nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2022‒05‒09
twenty papers chosen by
Georg Man

  1. Macroeconomic Effects of Collateral Requirements and Financial Shocks By Aicha Kharazi
  2. Understanding Financial Inclusion: What Matters and How It Matters By Park, Cyn-Young; Mercado, Rogelio
  3. Big techs, QR code payments and financial inclusion By Thorsten Beck; Leonardo Gambacorta; Yiping Huang; Zhenhua Li; Han Qiu
  4. The Impact of Fintech Lending on Credit Access for U.S. Small Businesses By Giulio Cornelli; Jon Frost; Leonardo Gambacorta; Julapa Jagtiani
  5. COVID-19, Digital Transactions, and Economic Activities: Puzzling Nexus of Wealth Enhancement, Trade, and Financial Technology By Mehar, Muhammad Ayub
  6. The Inverted Leading Indicator Property and Redistribution Effect of the Interest Rate By Patrick A. Pintus; Yi Wen; Xiaochuan Xing
  7. Testing Bank Resiliency Through Time By Sergio A. Correia; Matthew P. Seay; Cindy M. Vojtech
  8. Slowdown of the Indian Economy during 2019-20: An Enigma or an Anomaly By Poonam Gupta; Abhinav Tyagi
  9. The low productivity of European firms- how can policies enhance the allocation of resources? By Grégory Claeys; Marie Le Mouel; Giovanni Sgaravatti
  10. The Return of Expansionary Austerity: Firms’ Investment Response to Fiscal Adjustments in Emerging Markets By Mr. Nicolas E Magud; Samuel Pienknagura
  11. Asymmetric Impact of Real Effective Exchange Rate Changes on Domestic Output Revisited: Evidence from Egypt By Sharaf, Mesbah; Shahen, Abdelhalem
  12. The impact of governance and capital flows on food and nutrition security and undernourishment: further evidence from Sub-Saharan Africa By Cassimon, Danny; Fadare, Olusegun; Mavrotas, George
  13. Who lends to Africa and how? Introducing the Africa debt database By Mihalyi, David; Trebesch, Christoph
  14. A Journey in the History of Sovereign Defaults on Domestic-Law Public Debt By Aitor Erce; Enrico Mallucci; Mattia Picarelli
  15. Wealth and its Distribution in Germany, 1895-2018 By Thilo N. H. Albers; Charlotte Bartels; Moritz Schularick
  16. Financial dynamics, economic state classification and optimal portfolio construction for unseen market conditions: learning from the past 60 years By Nick James; Kevin Chin
  17. When the United States and the People’s Republic of China Sneeze: International Real and Financial Spillovers in Asia By Beirne, John; Renzhi, Nuobu; Volz, Ulrich
  19. Consumption-investment decisions with endogenous reference point and drawdown constraint By Zongxia Liang; Xiaodong Luo; Fengyi Yuan
  20. Instant Loans Can Lift Subjective Well-Being: A Randomized Evaluation of Digital Credit in Nigeria By Daniel Bj\"orkegren; Joshua Blumenstock; Omowunmi Folajimi-Senjobi; Jacqueline Mauro; Suraj R. Nair

  1. By: Aicha Kharazi (Free University of Bozen-Bolzano, Italy)
    Abstract: This article explores the implications of borrower's side collateral constraints have on the real economy. The novel element in this model relative to the industry standard model is that I model the entrepreneurs, which are crucial for investment, as collateral constrained. The model is estimated using Bayesian methods and can be employed to measure the role of collateral. Regarding the results, I document that collateral requirements are highly volatile during the period of 2007–2012, and I find that the effect of an increase in collateral requirements is highly significant. Interestingly, the model assigns an important role for collateral in the shock decomposition, and the contribution of financial shocks is much marked during the financial crisis and substantially shapes macroeconomic fluctuations.
    Keywords: Business Loan, Collateral, Financial Shocks.
    JEL: E32 E44 G21
    Date: 2022–04
  2. By: Park, Cyn-Young (Asian Development Bank Institute); Mercado, Rogelio (Asian Development Bank Institute)
    Abstract: We introduce a new index of financial inclusion for 153 advanced, emerging, and developing economies using a comprehensive set of new indicators, grouped into four different dimensions: financial access, usage, financial development, and fintech infrastructure. The fintech infrastructure dimension in particular captures electronic and digital payments and their enabling infrastructure. In the two-step regression, we first estimated effective financial inclusion using the linear predicted values of financial inclusion based on the economic factors that are known to be the main determinants of financial inclusion. Second, we estimated the impact of effective financial inclusion on various development outcomes. The empirical results indicate that effective financial inclusion and all four related dimensions lower poverty. Improved access and fintech infrastructure reduce income inequality, and these two dimensions complement usage in increasing entrepreneurship. However, the dimensions do not have a uniform effect across different income groups. Moreover, an increase in effective financial inclusion is stronger for middle-income economies than for low-income economies. This suggests that the level of economic development, which can provide a better enabling environment for business and economic opportunities, matters for the effectiveness of financial inclusion in achieving poverty reduction.
    Keywords: financial inclusion; poverty; income inequality
    JEL: G18 I13 L26 O11
    Date: 2021–11
  3. By: Thorsten Beck; Leonardo Gambacorta; Yiping Huang; Zhenhua Li; Han Qiu
    Abstract: Using a unique dataset of around half a million Chinese firms that use a QR code-based mobile payment system, we find that (i) the creation of a digital payment footprint allows firms to access credit provided by the same big tech company; (ii) transaction data generated via QR code generate spillover effects on access to bank credit; and (iii) there are positive effects of access to big tech credit on sales, including during the Covid-19 shock. The findings suggest that access to innovative payment methods helps micro firms build up credit history, and that using big tech credit can ease access to bank credit.
    Keywords: big tech, big data, QR code, banks, asymmetric information, financial inclusion, credit markets.
    JEL: D22 G31 R30
    Date: 2022–05
  4. By: Giulio Cornelli; Jon Frost; Leonardo Gambacorta; Julapa Jagtiani
    Abstract: Small business lending (SBL) plays an important role in funding productive investment and fostering local economic growth. Recently, nonbank lenders have gained market share in the SBL market in the United States, especially relative to community banks. Among nonbanks, fintech lenders have become particularly active, leveraging alternative data for their own internal credit scoring. We use proprietary loan-level data from two fintech SBL platforms (Funding Circle and LendingClub) to explore the characteristics of loans originated pre-pandemic (2016‒2019). Our results show that fintech SBL platforms lent more in zip codes with higher business bankruptcy filings and higher unemployment rates. Moreover, fintech platforms’ internal credit scores were able to predict future loan performance more accurately than the traditional approach to credit scoring. Using Y-14M loan-level bank data, we also compare fintech SBL with traditional bank business cards in terms of credit access and interest rates. Overall, fintech lenders have a potential to create a more inclusive financial system, allowing small businesses that were less likely to receive credit through traditional lenders to access credit and to do so at lower cost.
    Keywords: peer-to-peer (P2P) lending; marketplace lending; small business lending (SBL); Funding Circle; LendingClub; alternative data; credit access; credit scoring; fintech credit
    JEL: G18 G21 G28 L21
    Date: 2022–04–25
  5. By: Mehar, Muhammad Ayub (Asian Development Bank Institute)
    Abstract: We examine the role and effectiveness of the several modes of financial inclusion and technology for uninterrupted economic and business activities during the COVID-19 pandemic. Our study is based on empirical analysis through statistical estimation of four mathematical equations. The Cross-Sectional Random-Effects Model in panel least squares (PLS) technique based on 4 years’ data on 102 countries was applied to identify the determinants of GDP growth, shareholders’ wealth, and trade in goods and services. We tested the impacts of the use of credit cards, use of the internet for shopping and payment of utility bills, and electronic transfer of funds on GDP growth, trade in goods and services, and shareholders’ wealth. We envisage that COVID-19 has adversely affected GDP growth, but the use of financial technology for buying goods and services, and receiving money through digital modes during the pandemic crisis, may offset economic losses to some extent. The empirical evidence shows that a higher share of the population receiving payments by digital mode and using the internet to pay bills or buy something online is significant and a robust determinant of trade in goods and services. Similarly, the use of the internet for buying things and for paying utility bills is a significant positive determinant of GDP growth. We also estimate the results for 35 Asian countries separately and found that the COVID-19 pandemic and the use of fintech have affected these Asian countries in a similar way. These conclusions support the promotion of e-money and digital transactions in the economy. Although the role of the provision of domestic credit to the private sector is not significant in the determination of trade in services, it is a highly significant determinant of the value of investors’ wealth and merchandising trade. The positive association of trade in services with the magnitude of merchandising trade indicates that policy makers must consider the interconnectivity of these two types of trade. Another important finding from the policy formulation point of view is the significant role of financial technology in GDP growth. We also observed a significant association between GDP growth and the number of deaths due to COVID-19.
    Keywords: digital payments; payments through the internet; debit/credit card; market capitalization; trade in services; panel least squares
    JEL: E51 F34 G10 O33
    Date: 2021–12
  6. By: Patrick A. Pintus (Aix Marseille Univ, CNRS, AMSE, Marseille, France); Yi Wen (Shanghai Jiao Tong University Antai College of Economics and Management: Shanghai, Xuhui District, CN); Xiaochuan Xing (Yale University)
    Abstract: The interest rate at which US firms borrow funds has two features: (i) it moves in a countercyclical fashion and (ii) it is an inverted leading indicator of real economic activity: low interest rates today forecast future booms in GDP, consumption, investment, and employment. We show that a Kiyotaki-Moore model accounts for both properties when interest-rate movements are driven, in a significant way, by self-fulfilling belief shocks that redistribute income away from lenders and to borrowers during booms. The credit-based nature of such self-fulfilling equilibria is shown to be essential: the dynamic correlation between current loanable funds rate and future aggregate economic activity depends critically on the property that the interest rate is state-contingent. Bayesian estimation of our benchmark DSGE model on US data shows that the model driven by redistribution shocks results in a better fit to the data than both standard RBC models and Kiyotaki-Moore type models with unique equilibrium.
    Keywords: endogenous collateral constraints, state-contingent interest rate, redistribution shocks, multiple equilibria
    JEL: E21 E22 E32 E44 E63
    Date: 2022–04
  7. By: Sergio A. Correia; Matthew P. Seay; Cindy M. Vojtech
    Abstract: A resilient banking system meets the demands of households and businesses for financial services during both benign and severe macroeconomic and financial conditions. Banks' ability to weather severe macroeconomic shocks, and their willingness to continue providing financial services, depends on their levels of capital, balance sheet exposures, and ability to generate earnings. This note uses the Forward-Looking Analysis of Risk Events (FLARE) stress testing model to evaluate the resiliency of the banking system by consistently applying severe macroeconomic and financial shocks each quarter between 2014:Q1 and 2021:Q3.
    Date: 2022–03–18
  8. By: Poonam Gupta (National Council of Applied Economic Research); Abhinav Tyagi (National Council of Applied Economic Research)
    Abstract: In this paper, we analyze the deep and anomalous economic slowdown in 2019-20, when the Indian economy grew at a rate of 4 percent, the lowest in a decade. We argue that the slowdown was largely confined to one year, 2019-20. The growth rate in the prior years averaged at 7 percent a year, and in none of the other years was it significantly below this average rate of growth. In contrast to some of the prevailing narratives, the slowdown did not permeate widely across sectors and activities. It was concentrated primarily in the manufacturing sector. The agriculture sector grew faster than before, and the services sector experienced only a mild deceleration, that too in the last two quarters of the year. On the demand side, the slowdown was primarily reflected in a sharp contraction in exports. In comparison, consumption decelerated by a milder amount, investment growth was broadly flat, and government expenditure grew at a faster pace than in the previous decade. The slowdown can be accounted for by three factors. First, about a 50 basis points worth of the slowdown was due to the COVID-induced lockdown in the last week of March 2020. Second, more than 100 basis points worth of the slowdown was due to the collapse in exports, attributed both to a large global slowdown in trade, and to the fact that India lost ground to other countries in maintaining its market share in a slowing market. Finally, the credit collapse from banks, Non-Banking Financial Companies, and Housing Finance Companies mattered, which likely made the lack of credit an impediment to production, investment, export, and consumption decisions.
    Keywords: Development, Growth, Exports, Manufacturing, India
    JEL: E65 F40 O11 O47 O53
  9. By: Grégory Claeys; Marie Le Mouel; Giovanni Sgaravatti
    Abstract: This Working Paper is an output from the MICROPROD project, which received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement no. 822390. This paper summarises the most important policy lessons from the research undertaken in the MICROPROD project, work package 4, related to the allocation of the factors of production, with a special focus on the weak dynamism of European small and medium-sized enterprises...
    Date: 2022–04
  10. By: Mr. Nicolas E Magud; Samuel Pienknagura
    Abstract: We study the response of corporate investment in Emerging Markets to unexpected fiscal shocks. We find that, although firm-level investment decreases on impact following unexpected public expenditure adjustments (classical Keynesian multiplier effect), it quickly rises above pre-shock levels. The rebound in investment is facilitated by fiscal space, flexible exchange rates, and more predictable fiscal policy. We also show that the composition of fiscal adjustments matters for investment’s response—compared to public investment adjustments, reductions in public consumption lead to larger private investment contractions on impact, but drive private investment to above pre-shock levels. Finally, we exploit firm-level heterogeneity in several dimensions, including to show that corporate investment’s recovery is stronger in firms in the tradable sector and in larger and less indebted firms, and to show that the long-run benefits to economic activity of the fiscal shock appear to outweigh its short-run costs.
    Keywords: Fiscal shocks, adjustment, corporate investment, emerging markets
    Date: 2022–04–08
  11. By: Sharaf, Mesbah (University of Alberta, Department of Economics); Shahen, Abdelhalem (Alexandria University)
    Abstract: The Egyptian pound has undergone substantial devaluations over the past five years. The Central Bank of Egypt aimed through these currency devaluations to stimulate domestic output. In this paper, we investigate the asymmetric impact of the real effective exchange rate (REER) on Egypt's real domestic output from 1960 to 2020 using a Nonlinear Autoregressive Distributed Lag (NARDL) model. The analyses account for the various channels via which the REER would affect domestic output. Results show evidence of a long-run asymmetry in the output effect of REER changes in which only real currency depreciations have a contractionary impact on output, while the REER has no impact on output in the short run. The Egyptian monetary authority cannot rely on domestic currency depreciation as a policy instrument to boost domestic output.
    Keywords: Asymmetric effects; Domestic output; Egypt; ARDL; Real effective exchange rate
    JEL: E63 F31 F41 F62
    Date: 2022–03–24
  12. By: Cassimon, Danny; Fadare, Olusegun; Mavrotas, George
    Abstract: The Sustainable Development Goal-2 to “end hunger, achieve food security and improved nutrition and promote sustainable agriculture” has received a lot of attention in recent years as part of the 2030 Agenda. At the same time, there exists a complex interaction between institutions, capital flows, and food and nutrition security. In this paper we estimate a series of dynamic panel data models to examine the impact of governance quality and capital flows (in the form of ODA, FDI, Portfolio Equity and Remittances) on food security, nutrition security and undernourishment by using panel data for 25 SSA countries over the period 1996 to 2018. One of the key contributions of the paper is the use of both aggregate and disaggregated capital flows to examine the impact on both food and nutrition security, a dimension that has been surprisingly neglected in most of the relevant literature. We combine this with the interaction of various types of capital flows with a governance quality index we constructed from various governance indicators and in order to examine also the impact of institutions on the overall nexus. We also employ a dynamic estimation methodology in the form of Difference-GMM and System-GMM estimators along with various misspecification diagnostics to deal with possible endogeneity issues. Finally, we also examine the impact not only on food and nutrition security but also on undernourishment Our findings clearly demonstrate the importance of a disaggregation approach and reflect on earlier work regarding the role of governance quality in the overall nexus between external capital flows and various measures of food and nutrition security which leads, and as expected, to an interesting variation in the results obtained, depending on the type of capital flows and the interaction with the governance indicators.
    Keywords: institutions; capital flows; food security; nutrition security; undernourishment; SSA; sub-Saharan Africa
    JEL: F30 I10 O10
    Date: 2022–05
  13. By: Mihalyi, David; Trebesch, Christoph
    Abstract: Africa's sovereign debt markets are not well understood, partly due to a lack of data. This paper introduces the Africa Debt Database (ADD), the most granular and comprehensive dataset on external borrowing by African governments thus far. Our project moves beyond existing aggregate datasets and instead releases information on individual loans and bonds, in particular on the financial terms of each instrument. Taken together, we cover nearly 7000 loans and bonds between 2000 and 2020, with a total volume of 644 billion USD. Using this data, we study Africa's record lending boom of the 2010s in detail. The debt boom was mainly driven by large sovereign bond issuances in London and New York, as well as growing lending by Chinese state-owned banks. The micro data also reveal a large variation in lending terms across countries, time, and creditors. Sovereign external bonds have interest rates of 6 percent, on average, Chinese banks charge 2-4 percent, and multilateral organizations just 1 percent. Strikingly, many governments in Africa simultaneously borrow large amounts from both private and official creditors, at vastly different rates. The large differences in debt servicing costs are indicative of a cross-creditor subsidy, as cheap concessional loans can be used to pay the high interest to private or Chinese creditors.
    Keywords: debt sustainability,debt composition,bond issuances
    JEL: E62 F34 H63
    Date: 2022
  14. By: Aitor Erce; Enrico Mallucci; Mattia Picarelli
    Abstract: We introduce a novel database on sovereign defaults that involve public debt instruments governed by domestic law. By systematically reviewing a large number of sources, we identify 134 default and restructuring events of domestic debt instruments, in 52 countries from 1980 to 2018. Domestic-law defaults are a global phenomenon. Over time, they have become larger and more frequent than foreign-law defaults. Domestic-law debt restructurings proceed faster than foreign ones, often through extensions of maturities and amendments to the coupon structure. While face value reductions are rare, net-present-value losses for creditors are still large. Unilateral amendments and post-default restructuring are the norm, but negotiated pre-default restructurings are becoming increasingly frequent. We also document that domestic-law defaults typically involve debt denominated in local currency and held by resident investors. We complement our analysis with a collection "sovereign histories", which provide the fine details about each episode.
    Keywords: Public debt; Sovereign default; Domestic law; Database
    JEL: E62 E65 F34 G01 H12 H63 K00 K41
    Date: 2022–03–18
  15. By: Thilo N. H. Albers (Humboldt University Berlin; Lund University); Charlotte Bartels (DIW Berlin; UCFS; IZA); Moritz Schularick (University of Bonn, Sciences Po Paris, and CEPR)
    Abstract: German history over the past 125 years has been turbulent. Marked by two world wars, revolutions and major regime changes, as well as a hyperinflation and three currency reforms, expropriations and territorial divisions, it provides unique insights into the role of country-specific shocks in shaping long-run wealth dynamics. This paper presents the first comprehensive study of wealth and its distribution in Germany since the 19th century. We combine tax and archival data, household surveys, historical national accounts, and rich lists to analyze the evolution of the German wealth distribution over the long run. We show that the top 1% wealth share has fallen by half, from close to 50% in 1895 to 27% today. Nearly all of this decline was the result of changes that occurred between 1914 and 1952. The interwar period and the wealth taxation in the aftermath of World War II stand out as the great equalizers in 20th century German history. After unification in 1990, two trends have left their mark on the German wealth distribution. Households at the top made substantial capital gains from rising business wealth while the middle-class had large capital gains in the housing market. The wealth share of the bottom 50% halved since 1990. Our findings speak to the importance of historical shocks to the distribution and valuations of existing wealth in explaining the evolution of the wealth distribution over the long run.
    Keywords: Wealth inequality; portfolio heterogeneity; saving; wealth taxation.
    JEL: D31 E01 E21 H2 N3
    Date: 2022–05
  16. By: Nick James; Kevin Chin
    Abstract: Motivated by the current fears of a potentially stagflationary global economic environment, this paper uses new and recently introduced mathematical techniques to study multivariate time series pertaining to country inflation (CPI), economic growth (GDP) and equity index behaviours. We start by assessing the temporal evolution among various economic phenomena, and complement this analysis with "economic driver analysis", where we decouple country economic trajectories and determine what is most important in their association. Next, we study the temporal self-similarity of global inflation, growth and equity index returns to identify the most anomalous historic periods, and windows in the past that are most similar to current market dynamics. We then introduce a new algorithm to construct economic state classifications and compute an economic state integral, where countries are determined to belong in one of four candidate states based on their inflation and growth behaviours. Finally, we implement a decade-by-decade portfolio optimization to determine which equity indices and portfolio assets have been most beneficial in maximizing portfolio risk-adjusted returns in various market conditions. This could be of great interest to those looking for asset allocation guidance in the current period of high economic uncertainty.
    Date: 2022–03
  17. By: Beirne, John (Asian Development Bank Institute); Renzhi, Nuobu (Asian Development Bank Institute); Volz, Ulrich (Asian Development Bank Institute)
    Abstract: We examine real and financial spillovers from monetary policy shocks originating in the United States (US) and the People’s Republic of China (PRC) to advanced and emerging economies in Asia over the period 2000 to 2020. Using a structural panel vector autoregression approach, we find that Asian economies overall are more susceptible to spillovers to GDP, inflation, and the current account emanating from monetary policy shocks in the PRC than to those from the US. This is related to high inter-regional trade integration in Asia and is in line with previous research findings. However, while the prevailing literature has highlighted the dominant role of US monetary policy as a transmitter of shocks to global and Asian financial markets, we find more persistence in the response of advanced Asian interest rates to PRC monetary policy shocks. In addition, emerging Asian economies are found to be more susceptible to shocks emanating from the PRC in respect of equity markets and exchange rates. The rising synchronization of Asian financial markets in relation to the PRC as the financial account in the PRC has gradually opened as well as indirect effects via trade and regional value chains help to rationalize our findings.
    Keywords: monetary policy; global financial cycle; international spillovers; US; People’s Republic of China
    JEL: E44 E52 F33 F42
    Date: 2021–11
  18. By: Emna Trabelsi (Unité de Recherche d'Analyses Quantitatives Appliquées - Université de Tunis)
    Abstract: In recent literature, there is a focus on the macroeconomic effects of macroprudential policy instruments. The innovation of this paper is to study the effects of transparent macroprudential policies on price stability. Our results provide the first empirical evidence that macroprudential transparency can aid to achieve stable inflation in emerging and developing countries. The effect is necessarily transmitted through the reduction of the occurrence of banking crisis. We also record a particular advantage of macroprudential transparency for non-inflation targeting countries. Overall, our results are robust to the use of two proxies of price stability.
    Keywords: macroprudential transparency,price stability,banking crisis,dynamic panel,mediation,bootstrapping
    Date: 2021–03–31
  19. By: Zongxia Liang; Xiaodong Luo; Fengyi Yuan
    Abstract: We propose a consumption-investment decision model where past consumption peak $h$ plays a crucial role. There are two important consumption levels: the lowest constrained level and a reference level, at which the risk aversion in terms of consumption rate is changed. We solve this stochastic control problem and derive the optimal value function, optimal consumption plan, and optimal investment strategy in semi-explicit forms. We find five important thresholds of wealth, all as functions of $h$, and most of them are implicit nonlinear functions. As can be seen from numerical results, this intuitive and simple model has significant economic implications and there are at least three important predictions: the marginal propensity to consume out of wealth is generally decreasing in wealth but can be increasing with an intermediate level of wealth; the implied relative risk aversion is a smile in wealth; the welfare of the poor is more vulnerable to wealth shocks than the wealthy.
    Date: 2022–04
  20. By: Daniel Bj\"orkegren; Joshua Blumenstock; Omowunmi Folajimi-Senjobi; Jacqueline Mauro; Suraj R. Nair
    Abstract: Digital loans have exploded in popularity across low and middle income countries, providing short term, high interest credit via mobile phones. This paper reports the results of a randomized evaluation of a digital loan product in Nigeria. Being randomly approved for digital credit (irrespective of credit score) substantially increases subjective well-being after an average of three months. For those who are approved, being randomly offered larger loans has an insignificant effect. Neither treatment significantly impacts other measures of welfare. We rule out large short-term impacts either positive or negative: on income and expenditures, resilience, and women's economic empowerment.
    Date: 2022–02

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