory costs. Using U.S. bank data, we estimate the regulatory costs imposed by the Dodd-Frank Act. Although the estimated regulatory costs are substantial, they are significatnly lower than those in self-reported estimates by banks. |
| Keywords: | Bank regulation, regulatory costs, the Dodd-Frank Act, bunching |
| Date: | 2022–02–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2022/041&r= |
| By: | Andrea Fabiani; Martha López Piñeros; José-Luis Peydró; Paul E. Soto |
| Abstract: | Non-US firms have massively borrowed dollars (foreign currency, FX), which may lead to booms and crises. We show the real effects of capital controls, including prudential benefits, through a firm-debt mechanism. Our identification exploits the introduction of a tax on FX-debt inflows in Colombia before the global financial crisis (GFC), and administrative, proprietary datasets, including loan-level credit register data and firm-level information on FX-debt inflows and imports/exports. Our results show that capital controls substantially reduce FX-debt inflows, particularly for firms with larger ex-ante FX-debt exposure. Moreover, firms with weaker local banking relationships cannot substitute FX-debt with domestic-debt and experience a reduction in total debt and imports upon implementation of the policy. However, our results suggest that, by preemptively reducing pre-crisis firm-level debt, capital controls boost exports during the subsequent GFC, especially among financially-constrained firms. |
| Keywords: | Capital controls; corporate FX-debt; real effects; macroprudential; capital inflows |
| JEL: | F3 F38 F4 F6 G01 G15 G21 G28 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1833&r= |
| By: | Uroš Herman; Tobias Krahnke |
| Abstract: | In this paper, we investigate whether a firm’s composition of foreign liabilities matters for their resilience during economic turmoil and examine which characteristics determine a firm’s foreign capital structure. Using firm-level data, we corroborate previous findings from the (international) macroeconomic literature that the composition of foreign liabilities matters for a country’s susceptibility to external shocks. We find that firms with a positive equity share in their foreign liabilities were less affected by the global financial crisis and also less likely to default in the aftermath of the crisis. In addition, we show that larger, more open, and more productive firms tend to have a higher equity share in total foreign liabilities. |
| Keywords: | External Liabilities, Foreign Direct Investment, Firm-level data, Financial Crisis |
| Date: | 2022–02–18 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2022/038&r= |
| By: | Joshua AIZENMAN; Menzie CHINN; ITO Hiroyuki |
| Abstract: | Over the years, policymakers have explored various combinations of varying degrees of monetary policy independence, exchange rate stability, and financial openness, while recognizing that not all three policies can be achieved to the fullest extent – this is known as the "monetary trilemma" hypothesis. In recent years, holding international reserves (IR) has become an important policy instrument as a buffer or insurance against liquidity shortages. Significant and fundamental economic events such as currency crises have often changed the policy mix. In this paper, we find that countries' policy mixes have been diverse and have varied over time from the perspective of both the monetary trilemma and IR holdings. We then illustrate how the combination of the three trilemma policies and IR holding drastically changed before and after the Asian Financial Crisis (AFC). However, the Global Financial Crisis (GFC) did not lead to a drastic change in the policy arrangements. We find that countries that faced large terms of trade shocks or negative economic growth during the crisis increase IR holding in the post-AFC. Countries that had negative growth during the crisis also tend to pursue more exchange rate flexibility and more open financial markets. This characteristic is true for commodity exporters, but not for manufacturing exporters. Countries with large current account deficits (i.e., "large capital borrowers") tended to be more sensitive to economic growth at the time of the AFC. Countries that are under IMF stabilization programs or those with sovereign wealth funds tend to hold more IR. These characteristics were not found in the aftermath of the GFC. In general, countries increased their IR holdings after the GFC, but did not respond to the during-crisis economic and institutional conditions. |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:22029&r= |
| By: | Youssef Ghallada; Alexandre Girard; Kim Oosterlinck |
| Abstract: | In theory credit booms, and the crises associated to these booms, should occur more frequently in Fiat monetary regimes than in regimes, such as the Gold Standard, where money creation is constrained. In this note, we investigate whether the importance of the credit boom factor, as an early warning indicator (EWI) of systemic financial crises, varies across monetary regimes for a sample of 17 developed countries over the 1870-2016 period. We find no evidence of a difference between monetary regime for credit-driven crises and this both for the occurrence and the severity of crises. |
| Date: | 2021–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:ulb:ulbeco:2013/335337&r= |
| By: | Laeven, Luc; Maddaloni, Angela; Mendicino, Caterina |
| Abstract: | Recent research developed under the ECB research task force on Monetary Policy, Macroprudential Policy and Financial Stability highlights the existence of trade-offs and spillovers that monetary policy and macroprudential authorities face when deciding on their policy interventions. Monetary policy measures are key to support the supply of credit to the economy, but they could also have unintended consequences on financial stability risks. Macroprudential policies are instead effective in limiting financial stability risks, but they could also reduce the length of economic expansions by preventing credit from flowing to productive economic activities. In addition, since monetary and macroprudential policies transmit to the broad economy via the financial system, they unavoidably affect each other’s effectiveness. Taking these factors into account is key for the design and implementation of both policies. JEL Classification: E3, E44, G01, G21 |
| Keywords: | financial frictions, policy trade-offs, risk taking, systemic risk |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20222647&r= |
| By: | Clayton, Christopher; Santos, Amanda Dos; Maggiori, Matteo; Schreger, Jesse |
| Abstract: | We empirically characterize how China is internationalizing the Renminbi by selectively opening up its domestic bond market and propose a dynamic reputation model to understand China's internationalization strategy. While previously closed to foreign investors, China has recently allowed major increases in foreign investment in its domestic bond market. China carefully controlled the entrance of foreign investors into its market, first allowing in relatively stable long-term investors like central banks before allowing in flightier investors like mutual funds. Foreign investors increasingly treat Renminbi denominated assets as a substitute for safe developed-market government bonds. Our framework explains these patterns as the result of a government strategy to build its reputation as an international currency issuer while minimizing the cost of potential capital flight as it gains credibility. We analyze optimal two-way liberalization: gradually letting more domestic capital flow abroad as foreigners increase their participation in domestic markets. |
| Date: | 2022–03–11 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:r2msa&r= |
| By: | Luis Bauluz (University of Bonn, World Inequality Lab); Filip Novokmet (University of Bonn, World Inequality Lab); Moritz Schularick (Sciences Po, University of Bonn, CEPR) |
| Abstract: | This paper provides a household-level perspective on the rise of global saving and wealth since the 1980s. We calculate asset-specific saving flows and capital gains across the wealth distribution for the G3 economies – the U.S., Europe, and China. In the past four decades, global saving inequality has risen sharply. The share of household saving flows coming from the richest 10% of household increased by 60% while saving of middle class households has fallen sharply. The most important source for the surge in top-10% saving was the secular rise of global corporate saving whose ultimate owners the rich households are. Housing capital gains have supported wealth growth for middle-class households despite falling saving and rising debt. Without meaningful capital gains in risky assets, the wealth share of the bottom half of the population declined substantially in most G3 economies. |
| Keywords: | Income and wealth inequality, household portfolios, historical micro data |
| JEL: | D31 E21 E44 N32 |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkdps:161&r= |
| By: | Anand, Ishan; Kumar, Rishabh (University of Massachusetts Boston) |
| Abstract: | Recently released official survey data show a decline in wealth inequality (measured by the Gini) and wealth concentration (shares of the top fractiles) over 2012-2018. We investigate a puzzling detail – the rich hold equities, whose prices increased over 2012-2018, while the middle class holds precious metals, whose prices declined over the same period. The survey predicts the richest Indian to be worth Rs 244 million in 2018; according to glossy magazine covers, the richest Indian has, in fact, a net worth of Rs 2,560 billion. We correct this series using data from named rich lists and find that the decline in wealth inequality is more modest. More strikingly, we find a sharp increase in wealth concentration, with the share of the Top 0.001 percent doubling in size – as of 2018, the wealth of the richest 7000 (approx.) Indians exceeds the wealth of the poorest 50 percent. |
| Date: | 2022–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:726c8&r= |
| By: | HOSONO Kaoru; TAKIZAWA Miho; YAMANOUCHI Kenta |
| Abstract: | We analyze the effects of financial constraints on markups. Using a firm-level dataset from Japan, we first find that financially constrained firms decreased markups and this effect was heightened during the Global Financial Crisis. Second, we find that financially constrained firms decreased inventories and tangible capital investment. These results are consistent with the liquidity management hypothesis that posits that financially constrained firms lower prices to shed inventories, but not with the customer market hypothesis that predicts that constrained firms raise prices to invest less in the customer base and decrease their market shares. Third, although the extent to which the dispersion in markups due to financial constraints results in aggregate TFP losses through inefficient resource allocation is economically small, the magnitude almost doubled during the Global Financial Crisis. Our results indicate that financial constraints matter for product market competition as well as investment. |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:22012&r= |
| By: | Ozili, Peterson K |
| Abstract: | This paper investigates the correlation of economic policy uncertainty (EPU) with nonperforming loans and loan loss provisions for 22 developed countries from 2008 to 2017. The findings reveal that economic policy uncertainty is negatively correlated with nonperforming loans and loan loss provisions in the banking sector of EU countries. Also, economic policy uncertainty is negatively correlated with nonperforming loans in the banking sector of the G7 countries while loan loss provision is more responsive to changes in EPU in EU countries. The implication of the findings is that the correlation of economic policy uncertainty with loan loss provisions and nonperforming loans is influenced by regional characteristics. |
| Keywords: | Loan loss provisions, bank performance, nonperforming loans, policy uncertainty, EPU index, economic policy uncertainty, European union, correlation. |
| JEL: | E52 E59 G21 G23 G28 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:112381&r= |
| By: | Eichfelder, Sebastian; Noack, Mona; Noth, Felix |
| Abstract: | We investigate the impact of the French 2012 financial transaction tax on trading activity, volatility, and price efficiency measured by first-order autocorrelation. We extend empirical research by analysing anticipation and reallocation effects. In addition, we consider measures for long-run volatility and first-order autocorrelation that have not been explored yet. We find robust evidence for anticipation effects before the effective date of the French FTT. Controlling for short-run effects, we only find weak evidence for a long-run reduction of trading activity due to the French FTT. Thus, the main impact of the French FTT on trading activity is short-run. We find stronger reactions of low-liquidity treated stocks and a reallocation of trading activity to high-liquidity stocks participating in the Supplemental Liquidity Provider Programme, which is both in line with liquidity clientele effects. Finally, we find weak evidence for a persistent volatility reduction but no indication for a significant FTT impact on price efficiency measured by first-order autocorrelation. |
| Keywords: | anticipation effect,financial transaction tax,long-run treatment effect,market quality,short-run treatment effect |
| JEL: | G02 G12 H24 M4 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:122022&r= |
| By: | Max Fuchs (University of Kassel) |
| Abstract: | Private cryptocurrencies allow for payments without the need for a financial institution. These institutions, the central bank and retail banks, may thus observe a decline in the demand for their payments systems, i.e. cash and deposits. Using the monetary search model of Lagos and Wright (2005), we show that the central bank is able to tilt the playing field until it wins. By introducing an interest-bearing central bank digital currency (CBDC), the central bank is able to provide a payment system which is superior to cryptocurrencies. Miners cannot match the CBDC rate and go bankrupt. Retail banks, on the other hand, face lower profits but survive in the equilibrium. In addition, it can be welfare-improving to kick out cryptocurrencies by an interest-bearing CBDC. |
| Keywords: | CBDC, cryptocurrencies, welfare analysis |
| JEL: | E41 E42 E51 E52 E58 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:202210&r= |
| By: | Kristian S. Blickle; Donald P. Morgan |
| Abstract: | Climate change could affect banks and the financial systems they anchor through various channels: increasingly extreme weather is one (Financial Stability Board, Basel Committee on Bank Supervision). In our recent staff report, we size up this channel by studying how U.S. banks, large and small, fared against disasters past. We find even the most destructive disasters had insignificant or small effects on bank stability and small and positive effects on bank income. We conjecture that recovery lending after disasters helps stabilize larger banks while smaller, local banks’ knowledge of “unmarked” (flood) hazards may help them navigate disaster risk. Federal disaster aid seems not to act as a bank stabilizer. |
| Keywords: | climate change; financial stability |
| JEL: | G21 |
| Date: | 2022–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:93906&r= |
| By: | Belloni, Marco; Kuik, Friderike; Mingarelli, Luca |
| Abstract: | In recent years there has been growing attention on the risks posed by climate change. One relevant question for financial stability is to which extent the materialisation of transition risks emerging from the sudden implementation of climate change mitigation policies would impact the financial system. In this paper we analyze the effects of changes in carbon price on the European banking system. We assess this climate change transition risk through a banking sector contagion model where firms are negatively impacted by an increase in carbon prices. Using a unique granular dataset we evaluate the consequences of a combination of different increases in carbon prices and firm emission reduction strategies. We find that taking early policy action, implying more gradual changes in carbon prices, is not expected to lead to adverse impacts on the banking system, especially if firms reduce their emissions efficiently. Conversely, a disorderly, abrupt transition to a low carbon economy requiring very high sudden changes in carbon prices might have disruptive effects on the financial system, especially if firms fail to reduce their emissions. JEL Classification: Q48, Q54, Q58 |
| Keywords: | climate change, empirical banking, financial networks, transition risk |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20222654&r= |
| By: | Aizhamal Rakhmetova; Roman Hoffmann; Mariola Pytlikova |
| Abstract: | Despite an increasing number of studies, there is no scientific consensus on the extent and conditions under which environmental factors influence migration. In particular, little is known about the role played by financial resources that may facilitate or hinder migration under environmental stress. Empirical evidence shows that some households migrate in response to environmental hazards while others remain in place, potentially being trapped due to lack of resources, i.e. poverty constraints. However, little is known about how access to financial resources influences the decision of a household to stay or migrate. On one hand, financial resources can help to alleviate poverty constraints and to cover migration costs, thereby increasing migration (climate-driver mechanism); on the other hand, financial resources can also improve the adaptation capacities of households at the place they reside, and thus reduce migration responses to environmental changes (climate-inhibitor mechanism). To shed light on households’ migration decisions in response to climate shocks depending on their access to financial resources, we utilize rich micro-data from Indonesia and exploit two sources of variation in climate and cash transfers. Our results suggest that better access to financial resources facilitates the climateinhibitor mechanism for short-term rainfall shocks and natural disasters. At the same time, better accessibility to financial resources enhances the climate-driver mechanism for accumulated rainfall shocks and temperature anomalies. |
| Keywords: | climate change; migration; financial resources; adaptation; |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp724&r= |