nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2022‒05‒16
thirty-one papers chosen by
Georg Man

  1. Financial development, poverty, and human development in the Fintech age: a regional analysis of the Southeast Asian states By Dina Chhorn
  2. Abundance from Abroad: Migrant Income and Long-Run Economic Development By Gaurav Khanna; Emir Murathanoglu; Caroline B. Theoharides; Dean Yang
  3. What Explains Remittance Fees? Panel Evidence By Mr. Kangni R Kpodar; Thorsten Beck; Mathilde Janfils
  4. Differential Growth Impact of FDI on LICs, LMICs, and ECs: The Role of Absorptive Capabilities By Pravakar Sahoo; Ranjan Kumar Das
  5. IMPACT OF OUTWARD FDI: Evidence from Emerging Economies for Policy By Pravakar Sahoo; Ashwani Bishnoi
  6. Do Absorptive Capacities matter for FPI-Growth Nexus? Evidence from Cross-country Analysis By Pravakar Sahoo; Ranjan Kumar Dash; Yoon Jung Choi
  7. DO DIFFERENT TYPES OF CAPITAL INFLOWS HAVE DIFFERENTIAL IMPACT ON OUTPUT? Evidence from Time series and Panel Analysis By Bhavesh Garg; Pravakar Sahoo
  8. Finance, Trade, Man and Machines: A New-Ricardian Heckscher-Ohlin-Samuelson Model By Sugata Marjit; Gouranga Gopal Das
  9. "Why the Feldstein-Horioka "Puzzle" Remains Unsolved" By Jesus Felipe; Scott Fullwiler; Al-Habbyel Yusoph
  10. How Economic, Political and Institutional Factors Influence the Choice of Exchange Rate Regimes? New Evidence from Selected Countries of the MENA Region By Maraoui, Najia; Amor, Thouraya Hadj; Khefacha, Islem; Rault, Christophe
  11. Crypto, Corruption, and Capital Controls: Cross-Country Correlations By Nikolay Gueorguiev; Mr. Dmitriy L Rozhkov; Mr. Jiro Honda; Keyra Primus; Ms. Marwa Alnasaa; Eslem Imamoglu; Mr. Paolo Mauro
  12. Less Cash, Less Theft? Evidence from Fintech Development in the People’s Republic of China By Jiang, Hongze; Liang, Pinghan
  13. Does the Level of Inflation Matter in the Inflation-Growth Nexus in Ghana? By Prempeh, Kwadwo Boateng; Kyeremeh, Kwadwo; Peprah-Amankona, Godfred
  14. Hrvatski indeks sistemskog stresa (HISS) By Ervin Duraković Author-Name-First: Ervin
  15. Valuing Financial Data By Maryam Farboodi; Dhruv Singal; Laura Veldkamp; Venky Venkateswaran
  16. Modeling the Great Recession as a Bank Panic: Challenges By Lawrence Christiano; Hüsnü Dalgic; Xiaoming Li
  17. Assessing the Effects of Borrower-Based Macroprudential Policy on Credit in the EU Using Intensity-Based Indices By Lara Coulier; Selien De Schryder
  18. The Importance of Technology in Banking during a Crisis By Nicola Pierri; Yannick Timmer
  19. Independent Regulators and Financial Stability: Evidence from Gubernatorial Campaigns and a Progressive Era Policy Experiment By Marco Del Angel; Gary Richardson
  20. Do Zombies Rise when Interest Rates Fall? A Relationship Banking Model By Fabian Herweg; Maximilian Kähny
  21. Cross-subsidization of Bad Credit in a Lending Crisis By Nikolaos Artavanis; Brian Jonghwan Lee; Stavros Panageas; Margarita Tsoutsoura
  22. Giving zombie firms a second chance: An assessment of the reform of the Portuguese insolvency framework By Ernesto Nieto Carrillo; Carlos Carreira; Paulino Maria Freitas Teixeira
  23. Investment and access to external finance in Europe: Does analyst coverage matter? By Sébastien Galanti; Aurélien Leroy; Anne-Gaël Vaubourg
  24. Investment Slowdown in India: Role of Fiscal-Monetary policy and Economic Uncertainty By Pravakar Sahoo; Ashwani Bishnoi
  25. European investment Bank loan appraisal, the EU climate bank ? By Ebeling Antoine
  26. Subnational Regional Growth, Debt Thresholds and Sustainability By Alfonso Mendoza-Velazquez; Heidi J. Smith; Diego Mendoza-Martinez
  27. A p Theory of Government Debt and Taxes By Wei Jiang; Thomas J. Sargent; Neng Wang; Jinqiang Yang
  28. Enough Potential Repudiation: Economic and Legal Aspects of Sovereign Debt in the Pandemic Era By Anna Gelpern; Ugo Panizza
  29. China as an international creditor By Kaaresvirta, Juuso; Laakkonen, Helinä
  30. Wealth and subjective well-being in Germany By Jantsch, Antje; Le Blanc, Julia; Schmidt, Tobias
  31. Multidimensional Equality of Opportunity in the United States By Paul Hufe; Martyna Kobus; Andreas Peichl; Paul Schüle

  1. By: Dina Chhorn (GREThA - Groupe de Recherche en Economie Théorique et Appliquée - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper examines the effect of financial development in the Fintech age, measured by broad money, domestic credit, and mobile money, on poverty and human development in the Southeast Asian economies. Using unbalanced longitudinal dataset (1990-2017), the findings suggest that broad money and domestic credit contribute to poverty reduction and promote human development. The role of mobile money is seen to have a statistically positive impact only if we analyse it with human development. Additionally, when we take a closer look at the different stage of economic, political and institutional development in this region, we found that the positive effect of broad money and domestic credit is mostly found only in the less developed and less democratic countries. The mobile money, on the other hand, is found to statistically promote the human development in both groups of countries, but there is no statistical relationship for poverty analysis. To avoid the endogeneity bias driven by the fact that the variables in the analysis are not exogenous, the paper uses the instrumental variables and two-stage least squares for panel-data estimations, taking from the economic literature on the role of financial development in developing countries. In doing so, along with additional statistical tests of subsample analysis of political and institutional factors and higher- and lower-income countries, the results confirm the robustness in the analysis.
    Keywords: Financial development,Fintech,poverty,human development
    Date: 2021
  2. By: Gaurav Khanna; Emir Murathanoglu; Caroline B. Theoharides; Dean Yang
    Abstract: How does income from international migrant labor affect the long-run development of migrant-origin areas? We leverage the 1997 Asian Financial Crisis to identify exogenous changes in international migrant income across regions of the Philippines, derived from spatial variation in exposure to exchange rate shocks. The initial shock to migrant income is magnified in the long run, leading to substantial increases in income in the domestic economy in migrant-origin areas; increases in population education; better-educated migrants; and increased migration in high-skilled jobs. Four-fifths of long-run income gains are actually from domestic (rather than international migrant) income. A simple structural model yields insights on mechanisms and magnitudes, in particular that one-fifth of long-run income gains are due to increased educational investments in origin areas. Increased income from international labor migration not only benefits migrants themselves, but also fosters long-run economic development in migrant-origin areas.
    JEL: F22 J24 O15 O16
    Date: 2022–03
  3. By: Mr. Kangni R Kpodar; Thorsten Beck; Mathilde Janfils
    Abstract: This paper uses data across 365 corridors to document time and country variation in remittance fees and explore factors predicting variation in remittance fees. We document a general reduction in such fees over the past decade although the goal of fees below 3 percent has not been met yet in many corridors. We identify both cost- and risk-based constraints and market structure as barriers to lower remittance fees. Higher transaction costs as result of a more rural population in the sending country and lower scale are associated with higher remittance fees. However, lower risks due to the stability of fixed exchange rates and Internet rather than cash payment are associated with lower remittance fees. Finally, remittance corridors dominated by banks and few players are characterized by higher fees.
    Keywords: Remittances; migration; access to financial services
    Date: 2022–04–01
  4. By: Pravakar Sahoo; Ranjan Kumar Das (Institute of Economic Growth, Delhi)
    Abstract: FDI has been beneficial to developing countries through increased access to capital, technology, foreign markets, superior managerial skills, and other backward and forward spillover effects. However, the developmental implications of FDI are dependent on the absorptive capabilities and levels of development. In this context, we scientifically examine the impact of FDI on economic growth for 93 developing countries for the period 2000-2017. The strength of this comprehensive study lies in the nuance that it adds to the current discussion by analyzing the differential impacts of FDI inflows across different types of developing countries such as emerging countries(ECs), lower-middle-income countries (LMICs), and low-income countries (LICs). Unlike previous studies, we investigate the particular channels through which positive spillovers from FDI are transmitted towards the growth of these different country categories. The results reveal that the beneficial impact of FDI varies across different country groups. Thus, the efficacy with which FDI positively impacts growth is contingent upon the absorptive capacities of developing countries, which in turn are determined by trade openness, stock of human capital, infrastructure, financial sector development, institutional setup, and foreign debt.
    Keywords: FDI, economic growth, LICs, LMICs, ECs, developing countries, panel data, GMM model
    JEL: C51 F21 F23 F62 O11
    Date: 2021–11
  5. By: Pravakar Sahoo; Ashwani Bishnoi (Institute of Economic Growth, Delhi)
    Abstract: The study makes an attempt to contribute to the ongoing policy debate on whether OFDI has a complementary or substitution effect on domestic investment and hence, growth. For the purpose, the current paper uses panel data analysis to understand the impact of OFDI for 14 emerging economies in the period 1981-2019. We supplement the cross-country evidence with a time series analysis for India, given that FDI outflows from the country have been steadily increasing over the years. The results confirm the positive effect of OFDI on economic growth, but the substitution effect for domestic investment. This indicates that the OFDI positively affects growth through its effect on trade and other positive spillover effect, rather than domestic investment. However, in case of India, the findings support the complementary effect of OFDI on domestic investment.
    Keywords: OFDI, Growth, Domestic Investment, Emerging Countries, India
    JEL: F21 F23 F62 O40 R11
    Date: 2021–07
  6. By: Pravakar Sahoo; Ranjan Kumar Dash; Yoon Jung Choi (Institute of Economic Growth, Delhi)
    Abstract: Since the 1990s, there has been an increase in the volume of Foreign Portfolio Investments (FPI) flowing to developing economies. Theoretically, FPI inflows are supposed to promote economic growth by lowering cost of capital, increasing investment, diversifying risk and developing the financial sector. However, FPI - being short term investments – may lead to boom and bust cycle affecting growth and stability. In this context, we empirically examine the impact of FPI on the economic growth for 82 countries for the period 2000-2017. We try to capture the differential effects of FPI across different categories of countries and transmission channels. Results reveal a positive relationship between FPI and economic growth for all sets of developing countries, with the magnitude of benefits being the highest for emerging economies. Moreover, domestic factors such as human capital, financial sector and external debt are found to influence the impact of FPI on growth. Therefore, there is a need to push for pro-FPI policies and develop the absorptive capacities of developing countries to promote and sustain their economic growth.
    Keywords: FPI, Economic growth, Developing countries, Panel data, GMM model
    JEL: C51 F21 F62 O11
    Date: 2021–07
  7. By: Bhavesh Garg; Pravakar Sahoo (Institute of Economic Growth, Delhi)
    Abstract: Emerging market economies have experienced an unprecedented rise in cross-border capital flows and the existing literature provides us evidence of both expansionary and contractionary effects of inflows on domestic output. In this context, we make an attempt to answer the following questions: (1) Do capital inflows lead to expansionary or contractionary effect on emerging countries? (2) Do different types of capital inflows have different impacts? and (3) Do absorptive capacities influence the effect of capital flows on the host countries? To answer these questions, we carry out a comparative analysis for India and China using quarterly data for the period 1998Q1 to 2020Q1. The results reveal that total gross capital inflows as well as disaggregated capital inflows exhibit expansionary effect on domestic output in case of both India and China. We supplement the time series data with panel analysis for the top ten capital flows recipient EMEs over the period 1998-2019. We find that capital inflows a t aggregate level and also at the disaggregate level except debt flows have an expansionary effect on output.
    Keywords: Gross capital inflows, FDI, Emerging economies, Structural breaks
    JEL: F21 F32 F43 C22 C23
    Date: 2021–09
  8. By: Sugata Marjit; Gouranga Gopal Das
    Abstract: This paper attempts to build up a Heckscher-Ohlin-Samuelson model of production and trade where capital is introduced outside the production process as a financial capital or credit as per the classical Ricardian wage fund framework. Stock of credit or financial capital as past savings, finances employment and machines or capital goods used in the process of production with Ricardian fixed coefficient technology. We derive the relationship between factor prices and rate of interest on one hand and relative price and endowments on the other. Availability of finance does not impact production or pattern of trade only nominal factor prices. International financial flows will not alter pattern of trade, but movement of labour and machines will. Such results change drastically when we consider a model with unemployment and finance dictates real outcomes much more than before. Introducing finance affects trade patterns with unemployment and especially with imperfect credit markets. The results could explain a vast array of stylized facts such as, financial crisis or shock, credit rationing and their impact on production, trade and unemployment. The paper has policy implications for role of financial development, quality of institutions in economic development.
    Keywords: wage-fund, Heckscher-Ohlin-Samuelson, Ricardo, inequality, credit, general equilibrium, financial development, unemployment, trade
    JEL: B12 B13 B17 F11 F63 F65 F16 O12
    Date: 2022
  9. By: Jesus Felipe; Scott Fullwiler; Al-Habbyel Yusoph
    Abstract: This paper argues that the 40-year-old Feldstein-Horioka "puzzle" (i.e., that in a regression of the domestic investment rate on the domestic saving rate, the estimated coefficient is significantly larger than what would be expected in a world characterized by high capital mobility) should have never been labeled as such. First, we show that the investment and saving series typically used in empirical exercises to test the Feldstein-Horioka thesis are not appropriate for testing capital mobility. Second, and complementary to the first point, we show that the Feldstein-Horioka regression is not a model in the econometric sense, i.e., an equation with a proper error term (a random variable). The reason is that by adding the capital account to their regression, one gets the accounting identity that relates the capital account, domestic investment, and domestic saving. This implies that the estimate of the coefficient of the saving rate in the Feldstein-Horioka regression can be thought of as a biased estimate of the same coefficient in the accounting identity, where it has a value of one. Since the omitted variable is known, we call it "pseudo bias."" Given that this (pseudo) bias is known to be negative and less than one in absolute terms, it should come as no surprise that the Feldstein-Horioka regression yields a coefficient between zero and one.
    Keywords: Accounting Identity; Feldstein-Horioka Paradox; Investment; Pseudo Bias; Saving
    JEL: E01 F21 F32 F36 F41 G15
    Date: 2022–04
  10. By: Maraoui, Najia (Monastir University); Amor, Thouraya Hadj (Monastir University); Khefacha, Islem (Monastir University); Rault, Christophe (University of Orléans)
    Abstract: In this paper, we investigate how economic, political and institutional factors affect the choice of exchange rate regimes, using data on eight MENA (Middle East and North Africa) countries over the 1984-2016 period. Specifically, we run random-effects ordered probit regressions of the likelihood of exchange rate regimes on potential determinants of exchange rate regimes. Three important findings emerge from the analysis. i) Political and institutional factors play an important role in determining the exchange rate regime in MENA countries: a democratic political regime and a low level of corruption increases the probability to opt for a fixed regime. While, strong governments, political stability such as less internal conflicts and more government stability, more law and order enforcement and left-wing Government decreases the probability to opt for a fixed regime. ii) Bureaucracy, independent central banks, elections, terms of trade as well as the monetary independence have no effect on the choice of exchange rate regimes. iii) Financial development is not a robust determinant of the choice of exchange rate regimes. Our results still hold when considering alternative specifications and have important implications for policy makers in MENA countries.
    Keywords: exchange rate regimes, country risk, political and institutional factors, panel data, ordered probit regression, MENA
    JEL: C23 F33 F55 H80
    Date: 2022–04
  11. By: Nikolay Gueorguiev; Mr. Dmitriy L Rozhkov; Mr. Jiro Honda; Keyra Primus; Ms. Marwa Alnasaa; Eslem Imamoglu; Mr. Paolo Mauro
    Abstract: Empirical investigation of the factors underlying the growing usage of crypto-assets is in its infancy, owing to data limitations. In this paper, we present a simple cross-country analysis drawing on recently released survey-based data. We explore the correlation of crypto-asset usage with indicators of corruption, capital controls, a history of high inflation, and other factors. We find that crypto-asset usage is significantly and positively associated with higher perception of corruption and more intensive capital controls. Notwithstanding the data limitations, the results support the case for regulating crypto-assets, including know-your-customer approaches, as opposed to taking a laissez-faire stance.
    Keywords: cypto-assets, cryptocurrency, corruption, capital controls; crypto-asset usage; Pairwise correlation; data limitation; capital control; crypto-asset adoption; capital openness; Capital controls; Virtual currencies; Corruption; Global
    Date: 2022–03–25
  12. By: Jiang, Hongze (Asian Development Bank Institute); Liang, Pinghan (Asian Development Bank Institute)
    Abstract: We investigate the impact of fintech development on an important type of crime: theft. Based on Becker’s rational criminal theory, we suggest that fintech development could mitigate theft activities by increasing the earnings from legitimate work, relaxing potential criminals’ financial constraints, and reducing the expected gains from theft. We established a unique dataset containing information on more than 1 million theft defendants during the period 2014–2018, which we extracted from 874,000 judgment statements. Then, we aggregated them to construct a city-year panel of theft activities and matched it with the city-level economic activities and Fintech development level. The results show that a 1 standard deviation increase in the fintech development level has a significant association with a 0.39 standard deviation decrease in thefts’ density. Robustness checks and instrumental variable estimation support the main results. Further, the development of fintech reduces the density of thefts by reducing residents’ cash holding and providing more job opportunities. Finally, we utilized a nationally representative household survey to estimate the cost of theft for households, finding that victims suffer from more mental health problems, increasing their health expenditure. Our results suggest an unexpected source of welfare gain from the development of fintech: an improvement in public security.
    Keywords: fintech; theft; crime; People’s Republic of China
    JEL: C81 G59 K14 K42
    Date: 2021–08
  13. By: Prempeh, Kwadwo Boateng; Kyeremeh, Kwadwo; Peprah-Amankona, Godfred
    Abstract: The study uses a threshold regression model to provide new evidence that the deleterious effects of inflation on growth only “kick in” once inflation hits a certain level. Until then, inflation is beneficial to growth.
    Keywords: Inflation; economic growth; threshold; Ghana
    JEL: C54 G28
    Date: 2022–03–07
  14. By: Ervin Duraković Author-Name-First: Ervin (Hrvatska narodna banka, Hrvatska)
    Abstract: Kako bi se prepoznale epizode sistemskog stresa u Republici Hrvatskoj, u radu je konstruiran hrvatski indeks sistemskog stresa (HISS), kompozitni pokazatelj koji primjenom moderne teorije portfelja dnevne pokazatelje financijskog stresa na pojedinim tržištima sintetizira u jedinstven pokazatelj. Na ovaj su način prvi put na sveobuhvatan način i na dnevnoj razini kvantificirani događaji na domaćim financijskim tržištima, pri čemu je uzeta u obzir visoka koreliranost tržišta u razdobljima nepovoljnih događaja. Ovakav metodološki pristup ključan je doprinos ovog rada literaturi na temu sistemskih rizika s obzirom na to da se poremećaji sistemskoga karaktera prelijevaju i propagiraju na više tržišta istodobno uz moguće posljedice na makroekonomsko okružje. Konstruirani pokazatelj identificira tri važnije krizne epizode u Hrvatskoj koje su sistemskoga karaktera: recesiju potkraj devedesetih godina, početak globalne financijske krize 2008. godine te krizu održivosti državnog duga i solventnosti banaka u rubnim zemljama europodručja 2011. i 2012. godine. Robusnost rezultata potvrđena je primjenom nekoliko različitih metodoloških pristupa, a kvantifikacija utjecaja takvih sistemskih šokova na gospodarstvo procijenjena je TVAR modelom, čiji rezultati upućuju na nelinearnu vezu između financijskog sektora i makroekonomske dinamike te definiraju vrijednost indeksa iznad koje šokovi mogu imati znatan utjecaj na gospodarsku aktivnost. Konstruirani indeks mogao bi se primijeniti na širokom polju empirijskih istraživanja, no njegov najveći doprinos zasigurno je na području ocjene makroprudencijalne politike te praćenja procesa neravnoteža u sustavu oblikovanja pravodobne i primjerene politike stabilizicaje.
    Keywords: sistemski stres, financijski stres, teorija portfelja, sistemski rizici, financijska tržišta, TVAR model, sistemski šokovi
    JEL: E44 E50 G01 G10 G20
    Date: 2021–03–10
  15. By: Maryam Farboodi; Dhruv Singal; Laura Veldkamp; Venky Venkateswaran
    Abstract: How should an investor value financial data? The answer is complicated because it depends on the characteristics of all investors. We develop a sufficient statistics approach that uses equilibrium asset return moments to summarize all relevant information about others' characteristics. It can value data that is public or private, about one or many assets, relevant for dividends or for sentiment. While different data types have different valuations, heterogeneous investors value the same data very differently, which suggests a low price elasticity for data demand. Heterogeneous investors' data valuations are also affected very differentially by market illiquidity.
    JEL: G0 G11 G12 G14
    Date: 2022–03
  16. By: Lawrence Christiano; Hüsnü Dalgic; Xiaoming Li
    Abstract: We consider bank panic models in which, depending on the configuration of fundamentals, there can be a positive probability of a bank panic. A crucial assumption in these models is that new equity cannot enter in a panic. We quantify the importance of this assumption by computing the minimal entry cost that justifies the no-entry assumption. We find that that cost is implausibly high across the several models considered. We also show that small changes in assumptions about entry have a qualitative impact on equilibria: a panic may not be possible or there could be several equilibria with different levels of panic. The economic reasons for this sensitivity are clarified by transforming the market economy into a game and studying banker best response functions. A second, additional result, is displayed in a three-period version of the panic model of Gertler and Kiyotaki (2015). That model naturally suggests the idea that welfare can be improved by imposing a restriction on bank leverage. We compute the Ramsey-optimal leverage restriction but find that there is an implementation problem: the restriction can be associated with more than one equilibrium, not just the desired one. We discuss one way to address the implementation problem.
    JEL: G01
    Date: 2022–04
  17. By: Lara Coulier; Selien De Schryder (-)
    Abstract: We construct new data-driven intensity-adjusted indices for a broad set of macroprudential policy announcements in the European Union (EU) that are able to capture the restrictiveness and bindingness of the macroprudential policy actions. The indices are used to assess the effectiveness of borrower-based macroprudential policy in reducing credit in the EU from 1995 to 2019. Our results indicate that these instruments have successfully reduced household, housing, and to a smaller extent consumption credit, especially in the long run. Moreover, we find that standard dummy approaches used to measure macroprudential policy signal different effects of borrower-based policies in our sample and are more sensitive to outliers, resulting in deceptive and incomplete results.
    Keywords: Macroprudential policy, intensity-adjustment, household credit, panel data analysis
    JEL: E58 C23 G18 G28
    Date: 2022–04
  18. By: Nicola Pierri; Yannick Timmer
    Abstract: What are the implications of information technology (IT) in banking for financial stability? Data on US banks' IT equipment and the background of their executives reveals that higher pre-crisis IT adoption led to fewer non-performing loans and more lending during the global financial crisis. Empirical evidence indicates a direct role of IT adoption in strengthening bank resilience; this includes instrumental variable estimates exploiting the historical location of technical schools. Loan-level analysis shows that high-IT banks originated mortgages with better performance, indicating better borrower screening. No evidence points to offloading of low-quality loans, differences in business models, or enhanced monitoring.
    Keywords: Technology; Financial Stability; IT Adoption; Non-Performing Loans; Screening
    JEL: D82 D83 E44 G14 G21 O30
    Date: 2022–04–13
  19. By: Marco Del Angel; Gary Richardson
    Abstract: Regulatory independence forms a foundation for modern financial systems. To illuminate the value of this ubiquitous institution, we examine a Progressive Era policy experiment in which hitherto independent regulators came under gubernatorial supervision. After this change, failure rates declined during gubernatorial election campaigns for banks under gubernatorial jurisdiction. Declines did not occur during campaigns for other officials or for nationally chartered banks. Declines in bank resolutions during campaigns reduced business bankruptcies. We corroborate these claims with new data and novel IV regressions. Our results indicate that political subservience of financial regulators links electoral and economic cycles.
    JEL: G01 G21 G33 H1 H7 K2 L51 N1 N2
    Date: 2022–04
  20. By: Fabian Herweg; Maximilian Kähny
    Abstract: An entrepreneur chooses a relationship bank or market finance. The advantage of bank finance is that the quality of the entrepreneur’s project is identified early, allowing to liquidate low-quality projects. The loan contract induces an efficient continuation decision if the entrepreneur has sufficient wealth. If the entrepreneur is cash constrained, the loan contract is such that the bank continues inefficient projects, i.e., zombie lending occurs. In the short run - for a given contract - a drop in the market interest rate increases zombification. The bank adapts the contract to this drop in the long run, and zombification diminishes.
    Keywords: evergreening, interest rates, relationship banking, Zombie firms
    JEL: D82 D86 G21 G33
    Date: 2022
  21. By: Nikolaos Artavanis; Brian Jonghwan Lee; Stavros Panageas; Margarita Tsoutsoura
    Abstract: We study the corporate-loan pricing decisions of a major Greek bank during the Greek financial crisis. A unique aspect of our dataset is that we observe both the interest rate and the “breakeven rate” of each loan, as computed by the bank’s own loan-pricing department (in effect, the loan’s marginal cost). We document that low-breakeven-rate (safer) borrowers are charged significant markups, whereas high-breakeven-rate (riskier) borrowers are charged small and sometimes even negative markups. We rationalize this de-facto cross-subsidization of riskier borrowers by safer borrowers through the lens of a dynamic model featuring depressed collateral values, impaired capital-market access, and limit pricing.
    JEL: E43 E44 G01 G21 G3
    Date: 2022–03
  22. By: Ernesto Nieto Carrillo (Ph.D. Student at Faculty of Economics, University of Coimbra); Carlos Carreira (University of Coimbra, Centre for Business and Economics Research, CeBER and Faculty of Economics); Paulino Maria Freitas Teixeira (University of Coimbra, Centre for Business and Economics Research, CeBER and Faculty of Economics)
    Abstract: In most advanced economies productivity growth has been hampered by barriers that allow zombie firms to survive. We examine the effectiveness of institutional reforms in Portugal that were aimed to improve efficiency in insolvency framework. Estimates show that reallocation barriers declined. The reforms appear to have larger and more effective results in zombie recovery than in exit. Firm size plays a major role in tackling zombie-entrenchment. The decline in barriers has also implied a lower distortion in the economy-wide selection process. The new setting seems to be more desirable than forcing zombie exit at all costs.
    Keywords: Insolvency regimes; Zombie firms; Productivity; Reallocation barriers; Firm exit;Restructuring.
    JEL: D24 G32 G33 K22 L25 O47
    Date: 2022–01
  23. By: Sébastien Galanti (LEO - Laboratoire d'Économie d'Orleans - UO - Université d'Orléans - UT - Université de Tours); Aurélien Leroy (UB - Université de Bordeaux, BSE - Bordeaux Sciences Economiques - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique); Anne-Gaël Vaubourg (CRIEF - Centre de recherche sur l'intégration économique et financière - Université de Poitiers)
    Abstract: We aim to determine whether analyst coverage improves European firms' access to capital markets and investment. Based on a data set that includes firms from several European countries between 2000 and 2015, we implement a treatment effect framework and an instrumental variables (IV) approach, in which the intensity of industry-level waves in coverage is used as an instrument for firm-level coverage. We show that analyst coverage is favorable to firms' debt and share issuance and their investment expenses. Our paper emphasizes the key role of financial analysts in improving European firms' financial conditions
    Keywords: nvestment,debt issuance,share issuance,analyst,coverage
    Date: 2022–03
  24. By: Pravakar Sahoo; Ashwani Bishnoi (Institute of Economic Growth, Delhi)
    Abstract: The current study attempts to understand the determinants of investment and the underlying reasons for its current slowdown in India. For the purpose, we estimate the investment functions by using the ARDL bounds-testing approach on quarterly data from 2004-05Q1 to 2019-20Q1 at three levels - aggregate investment, private investment and private corporate investment. The study finds that aggregate investment can be explained by aggregate demand, fiscal policy, monetary policy, financial resources, exchange rate and uncertainty. Similarly for private investment, determinants include public investment, fiscal deficit, cost of capital, business confidence and uncertainty, along with measures for demand and financial sector developments. Finally, private corporate investment is found to be responsive to bonds market development, real exchange rate, debt service ratio, business confidence and economic uncertainty, besides the conventional variables. Thus, in order to counter the current investment slowdown, there is a need to make efforts for developing capital markets, strengthening monetary transmission, implementing appropriate fiscal policies and, reducing uncertainty in the economy.
    Keywords: Investment, India, Fiscal Policy, Monetary Policy, Economic Uncertainty
    Date: 2021–08
  25. By: Ebeling Antoine
    Abstract: What are the determining factors in the allocation of European Investment Bank (EIB) green investments? Using data describing more than 17,000 EIB loans to European Union (EU) member states from 1960 to 2020, we first break down EIB loans into green, neutral and brown loans. We then provide evidence that EIB green investments tend to be allocated to the most advanced economies, specifically, that green investment is positively correlated with high GDP per capita and increases with national environmental expenditure. Our findings illustrate the dichotomy between economic development and environmental objectives faced by the EIB.
    Keywords: European investments Bank ; Green investment ; Climate policy.
    JEL: E22 G24 Q56
    Date: 2022
  26. By: Alfonso Mendoza-Velazquez (Centro de Investigacion e Inteligencia Economica-Universidad Popular Autonoma del Estado de Puebla); Heidi J. Smith (Department of Economics, Universidad Iberoamericana Ciudad de Mexico); Diego Mendoza-Martinez (Department of Economics-Universidad de las Americas Puebla)
    Abstract: This research employs Mexico’s state level data from 2001-2016 to examine the nexus between debt sustainability and regional economic growth. Following the ideas of Reinhart and Rogoff 2010 and Ilzetzki, et al 2019, the research seeks to establish the threshold between debt and regional growth. There is a need to understand whether increasing debt exerts benign effects on regional GDP growth in centralized fiscal systems prevalent in emerging countries and whether these effects differ by type of financing. The study employs the dynamic panel approach by Arellano and Bond (1991) to control for different types of endogeneity and the Seo and Shin (2016) kink model to estimate debt thresholds. The results point to a weak but positive association between debt and GDP growth, which differs by type of debt. Subnational debt thresholds of local governments locate at 67% as a share of guaranteed resources–lower than those reported at the national level. Employing debt as a share of GDP we find a much lower debt threshold (3.25%) which is explained by the fiscal interrelations architecture of federal systems with high local government dependence on federal transfers and subject to soft budget problems. The study finds economic growth is more sensitive to commercial bank debt and capital market debt than other types of debt.
    JEL: H6 H63 H7
    Date: 2022–03–29
  27. By: Wei Jiang; Thomas J. Sargent; Neng Wang; Jinqiang Yang
    Abstract: An optimal tax and government borrowing plan in a setting with tax distortions (Barro, 1979) locally pin down the marginal cost of servicing government debt, called marginal p. An option to default determines the government’s debt capacity and its optimal state-contingent risk management policies make its debt risk-free. Optimal debt-GDP ratio dynamics are driven not only by three widely discussed forces, 1.) a primary deficit, 2.) interest payments, and 3.) GDP growth, but also by 4.) hedging costs. Hedging fundamentally alters debt transition dynamics and equilibrium debt-capacity, which are at the center of the recent 'r-g' and debt sustainability discussions. We calibrate our model and make comparative dynamic quantitative statements about the debt-GDP ratio transition dynamics, equilibrium debt capacity, and how long it will take the US to attain debt capacity.
    JEL: E44 E62 G12 H21 H63
    Date: 2022–04
  28. By: Anna Gelpern (Georgetown University Law Center & Peterson Institute for International Economics); Ugo Panizza (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: This paper surveys recent economic and legal literature on sovereign debt in light of the COVID-19 shock. Most of the core theoretical contributions we review across the two disciplines hinge on immunity, and the sovereign borrower's consequent inability to commit to repay foreign creditors, as the distinguishing attribute of sovereignty. We highlight a persistent gap between sovereign debt theories grounded in immunity and empirical evidence that low- and middle-income country governments borrow far more than theory would predict. On the other hand, advanced economy governments, generally viewed as outside the scope of this literature before the euro area debt crisis, have shown themselves to be far more commitment challenged than previously supposed. We conclude that the traditional split between a literature concerned with developing economy sovereigns that repudiate, and one concerned with advanced economies that don't, is no longer appropriate (if it ever was). We argue that shifting some attention away from immunity to a different attribute of sovereignty-authority, or the ability to make rules for domestic markets and negotiate market access terms with other sovereigns—could help bridge the gap between the two literatures, and between theory and experience.
    Keywords: Sovereign Debt; Sovereign Default; Public Debt
    JEL: F30 F34 G15 K12
    Date: 2022–04–28
  29. By: Kaaresvirta, Juuso; Laakkonen, Helinä
    Abstract: China became the world's largest lender to emerging and developing economies over the past decade. At the same time, concerns on the debt sustainability of many of these countries have grown. Some countries have found themselves struggling to repay their loans and China has had to renegotiate debt restructurings bilaterally. As covid-19 pandemic hit many of the borrowers hard in 2020, China committed with all other G20 countries to the Debt Service Suspension Initiative (DSSI) to temporarily suspend official bilateral debt payment of 73 beneficiary countries. While China's overseas lending remain opaque, there is little evidence that China intentionally practices "debt-trap diplomacy."
    Keywords: China,loans,loan restructuring,low-income and emerging economies
    Date: 2021
  30. By: Jantsch, Antje; Le Blanc, Julia; Schmidt, Tobias
    Abstract: Wealth in addition to income determines to a large degree an individual's consumption opportunities and economic situation, which should in turn affect their subjective well-being. We analyse empirically the relationship between life satisfaction as an indicator of subjective well being and households' wealth. We contribute to the scarce literature on wealth and well-being using micro-data from the German wealth survey, Panel on Household Finances - PHF, for 2010 and 2014. Using panel regression models, we find that (i) individuals' life satisfaction is statistically significant and positively associated with their households' wealth holdings, (ii) different components of wealth, such as real and financial assets, as well as debt, have differential effects on life satisfaction, (iii) both wealth levels and wealth holdings relative to other households matter for life satisfaction. Our study shows that it is important to consider wealth, in addition to income, when analysing individuals' life satisfaction.
    Keywords: wealth,debt,assets,life satisfaction,relative wealth,subjective well-being
    JEL: I31 D19 D31
    Date: 2022
  31. By: Paul Hufe; Martyna Kobus; Andreas Peichl; Paul Schüle
    Abstract: Are the United States still a land of opportunity? We provide new insights on this question by invoking a novel measurement approach that allows us to target the joint distribution of income and wealth. We show that inequality of opportunity has increased by 77% over the time period 1983-2016. Increases are driven by two distinct forces: (i) a less opportunity-egalitarian distribution of income until 2000, and (ii) a less opportunity-egalitarian distribution of wealth after the financial crisis in 2008. In sum, our findings suggest that the US have consistently moved further away from a level playing field in recent decades.
    Keywords: fairness, intergenerational mobility, time trends, measurement
    JEL: D31 D63 J62
    Date: 2022

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