nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2022‒04‒25
28 papers chosen by
Georg Man

  1. SYSTEME BANCAIRE ET CROISSANCE ECONOMIQUE AU CAMEROUN By Ekamena Ntsama, Nadine Sabine; Ngo Bilong, Adèle Micheline; Alhadji, Abdoul Dani
  2. Foreign Direct Investment, Growth, and Publication Bias in Latin America and the Caribbean By Iorngurum, Tersoo
  3. SME Financial Distress and the Macroeconomic Recovery: A Microsimulation Approach By Kren, Janez; Lawless, Martina; McGuinness, Gerard; O'Toole, Conor
  4. COVID-19, Fintech, and the Recovery of Micro, Small, and Medium-sized Enterprises: Evidence from Bangladesh By Hossain, Monzur; Chowdhury, Tahreen Tahrima
  5. The Financial Performance and Macrofinancial Implications of Large State-Owned Enterprises in Sub-Saharan Africa By Torsten Wezel; Naly Carvalho
  6. Zombie Lending: Theoretical, International and Historical Perspectives By Viral V. Acharya; Matteo Crosignani; Tim Eisert; Sascha Steffen
  7. Indirect Effects of Access to Finance By Jing Cai; Adam Szeidl
  8. Estimating General Equilibrium Spillovers of Large-Scale Shocks By Kilian Huber
  9. Nowcasting GDP - A Scalable Approach Using DFM, Machine Learning and Novel Data, Applied to European Economies By Mr. Jean-Francois Dauphin; Marzie Taheri Sanjani; Mrs. Nujin Suphaphiphat; Mr. Kamil Dybczak; Hanqi Zhang; Morgan Maneely; Yifei Wang
  10. Service-led industrialization in developing economies: Some implications of technology gap dynamics By Thakur, Gogol M
  11. "Financial Barriers to Structural Change in Developing Economies: A Theoretical Framework" By Francesco Zezza; Gennaro Zezza
  12. The case of financial and banking integration of Central, Eastern and South Eastern European countries: A gravity model approach By Léonore Raguideau-Hannotin
  13. Governance, foreign aid, and Chinese foreign direct investment By Fon, Roger; Alon, Ilan
  14. Disinflation Costs and Macroprudential Policies: Real and Welfare Effects By Busato, Francesco; Ferrara, Maria; Varlese, Monica
  15. Monetary Policy and Economic Growth in a Schumpeterian Model with Incumbents and Entrants By Lu, You-Xun; Chen, Shi-kuan; Lai, Ching-chong
  16. FinTech Lending, Social Networks and the Transmission of Monetary Policy By Xiaoqing Zhou
  17. Análisis de la transmisión de la tasa de interés de política monetaria en la tasa de interés de microcréditos en Colombia: discusiones de independencia By Batz, A.; Montes, J.; Romero, J.; Rubio, P.
  18. Heterogeneous savers and their inflation expectation during German industrialization: Social class, wealth, and gender By Lehmann-Hasemeyer, Sibylle H.; Neumayer, Andreas; Streb, Jochen
  19. Do Countries Default in Bad Times? The Role of Alternative Detrending Techniques By Ugo Panizza
  20. Financial bubbles and income inequality By Brett, Craig; Sarkar, Saikat
  21. What Drives Stock Market Development in Arab Countries? By Chiad, Faycal; Hadj Sahraoui, Hamoudi
  22. South Africa: Financial Sector Assessment Program-Financial System Stability Assessment By International Monetary Fund
  23. Evaluating the Effectiveness of Early Warning Indicators: An Application of Receiver Operating Characteristic Curve Approach to Panel Data By Yildirim, Yusuf; Sanyal, Anirban
  24. Optimal timing of policy interventions in troubled banks By König, Philipp Johann; Mayer, Paul; Pothier, David
  25. Collective Moral Hazard and the Interbank Market By Levent Altinoglu; Joseph E. Stiglitz
  26. Investing in the Next Generation: The Long-Run Impacts of a Liquidity Shock By Patrick Agte; Arielle Bernhardt; Erica M. Field; Rohini Pande; Natalia Rigol
  27. Liquidity constraints and fiscal multipliers By Sá, Diogo
  28. The paper assesses the effects of dominant currency shocks (strong US dollar) on emerging markets by studying exchange market pressure (EMP) or foreign exchange (FX) liquidity, GDP growth, external debt, and inflation. The literature emphasizes inflation passthrough, trade volume and GDP growth contraction in the periphery following a strong dollar. Comparing the dollar shock with euro and commodity price shocks and employing pooled mean group estimates and panel VAR across regimes of trade invoicing, this paper shows that bilateral depreciation can decrease FX liquidity and GDP growth in the periphery, failing to achieve the conventional macroeconomic adjustments of a competitive depreciation. A strong dollar reduces external debt, but strong euro has the opposite effect, implying circumvention of the ‘original sin.’ An EMP, FX liquidity, shock from the periphery appreciates the US dollar, affirming dollar’s safehaven status. These findings have implications for balance of payments and exchange rate policy management. By Aleksandr V. Gevorkyan; ATarron Khemraj

  1. By: Ekamena Ntsama, Nadine Sabine; Ngo Bilong, Adèle Micheline; Alhadji, Abdoul Dani
    Abstract: This study aims to assess the effect of bank credit granted to the private sector and gross domestic savings on economic growth in Cameroon. We use the Ordinary Least Squares method on time series data for a period from 1980 to 2019 from the World Bank (WDI). The main results show that credit granted to the private sector by banks and gross domestic savings have a positive and significant effect on economic growth in Cameroon over the study period. In sum, we find the existence of a significant effect of the banking system on economic growth in Cameroon between 1980 and 2019. It emerges the main recommendation that the country's political decision-makers must promote the development of the banking system and focus on restructuring financial development to accelerate sustainable short- and long-term growth
    Keywords: Economic growth , private credit , gross domestic savings, financial development
    JEL: E51
    Date: 2022–04–06
  2. By: Iorngurum, Tersoo
    Abstract: Economic literature contains conflicting empirical results and explanations concerning the growth effect of foreign direct investment (FDI). In this study, several numerical estimates of FDI’s growth effect in Latin America and the Caribbean were drawn from 33 empirical studies and analysed with meta-analytic techniques. The results show that the true growth effect of FDI is near zero and statistically insignificant at all conventional levels. Tests of publication bias performed on the estimates reveal evidence of publication bias in peer-reviewed journal publications authored by PhD holders, but reveal no evidence of publication bias in the empirical literature as a whole. Furthermore, multivariate meta-regression analysis and Bayesian model averaging both show that publication bias is dependent on type of publication outlet and sample size. More precisely, publishing in peer-reviewed journals leads to publication bias, while sample size enlargement reduces publication bias.
    Keywords: Foreign Direct Investment, Economic Growth, Publication Bias, Meta-Analysis, Latin America and the Caribbean.
    JEL: C83 F21 O47
    Date: 2022–02–23
  3. By: Kren, Janez; Lawless, Martina; McGuinness, Gerard; O'Toole, Conor
    Date: 2022
  4. By: Hossain, Monzur (Asian Development Bank Institute); Chowdhury, Tahreen Tahrima (Asian Development Bank Institute)
    Abstract: We assess the impact of the COVID-19 pandemic on micro, small, and medium-sized enterprises (MSMEs) and the role of fintech, in particular, mobile financial services (MFS), in their recovery from COVID-induced losses. We use data from a survey of 216 MSMEs from Bangladesh Small and Cottage Industries Corporation industrial estates in Bangladesh during January to March 2021. Our results suggest that firms have been recovering gradually after the withdrawal from lockdown in June 2020. So far, 80% of production of the firms compared with pre-COVID levels had recovered by the end of December 2020. We use instrumental variable regression to assess the impact of the use of MFS on firms’ production, sales, and profit for three periods: lockdown (March–May 2020), limited lockdown (June–September 2020) and the reopening period (October–December 2020). We find significant and positive impact from the use of MFS on the production, sales, and profit of firms during this pandemic. The results indicate that the use of digital finance facilitates firms’ production through ensuring a stable supply of raw materials and sales that have prompted them to recover faster. However, the concern is that only about 31% of our sample firms use MFS for their businesses and an even lower proportion of firms are accustomed to using an online platform. Therefore, more incentives and supportive policies are needed to motivate MSMEs to use digital finance and online platforms to stay active in operations, particularly during the pandemic.
    Keywords: fintech; MSMEs; Bangladesh Small and Cottage Industries Corporation Estates; BSCIC; COVID-19; firm recovery; Bangladesh
    JEL: D20 D22 G10 G20
    Date: 2022–04–01
  5. By: Torsten Wezel; Naly Carvalho
    Abstract: Using a newly-compiled dataset of state-owned enterprises in Sub-Saharan Africa, we present aggregate information about profitability, liquidity and leverage. We find that 40 percent of the close to 300 surveyed SOEs are unprofitable, while larger firms also tend to be illiquid and overleveraged. In cross-sectional regressions we find that SOE debt stock sustainability is impacted by firms’ profitability and liquidity, while macroeconomic factors cannot be shown to matter, expect for some governance variables. Based on these findings and citing country examples, we also illustrate that weak SOE performance may have a macrofinancial impact affecting bank soundness through delinquent loan exposures.
    Keywords: Firm Performance, State-Owned Enterprises, Sub-Saharan Africa
    Date: 2022–03–18
  6. By: Viral V. Acharya; Matteo Crosignani; Tim Eisert; Sascha Steffen
    Abstract: This paper surveys the theory on zombie lending incentives and the consequences of zombie lending for the real economy. It also offers a historical perspective by reviewing the growing empirical evidence on zombie lending along three dimensions: (i) the role of under-capitalized banks, (ii) effects on zombie firms, and (iii) spillovers and distortions for non-zombie firms. We then provide an overview of how zombie lending can be attenuated. Finally, we use a sample of U.S. publicly listed firms to compare various measures proposed in the literature to classify firms as "zombies." We identify definitions of zombie firms that are adequate to investigate economic inefficiency in the form of real sector competitive distortions of zombie lending. We find that only definitions that are based on interest rate subsidies are able to detect these spillovers and thereby provide evidence in support of credit misallocation.
    JEL: E44 E58 G01 G2 G3
    Date: 2022–04
  7. By: Jing Cai; Adam Szeidl
    Abstract: We created experimental variation across local markets in China in the share of firms having access to a new loan product, to measure the direct and indirect effects of access to finance. We find that: (1) Access to finance had a large positive direct effect on the performance of treated firms. (2) Access to finance had a similar-sized negative indirect effect on the performance of firms with treated competitors. The two effects offset in the aggregate and imply no detectable gains in producer surplus. (3) Access to finance had a positive direct effect on business practices, service quality, and consumer satisfaction, and a negative effect on price. None of these effects were offset by indirect effects, suggesting net gains in consumer surplus. (4) Two additional indirect effects were active: diffusion of borrowing to firms with treated peers, and diffusion of demand to firms with treated neighbors. (5) Combining several effects in a model-based evaluation, we estimate that the loan had a private return of 74%, most of which was offset by losses to competitors, and a social return of 60%, most of which was driven by gains to consumers.
    JEL: G00 G21 L00 O1
    Date: 2022–03
  8. By: Kilian Huber
    Abstract: Large-scale financial and macroeconomic shocks directly affect some firms and households and indirectly impact others through general equilibrium spillovers. In this paper, I describe how researchers can estimate spillovers directly using quasi-experimental or experimental variation. I then argue that spillover estimates suffer from distinct sources of mechanical bias that standard empirical tools cannot resolve. These biases are particularly relevant in finance and macroeconomics where multiple spillover channels and nonlinear effects are common. I offer guidance on how to detect and overcome mechanical biases. An application to a credit shock and additional examples highlight the broad relevance of the suggested methods.
    JEL: C13 C2 D5 E0 E51 G0 G21 G30 L2 R11 R23 R51
    Date: 2022–04
  9. By: Mr. Jean-Francois Dauphin; Marzie Taheri Sanjani; Mrs. Nujin Suphaphiphat; Mr. Kamil Dybczak; Hanqi Zhang; Morgan Maneely; Yifei Wang
    Abstract: This paper describes recent work to strengthen nowcasting capacity at the IMF’s European department. It motivates and compiles datasets of standard and nontraditional variables, such as Google search and air quality. It applies standard dynamic factor models (DFMs) and several machine learning (ML) algorithms to nowcast GDP growth across a heterogenous group of European economies during normal and crisis times. Most of our methods significantly outperform the AR(1) benchmark model. Our DFMs tend to perform better during normal times while many of the ML methods we used performed strongly at identifying turning points. Our approach is easily applicable to other countries, subject to data availability.
    Keywords: Nowcasting, Factor Model, Machine Learning, Large Data Sets
    Date: 2022–03–11
  10. By: Thakur, Gogol M
    Abstract: Can expansion of modern-services such as telecommunications, banking & finance and business services boost industrialization in developing countries? We explore this question in a two-sector Kaleckian model where an autonomously growing service sector generates market for a demand-constrained domestic industry but the latter faces competition from technologically-superior imports. We show that it is possible to have a steady state in this model, where domestic industry grows at the same rate as the service sector with positive industrial employment growth. Convergence to this steady state, however, requires domestic industry to increase its rate of technical change in response to increasing import competition. We find that improvements in the conditions for technological progress in the domestic industrial sector, say because of policy interventions that helps in upgrading technology, can increase relative size of domestic industry. On the other hand, an increase in the pace of technological progress abroad or an increase in the elasticity of imports of industrial product with respect to technology gap between the domestic industry and its foreign competitor reduces the same.
    Keywords: Modern services and industrialization, imports, technology gap, developing countries, two-sector Kaleckian model
    JEL: F63 F68 O14 O19 O41
    Date: 2022–01
  11. By: Francesco Zezza; Gennaro Zezza
    Abstract: Starting from the seminal works of Wynne Godley (1999; Godley and Lavoie 2005, 2007a, 2007b), the literature adopting stock-flow consistent (SFC) models for two or more countries has been flourishing, showing that consistently taking into account real and financial markets of two open economies will generate different results with respect to more traditional open economy models. However, few contributions, if any, have modeled two regions in the same country, and our paper aims at filling this gap. When considering a regional context, most of the adjustment mechanisms at work in open economy models--such as exchange rate movements, or changes in interest on public debt--are simply not present, as they are in control of "external" authorities. So, what are the adjustment mechanisms at work? To answer this question, we adapt the framework suggested in Godley and Lavoie (2007a) to consider two regions that share the same monetary, fiscal, and exchange rate policies. We loosely calibrate our model to Italian data, where the South (Mezzogiorno) has both a lower level of real income per capita and a lower growth rate than the North. We also introduce a fragmented labor market, as discouraged workers in the South will move North in hopes of finding commuting jobs. Our model replicates some key features of the Italian economy and sheds light on the interactions between financial and real markets in regional economies with "current account" imbalances.
    Keywords: Stock-Flow Consistent; Regional Labor Mobility; Regional Economic Activity and Development
    JEL: E12 J61 R12
    Date: 2022–04
  12. By: Léonore Raguideau-Hannotin
    Abstract: The motivation of this article is to understand the determinants of banking integration of non-Euro CESEE EU Members. One stylized fact for these economies is the building up of external financial vulnerabilities since the beginning of the Transition period, with a large weight of cross-border banking, particularly with the European Union. In relation with the literature on the impact of gross financial flows on financial stability, we therefore estimate the long-term historical, geographical and cultural determinants of cross-border banking claims with a bilateral financial gravity model. We then analyze the impact of domestic (pull), foreign (push) and global factors using the gravity framework. Our results first show that cross-border banking in these economies is significantly driven by geographical proximity and common historical links, particularly with EU Member States. Second, we find that banking sector health variables are more significant as push factors, while structural banking system variables are more significant as pull factors. These results provide evidence in favor of an impact of European banking systems on financial liabilities in this region, in relation with the very high level of EU ownership of banking assets. Finally, US global liquidity factor matters more than exchange rate stability, which points towards policy dilemma effect in the region.
    Keywords: Gravity model, cross-border banking, Central Eastern and South Eastern European countries, European Union, push factors, pull factors, global factors, EU, CESEE
    JEL: F34 F36 C23 O52
    Date: 2022
  13. By: Fon, Roger; Alon, Ilan
    Abstract: This article examines how Chinese foreign aid interacts with the quality of the host country's governance in shaping Chinese state-owned enterprises' (CSOEs') foreign direct investment (FDI) in Africa. By analyzing the firm-level greenfield FDI data of CSOEs between 2003 and 2014 and distinguishing between China's official development assistance and less concessional forms of Chinese foreign aid, we reveal two main findings. First, the quality of the host country's governance negatively affects CSOEs' FDI. Second, other official aid and loans from China negatively moderate the relationship between the quality of the host country's governance and FDI by CSOEs. Specifically, the tendency for CSOEs to invest in locations with weak governance increases when their investments are integrated with less concessional forms of Chinese foreign aid in the form of other official flows and loans. Our results are robust to alternative measures of the governance and different methodological approaches. The article challenges the traditional notion of institutional theory which assumes a positive relationship between governance quality and FDI attraction.
    Keywords: foreign aid; foreign direct investment; governance; international political economy; state-owned enterprises; Wiley deal
    JEL: F3 G3
    Date: 2022–03–01
  14. By: Busato, Francesco; Ferrara, Maria; Varlese, Monica
    Abstract: This paper investigates the costs of disinflation in an otherwise standard DSGE model with borrowing constraints and credit frictions, augmented with macroprudential authority. Analyzing the real and welfare effects of a permanent change in the inflation rate, we study the role of macroprudential policy and its interaction with monetary policy in ensuring financial stability. Results show that when macroprudential authority intervenes actively in order to improve financial stability, disinflation costs are limited. As for the welfare effects, disinflation is welfare improving for savers but welfare costly for borrowers and banks.
    Keywords: Disinflation, Macroprudential policy, Loan-to-value ratio, Monetary policy, Sacrifice ratio, Welfare effects
    JEL: D60 E44 E58
    Date: 2022–02–28
  15. By: Lu, You-Xun; Chen, Shi-kuan; Lai, Ching-chong
    Abstract: An important aspect of economic growth is the interaction between incumbents and new firms. In this study, we develop a monetary Schumpeterian model with an endogenous market structure (EMS) and two types of quality improvements (the own-product improvements of incumbents and creative destruction of entrants) to analyze the effects of monetary policy. The key finding of our analysis is that an increase in the nominal interest rate importantly affects the composition of innovation that drives economic growth, stimulating the incumbents’ own-product improvements and reducing the entrants’ creative destruction. Therefore, the growth effect of monetary policy is ambiguous, and depends on the relative magnitudes of the incumbents’ and entrants’ contributions to R&D and growth. Finally, we provide a quantitative analysis of the growth and welfare effects of monetary policy and consider an extension of the benchmark model with an elastic labor supply and a CIA constraint on consumption.
    Keywords: innovation, monetary policy, economic growth, endogenous market structure
    JEL: E41 O31 O41
    Date: 2022–01–18
  16. By: Xiaoqing Zhou
    Abstract: One of the main channels through which monetary policy stimulus affects the real economy is mortgage borrowing. This channel, however, is weakened by frictions in the mortgage market. The rapid growth of financial technology-based (FinTech) lending tends to ease these frictions, given the higher quality services provided under this new lending model. This paper establishes that the role of FinTech lending in the monetary policy transmission is further amplified by consumers’ social networks. I provide empirical evidence for this network effect using county-level data and novel identification strategies. A 1 pp increase in the FinTech market share in a county’s socially connected markets raises the county’s FinTech market share by 0.23-0.26 pps. Moreover, I find that in counties where FinTech market penetration is high, the pass-through of market interest rates to borrowers is more complete. To quantify the role of FinTech lending and its network propagation in the transmission of monetary policy shocks, I build a multi-region heterogeneous-agent model with social learning that embodies key features of FinTech lending. The model shows that the responses of consumption and refinancing to a monetary stimulus are 13% higher in the presence of FinTech lending. Almost half of this improvement is accounted for by FinTech propagation through social networks.
    Keywords: FinTech; social networks; mortgage; monetary policy; regional transmission
    JEL: E21 E44 E52 G21 G23
    Date: 2022–03–25
  17. By: Batz, A.; Montes, J.; Romero, J.; Rubio, P.
    Abstract: La tasa de interés de los microcréditos es importante en la medida en la que representa un costo significativo bajo el cual los microempresarios, emprendedores y trabajadores informales acceden a la financiación. Por lo tanto, la relación entre la tasa de intervención de política monetaria y esta tiene un rol fundamental en el crecimiento y desarrollo socioeconómico de este grupo. Sin embargo, las tasas de interés de este producto crediticio exhiben cierta independencia de la estrategia de política monetaria implementada por el Banco de la República, y una mayor relación con la demanda, el riesgo asociado, la solvencia y estructura de costos de las instituciones microfinancieras, entre otros.
    Keywords: Microcréditos; tasa de interés; tasa de intervención; política monetaria
    JEL: E26 E41 E51 E52 E58
    Date: 2021–11–03
  18. By: Lehmann-Hasemeyer, Sibylle H.; Neumayer, Andreas; Streb, Jochen
    Abstract: Using microeconomic data on 2,500 savers of the savings bank Ludwigsburg, we study individual savings behavior in 19th century-Germany. We show that wealthy savers responded to an increase in the expected inflation rate (and falling real interest rate) by increasing their savings, suggesting that they pursued a real saving target that could only be defended by saving more when investment conditions became adverse. Workers' savings behavior changed over time. For a long time, poorer, often female, working-class savers were forced to reduce their savings in times of high prices because they had to spend most of their income on essential consumer goods. This changed in the 1880s, when the living conditions of the working class improved significantly due to rising real wages and greater social security. We therefore observe a structural break in the savings regime: the originally negative relationship between inflation expectations and savings was reversed into a positive one. Looking only at the aggregate may obscure the true motives and changes in behavior of heterogeneous savers.
    Keywords: expectations,inflation,industrialization,inequality,heterogeneous savers
    JEL: D15 E21 N33
    Date: 2022
  19. By: Ugo Panizza (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: Quantitative models of sovereign debt predict that countries should default during deep recessions. However, empirical research on sovereign debt has found a surprisingly large share of "good times" defaults (i.e., defaults that happen when GDP is above trend). Existing evidence also indicates that, on average, defaults happen when output is close to potential. This paper reassesses the empirical evidence and shows that the detrending technique proposed by Hamilton (2018) yields results that are closer to the predictions of standard quantitative models of sovereign debt.
    Keywords: Sovereign Debt; Default; Business Cycles
    JEL: F34 F32 H63
    Date: 2022–04–10
  20. By: Brett, Craig; Sarkar, Saikat
    Abstract: Using a sample of OECD countries, we explore the relationships between stock market bubbles and income inequality. Specifically, we test whether explosive growth in stock prices leads to increased concentration of income at the top of the distribution. Moreover, we investigate the possibility that increased income concentration at the top increases the incidence or severity of asset bubbles. Using instrumental variables techniques, we uncover a positive effect of asset bubbles on the share of income earned by those in the top 1% and top 0.1% of the income distribution. However, this effect is not present when capital gains are excluded from income, supporting the idea that the mechanical effect of bubbles on asset income is a dominant driver of their effect on top income inequality. On the other hand, we also find that concentration of income at the top is associated with an increase in bubbles, whether measured by incidence, duration, or intensity. Moreover, this finding remains when capital gains are excluded from income. Our results suggest that top income inequality, whatever its source, increases the demand for assets, setting the stage for abnormal growth in stock prices.
    Keywords: bubbles and crashes; top income shares
    JEL: D31 G19
    Date: 2022–02–10
  21. By: Chiad, Faycal; Hadj Sahraoui, Hamoudi
    Abstract: Arab stock exchanges have witnessed tremendous growth in recent decades, and the number of listed companies and the size of stock market capitalization have increased. In the light of this remarkable growth, this study aims to find out what are the most important determinants and economic factors affecting this development during the period 2006– 2017. By employing panel data models, we find that trade openness; market liquidity, money supply and economic growth have positive impacts on stock market development, whereas the global financial crisis has negative impact. Based on these results, measures should be taken to improve market liquidity, control of money supply, and maintain a balanced economic growth rate to promote the development of Arab stock exchanges. Policy recommendations are provided based on these findings.
    Keywords: Macroeconomic variables; stock markets development; Arab countries; panel data analysis
    JEL: E0 E00 G10
    Date: 2021
  22. By: International Monetary Fund
    Abstract: The economy recovered strongly in 2021, following an unprecedented real output contraction in 2020. However, the outlook remains precarious amidst projected future low growth, high unemployment and adverse debt dynamics, and the recovery pace is unlikely to be sustained. Ample buffers allowed the financial system to handle the COVID-19 shock relatively well, but domestic and external downside risks remain substantial—with potential implications for asset quality, profitability, and solvency.
    Keywords: B. bank solvency stress tests; IMF mission chief; foster market entry; increase capital market financing; coverage ratio; financial system structure; FSAP finding; D. nonbank risk analysis; Financial Sector Assessment Program; Stress testing; Insurance companies; COVID-19; Africa; Global
    Date: 2022–02–11
  23. By: Yildirim, Yusuf; Sanyal, Anirban
    Abstract: Early warning indicators (EWIs) of banking crises should ideally be judged on how well they function in relation to the choice issue faced by macroprudential policymakers. Several practical features of this challenge are translated into statistical evaluation criteria, including difficulties measuring the costs and advantages of various policy interventions, as well as requirements for the timeliness and stability of EWIs. We analyze the balance panel of possible EWIs for six countries that have experienced currency crisis and banking crisis in recent times. Using possible early warning indicators, we evaluate the suitability of these EWIs in view of their predictive power and stability of signals. The paper observes that credit disbursements to non-financial sectors and central government provides stable signal about systemic risks. Further debt service ratio, inter bank rates and total reserves are also found to be useful in predicting these crisis. Lastly, the paper observes that linear combination of these indicators improves the predictive power of EWIs further.
    Keywords: EWIs, ROC, area under the curve, shrinkage
    JEL: C40 G01 G21
    Date: 2022–02–23
  24. By: König, Philipp Johann; Mayer, Paul; Pothier, David
    Abstract: We analyze the problem of a policy authority (PA) that must decide when to resolve a troubled bank whose underlying solvency is uncertain. Delaying resolution increases the chance that information arrives that reveals the bank's true solvency state. However, delaying resolution also gives uninsured creditors the opportunity to withdraw, which raises the cost of bailing out insured depositors. The optimal resolution date trades off these costs with the option value of making a more efficient resolution decision following the arrival of information. Providing the bank with liquidity support buys the PA time to wait for information, but increases the PA's losses if the bank is insolvent. The PA may therefore optimally choose to delay the provision of liquidity support in order to minimize its losses.
    Keywords: Bank Resolution,Lender of Last Resort,Banking Crises
    JEL: G01 G21 G28
    Date: 2022
  25. By: Levent Altinoglu; Joseph E. Stiglitz
    Abstract: The concentration of risk within the financial system leads to systemic instability. We propose a theory to explain the structure of the financial system and show how it alters the risk taking incentives of financial institutions when the government optimally intervenes during crises. By issuing interbank claims, risky institutions endogenously become too interconnected to fail. This concentrated structure enables institutions to share the risk of systemic crises in a privately optimal way, but leads to excessive risk taking even by peripheral institutions. Interconnectedness and excessive risk taking reinforce one another. Macroprudential regulation which limits the interconnectedness of risky institutions improves welfare.
    JEL: E44 E61 G01 G18 G28
    Date: 2022–02
  26. By: Patrick Agte; Arielle Bernhardt; Erica M. Field; Rohini Pande; Natalia Rigol
    Abstract: How do poor entrepreneurs trade off investments in business enterprises versus children's human capital, and how do these choices influence intergenerational socio-economic mobility? To examine this, we exploit experimental variation in household income resulting from a one-time relaxation of household liquidity constraints (Field et al., 2013), and track schooling and business outcomes over the subsequent 11 years. On average, treatment households, who were made wealthier through the experiment, increase human capital investment such that their children are 35% more likely to attend college. However, schooling gains only accrue to children with literate parents, among whom college attendance nearly doubles. In contrast, treatment effects on investment among the illiterate accrue only on the business margin and are accompanied by adverse educational outcomes for children. As a result, treatment lowers relative educational mobility. In a forecasting exercise, we find that earnings gains for literate households are four times larger than the earnings gains for illiterate households, raising earnings inequality. Our findings highlight how parental investment choices can contribute to a growth in intergenerational earnings inequality despite reductions in urban poverty.
    JEL: G32 I24 I25 I26 I32 L26 O1 O15 O16
    Date: 2022–03
  27. By: Sá, Diogo
    Abstract: Although recent studies identified the percentage of constrained agents as the crucial force driving many fiscal policy mechanisms, the values attained were purely the result of model calibrations. We make use of household-level data to estimate the fraction of hand-to-mouth households for several European countries. We calibrate an overlapping generations model with heterogeneous agents to match the net liquid wealth distribution and study the impact of credit constraints on the effectiveness of fiscal consolidation policies. Our findings suggest that the share of hand-to-mouth agents is no longer quantitatively relevant to explain the cross-country heterogeneity in fiscal multipliers when we calibrate the model to match empirically plausible estimates of that share. These results may be driven by the characteristics of the model we employ, which excludes the wealthy hand-to-mouth.
    Keywords: Fiscal Multipliers, Liquidity Constraints, Fiscal Consolidation, Hand-to-Mouth
    JEL: D31 E21 E62 H31
    Date: 2022–01
  28. By: Aleksandr V. Gevorkyan; ATarron Khemraj (Schwartz Center for Economic Policy Analysis (SCEPA))
    Keywords: dominant currency pricing, exchange market pressure, international monetary system, nominal spillovers
    JEL: E24 I14 J62 J38 E21 J83 J32
    Date: 2022–04

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