nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2022‒05‒30
twenty-two papers chosen by
Georg Man

  1. India’s Banks: Lending to Productive Firms? By Mr. Divya Kirti; Soledad Martinez Peria; Siddharth George; Rajesh Vijayaraghavan
  2. The occurrence of potential complementarity and the Behavior of Bank-Coordinator and See Off Behavior By Hobara, Nobuhiro
  3. COVID-19 and the finance-economic growth nexus in Kenya By Maturu, Benjamin O.
  4. Impact of foreign direct investment on inequality in emerging economies: Does the Kuznets curve hypothesis exist? By , Le Thanh Tung
  5. Fiscal federalism and foreign direct investment: An empirical analysis By Feld, Lars P.; Köhler, Ekkehard A.; Palhuca, Leonardo; Schaltegger, Christoph A.
  6. The Chinese Influence in Africa: Neocolonialism or Genuine Cooperation? By Vicini, Andrea; Ventroni, Matteo; Vicini, Matteo
  7. An empirical equilibrium model of formal and informal credit markets in developing countries By Fan Wang
  8. The impact of Microfinance Institutions on the Informal Economy in Nigeria By Osuagwu, Eze Simpson; Hsu, Sara; Adesola, Ololade
  9. Financial Development and Female Labor Income Share: Evidence from Global Data By Kırmızıoğlu, Hale; Elveren, Adem Yavuz
  10. Stylized facts on the evolution of profit rates in the US: Evidence from firm-level data By Leila Davis; Joao de Souza
  11. Public Debt and Real GDP: Revisiting the Impact By Constance de Soyres; Mengxue Wang; Reina Kawai
  12. Sovereign Defaults and Debt Sustainability: The Debt Recovery Channel By Ibrahima Diarra; Michel Guillard; Hubert Kempf
  13. Sovereign Debt Repatriation During Crises By Mr. Serkan Arslanalp; Laura Sunder-Plassmann
  14. Cassel, Ohlin, Åkerman and the Wall Street Crash of 1929 By Carlson, Benny
  15. House price dynamics, optimal LTV limits and the liquidity trap By Ferrero, Andrea; Harrison, Richard; Nelson, Benjamin
  16. Financial concerns and the marginal propensity to consume in Covid times: evidence from UK survey data By Albuquerque, Bruno; Green, Georgina
  17. Interest rate shocks, competition and bank liquidity creation By Kick, Thomas
  18. Causal Effects of the Fed's Large-Scale Asset Purchases on Firms' Capital Structure By Andrea Nocera; M. Hashem Pesaran
  19. COVID-19, policy interventions, credit vulnerabilities and financial (in)stability By Kimundi, Gillian
  20. Resilience of bank liquidity ratios in the presence of a central bank digital currency By Alissa Gorelova; Bena Lands; Maria teNyenhuis
  21. The Geographic Dynamics of Deposit Insurance By Ryan Defina
  22. Climate change and credit risk: the effect of carbon taxes on Italian banks’ business loan default rates By Maria Alessia Aiello; Cristina Angelico

  1. By: Mr. Divya Kirti; Soledad Martinez Peria; Siddharth George; Rajesh Vijayaraghavan
    Abstract: Capital misallocation is widely thought to be an important factor underpinning productivity and income gaps between advanced and emerging economies. This paper studies how well Indian banks allocate capital across firms with varying levels of productivity. The analysis reveals that the link between productivity and bank credit growth is weaker for firms with significant ties to public sector banks, especially in years when public sector banks represent a large share of new credit. Large flows of credit to unproductive firms represent important missed growth opportunities for more productive firms. These results suggest that measures to improve governance of public sector banks, potentially including privatization, would help reduce capital misallocation.
    Keywords: Productivity, bank lending, allocation of credit; capital misallocation; public sector bank; PSB dependence; PSB share; credit growth; Bank credit; Credit; Productivity; State-owned banks; Commercial banks; Global
    Date: 2022–04–29
  2. By: Hobara, Nobuhiro
    Abstract: The effect of investment is often depends on the degree of the potential complementarity among industries. But we often find that the enterprise who are concerned with the investment can not find such a situation and the chance for the occurrence of the potential complementarity is not realized in vain. While, if bank behaves as coordinator among enterprises or the complementarity in industries, such a complementarity occurs and the social welfare could be improved. First, The present article studies the behavior of the bank as the coordinator and the occurrence of complementarity in economy with recognizing the rise of productivity as curatorial in two periods model. But, as the assets of enterprise also accumulate, enterprises get credit and get the needed fund only from market. Then, bank loses chance to get profit from cordination. So, in order not to lose the chance to get profit through their own operation, bank has incentive to see off the chance of profit on purpose. Next, we expand the two period model to many periods model and describe such a see off behavior of bank and argue the relationships among such a behavior, entrance of other banks and induce or deduce policy by tax or subsidies.
    Date: 2022–05
  3. By: Maturu, Benjamin O.
    Abstract: We empirically re-examine the finance-economic growth nexus within the context of the COVID-19 pandemic using a financial intermediation model build upon the McKinnonShaw financial repression theory. The study findings show that there is a vicious circle of finance and economic growth which is exacerbated by McKinnon-Shaw-like financial repression. The COVID-19 pandemic labour supply shock adversely affects the human capital depreciation rate which in turn adversely affects the employment level in the economy and economic growth thereby compounding the vicious circle. Since the vicious circle cannot resolve itself, using appropriate socio-economic policies to break it is necessary. The authorities must however contend with the observed partial ineffectiveness of fiscal and monetary policies.
    Date: 2022
  4. By: , Le Thanh Tung
    Abstract: This paper aims to test the Kuznets hypothesis regarding the existence of the inverted U-curve in the relationship between FDI and income inequality with an international sample. Some economists have recently expressed concern that the globalization of the production process can promote inequality and create social problems. Whether foreign resources might be related to unequal income distribution in emerging economies remains an open question. In order to fill the research gap, the paper tries to examine the impact of foreign direct investment on inequality in 33 emerging economies between 1980 and 2019. There are two methods including OLS and 2-SLS estimations are employed to estimate the coefficients of the variables. Where the 2-SLS methodology employs instrumental variables to solve the endogenous phenomenon in the study function. The results indicate that both the FDI-inequality nexus and the income-inequality nexus are non-linear effects that confirm the Kuznets curve hypothesis and that improved infrastructure and trade openness can reduce inequality in this group of economies. Finally, the result also suggests that emerging economies need to persevere to FDI attracting strategy because there is a threshold that FDI will ultimately reduce inequality in these economies.
    Date: 2022–03–14
  5. By: Feld, Lars P.; Köhler, Ekkehard A.; Palhuca, Leonardo; Schaltegger, Christoph A.
    Abstract: Previous empirical studies suggest that decentralization, measured by the number of government layers, is associated with less foreign direct investment (FDI). With an improved dataset on tax autonomy of sub-federal government tiers, we present evidence that fiscal decentralization (de facto) does not reduce FDI. If local governments can set their tax rates and bases independently, they attract more FDI. Analyzing 83,458 corporate cross-border acquisitions (CBA), between 148 source and 187 host countries from 1997 to 2014, we also find that takeovers between two countries increase with size, cultural similarities and common borders of two economies. Shared institutions such as membership in a customs union facilitate CBA. These results apply for high-income hosts but not for middle-income countries.
    Keywords: Fiscal Decentralization,Cross-Border Acquisition (CBA),Foreign Direct Investment (FDI),Tax Autonomy
    JEL: G34 H25 H71
    Date: 2022
  6. By: Vicini, Andrea; Ventroni, Matteo; Vicini, Matteo
    Abstract: The scope of the paper provides a different view than the current debate that tracks the historical trajectory of the relationship between China and Africa. The widely discussed economic influence of China in Africa comes from the end of WWII and has not been built in the last decade, as has been recently reported in many parts of the press. To understand this international relationship, it is important to put the events in the right historical perspective. This aspect is particularly true for a nation like China, which has a long-term vision for its diplomacy with respect to Western countries. However, the main economic and political connections between China and Africa and their mutual influences are examined in detail
    Keywords: China, Africa, international relations, economics, underdevelopment, diplomacy.
    JEL: F2 F5 F54
    Date: 2022–04
  7. By: Fan Wang
    Abstract: I develop and estimate a dynamic equilibrium model of risky entrepreneurs' borrowing and savings decisions incorporating both formal and local-informal credit markets. Households have access to an exogenous formal credit market and to an informal credit market in which the interest rate is endogenously determined by the local demand and supply of credit. I estimate the model via Simulated Maximum Likelihood using Thai village data during an episode of formal credit market expansion. My estimates suggest that a 49 percent reduction in fixed costs increased the proportion of households borrowing formally by 36 percent, and that a doubling of the collateralized borrowing limits lowered informal interest rates by 24 percent. I find that more productive households benefited from the policies that expanded borrowing access, but less productive households lost in terms of welfare due to diminished savings opportunities. Gains are overall smaller than would be predicted by models that do not consider the informal credit market.
    Date: 2022–04
  8. By: Osuagwu, Eze Simpson; Hsu, Sara; Adesola, Ololade
    Abstract: This paper investigates the impact of microfinance institutions on the informal sector of the Nigeran economy drawing from a cross-sectional data of 14,189 customers from two major microfinance clusters – the Self-Reliance Economic Advancement Programme (SEAP) and ASHA Microfinance Bank Limited with a combined membership of over 700,000 clients. The study applies a descriptive and fully modified ordinary least square (FMOLS) model to evaluate the statistical relationship on average monthly borrowing amount and explanatory variables of factors that could affect the ability of clients to seek support from the various microfinance institutions. Empirical evidence suggests that amount of money borrowed by clients is significantly affected by the nature of business; whether the business is operating in the formal or informal sector, gender of the entrepreneur, and on the other hand whether the degree of borrowing is strongly affected by monthly household expenses of borrowers. The paper therefore concludes that the informal sector is largely supported by micro finance institutions but seeks a policy redirection for government to take steps to formalize the large stream of informal borrowers in order to improve domestic resource mobilization and actualize sustainable development of the Nigerian economy.
    Keywords: Microfinance, Informal Economy, Domestic Resource Mobilization, Sustainable Development, Nigeria
    JEL: D1 D14
    Date: 2021–06
  9. By: Kırmızıoğlu, Hale; Elveren, Adem Yavuz
    Abstract: This paper investigates the association between the dimensions of financial development and female labor income share for 160 countries for 1991-2019. The findings show that financial development is positively associated with women’s income in high-income countries but not in low-income countries. This suggests that financial development in poor countries is not sufficiently inclusive enough to create economic opportunities for women.
    Keywords: female labor income, financial development, gender
    JEL: J16 O15 O16
    Date: 2022
  10. By: Leila Davis; Joao de Souza
    Abstract: This paper builds on the literature analyzing the aggregate profit rate to describe profitability across the distribution of firms in the post-1970 U.S. economy. While median profitability mirrors well-established aggregate patterns, including a falling rate of profit through the mid- 1980s and a recovery thereafter, it also masks a striking post-1980 widening of the distribution. In this paper, we document this widening of the profitability distribution, and identify factors driving changes in profit rates at each end of the distribution. At the top, we show that, while top-end operational profit rates (operational returns on tangible capital) soar after 1980, this rise disappears when accounting for financial and intangible assets. We show that firms with high operational profit rates hold large stocks of financial and intangible assets, relative to those with high total profitability, but that larger shares of these assets fail to translate into higher returns on all assets. Thus, once accounting for post-1980 changes in asset composition, growth in top profit rates disappears. At the bottom, profit rates of the least profitable quintile of U.S. nonfinancial corporations become systematically and increasingly negative after the early 1980s. We show that this decline reflects persistently negative average profitability in new post-1970 cohorts, rather than falling profitability within continuing firms.
    Keywords: Profit rates; intangible assets; cash; entry dynamics
    JEL: B5 L1
    Date: 2022–05
  11. By: Constance de Soyres; Mengxue Wang; Reina Kawai
    Abstract: This paper provides new empirical evidence of the impact of an unanticipated change in public debt on real GDP. Using public debt forecast errors, we identify exogenous changes in public debt to assess the impact of a change in the debt to GDP ratio on real GDP. By analyzing data on gross public debt for 178 countries over 1995-2020, we find that the impact of an unanticipated increase in public debt on the real GDP level is generally negative and varies depending on other fundamental characteristics. Specifically, an unanticipated increase in the public debt to GDP ratio hurts real GDP level for countries that have (i) a high initial debt level or (ii) a rising debt trajectory over the five preceding years. On the contrary, an unanticipated increase in public debt boosts real GDP for countries that have (iii) a low-income level or (iv) completed the HIPC debt relief initiative.
    Keywords: Sovereign Debt, Growth, IMF predictions
    Date: 2022–04–29
  12. By: Ibrahima Diarra; Michel Guillard; Hubert Kempf
    Abstract: This paper focuses on the debt recovery channel linking the dynamics of public debt to partial sovereign defaults. We build a simple model which incorporates sovereign default and a debt recovery rule. It depends on a parameter that allows for partial debt recovery. We show that the maximum debt-to-GDP ratio that a country can sustain without defaulting is increasing, nonlinear, and sensitive to the debt-recovery parameter. A higher debt recovery parameter increases the fiscal space but worsens the financial position of a borrowing country after a default episode. We show the empirical relevance of this channel for estimating country-specific fiscal spaces.
    Date: 2022
  13. By: Mr. Serkan Arslanalp; Laura Sunder-Plassmann
    Abstract: We use a new, comprehensive data set on the sovereign debt investor base to document three novel empirical facts: (i) sovereign debt is repatriated - that is, shifted from external private to domestic investors - prior to sovereign defaults; (ii) not all crises are equal: evidence for repatriation during banking and currency crises is more limited; and (iii) the nature of defaults matters: external investors do not leave during preemptive debt restructurings. We further show that repatriation appears to be prevalent when defaults happen in large markets with low capital controls. The data set we use is uniquely suited to analyzing investor base dynamics during rare crises due to its large cross-section and time series, covering 180 countries from 1989 to 2020.
    Keywords: Sovereign debt, External debt, Capital flows, Sovereign default, Financial crisis, Banking crisis, Currency crisis
    Date: 2022–04–29
  14. By: Carlson, Benny
    Abstract: The 1929 stock market crash on Wall Street is one of the most spectacular economic events of all times. In Sweden, leading economists got involved in a lively debate on the events on Wall Street before, during and after the crash. Three of them were particularly active. Gustav Cassel and Bertil Ohlin were not overly worried since they regarded the stock market mania and the panic as phenomena more or less disconnected from the rest of the economy. Their theoretical argument was that booms and busts upon a stock market cannot create or destroy capital or purchasing power. Johan Åkerman on the contrary warned repeatedly that a serious stock market crash was in the making and, once it had happened, that it would in many ways affect the entire economy.
    Date: 2022–04–09
  15. By: Ferrero, Andrea (University of Oxford); Harrison, Richard (Bank of England); Nelson, Benjamin (RCM)
    Abstract: The global financial crisis prompted the rapid development of macro-prudential frameworks and an increased reliance on borrower-based policy tools, which influence the demand for credit. This paper studies the optimal design of one such tool, a loan-to-value (LTV) limit, and its implications for monetary policy in a model with nominal rigidities and financial frictions. The welfare-based loss function features a role for macro-prudential policy to enhance risk-sharing. Optimal LTV limits are strongly countercyclical. In a house price boom-bust episode, the active use of LTV limits alleviates debt-deleveraging dynamics and prevents the economy from falling into a liquidity trap.
    Keywords: Monetary and macro-prudential policy; financial crisis; zero lower bound
    JEL: E52 E58 G01 G28
    Date: 2022–03–25
  16. By: Albuquerque, Bruno (International Monetary Fund and University of Coimbra, CeBER, Faculty of Economics); Green, Georgina (Bank of England)
    Abstract: We study how household concerns about their future financial situation may affect the marginal propensity to consume (MPC) during the Covid-19 pandemic. We use a representative survey of UK households to compute the MPC from a hypothetical transfer of £500. We find that household expectations play a key role in determining differences in MPCs across households: households concerned about not being able to make ends meet have a 20% higher MPC than other households. This novel result holds when controlling for a range of important household-specific characteristics, including liquidity constraints. Our findings suggest that policies targeted to vulnerable and financially distressed households may prove more effective in stimulating demand than providing stimulus payments to all households.
    Keywords: Covid-19; marginal propensity to consume; survey data; household behaviour; expectations; financial concerns; fiscal polic
    JEL: D12 E21 E62 G51 H31
    Date: 2022–03–04
  17. By: Kick, Thomas
    Abstract: We study the effects of interest rate shocks (IRS) on banks' liquidity creation. A unique supervisory data set from the Deutsche Bundesbank allows identifying banks' liquidity creation for the real economy and the effects of banking market competition. Here, we employ a novel approach to account for IRS that are both unexpected and effective for a bank's business model. We find that higher individual pricing power in the market lowers banks' liquidity creation, which is in line with theory that monopolistic firms undersupply the market when utilizing their high pricing power in the bank competition-liquidity creation nexus. While positive IRS per se lead to an increase in bank liquidity creation, we find that a high bank-individual pricing power curbs this impact on liquidity creation significantly. Moreover, we show that monetary policy was most effective during the global financial crisis and for well-capitalized banks, whereas periods of low interest rates are characterized by the persistent increase in liability-side liquidity creation.
    Keywords: bank liquidity creation,unexpected monetary policy,low interest rate environment,financial crisis,financial markets regulation,banking market competition,dynamic GMM
    JEL: G21 G28 G30 C23
    Date: 2022
  18. By: Andrea Nocera; M. Hashem Pesaran
    Abstract: This paper investigates the short- and long-term impacts of the Federal Reserve’s large-scale asset purchases (LSAPs) on the capital structure of U.S. non-financial firms. To isolate the effects of LSAPs from the impact of concurrent macroeconomic conditions, we exploit cross-industry variations in the ability of firms therein to raise external funds without exhausting their debt capacity. We show that firms’ responses to LSAPs strongly depend on the financing decisions of other peers in the same industry. The higher the proportion of firms without high debt burdens in an industry, the stronger the response of firms within the industry to the Fed’s asset purchases. Overall, our results show that LSAPs facilitated firms’ access to debt financing and that the impacts of LSAPs on firms’ capital structure are likely to be long-lasting.
    Keywords: capital structure, identification, interactive effects, leverage, quantitative easing, unconventional monetary policy
    JEL: C32 E44 E52 E58
    Date: 2022
  19. By: Kimundi, Gillian
    Abstract: At the 2014 Michel Camdessus Inaugural Central Banking Lecture (IMF), Janet Yellen posed the following question, "...How should monetary and other policymakers balance macroprudential approaches ... in the pursuit of financial stability?" This conversation has become more critical following the effects of COVID-19 on economic and financial indicators globally. Using sector-level measures of financial stability, this study seeks to investigate the effect of monetary and fiscal policy interventions on the stability of the banking sector and determine the role (if any) played by the credit environment on financial stability's response to policy interventions. A Bayesian Threshold VAR model is estimated using quarterly data from (Q1) 2005 to June (Q2) 2021, where the Threshold variable is the Credit to GDP Gap, used to define high vs low credit environments. Facilitating the analysis and discussion using expansionary policy interventions implemented during the COVID-19 period (CBR reduction, lower reserves, higher fiscal spending and tax reliefs), the results indicate that the expansionary policy stances have clear implications on financial stability aggregates capturing credit risk (NPL Ratios) and liquidity risk (depository moments). Secondly, policy effects on financial stability indicators vary depending on the credit environment they are implemented in. More of the indicators respond poorly to expansionary fiscal and monetary policy action in a high credit environment. Based on this response, it is arguable that this credit cycle presents a vulnerability to the sector, rather than evidence of financial deepening. The results also point out a critical aspect relating to the choice of monetary policy action. Lower reserves are followed by more negative responses in financial stability aggregates in both credit environments, especially those related to credit risk. Policy recommendations following these results are also discussed.
    Date: 2022
  20. By: Alissa Gorelova; Bena Lands; Maria teNyenhuis
    Abstract: Could Canadian banks continue to meet their regulatory liquidity requirements after the introduction of a cash-like retail central bank digital currency (CBDC)? We conduct a hypothetical exercise to estimate how a CBDC could affect bank liquidity by increasing the run-off rates of transactional retail deposits under four increasingly severe scenarios.
    Keywords: Central bank research; Digital currencies and fintech; Econometric and statistical methods; Financial institutions; Financial stability
    JEL: E4 G2 G21 O3 O33
    Date: 2022–05
  21. By: Ryan Defina (International Association of Deposit Insurers)
    Abstract: Geography plays a fundamental role in today’s interconnected world. Financial flows operate within a multitude of regulatory and supervisory parameters often heavily influenced by regional factors. While deposit insurance is one factor affecting these flows, it too has been influenced by regional factors, particularly in the past 20 years with the rapid growth and development of deposit insurance systems, and has undergone substantial changes as a result. Understanding geographic dynamics in deposit insurance design enables policy makers to better understand the impact of regional factors on the features of deposit insurance systems and vice versa. Correlation between deposit insurer features in neighbouring jurisdictions offers the potential to facilitate collaboration under the grounds of common history and institutional development, but also introduces many challenges to multiple and bilateral coordination. We explore these issues further and highlight considerations for deposit insurance research, training and more targeted technical assistance initiatives. This paper investigates the associations between the features of deposit insurance systems and geography using a relatively simple statistical approach, and quantified through analysis of data collected by IADI. The results focus on a cross-sectional analysis of 2019 Annual Survey results. An implicit assumption is made that relationships observed in 2019 data are broadly representative of the true underlying dynamics between variables of interest and geography, although further analysis incorporating a time dimension would provide clarity on this assumption. Results suggest that geography is an important factor to consider when exploring a range of deposit insurance data items. However, this effect does not play a role for all aspects of deposit insurance systems, and is subject to a number of caveats. In some instances, the age of deposit insurers (a proxy for maturity in system design and implementation) can influence more than the region as a whole. Moreover, sample sizes used are relatively small so this needs to be taken into account when reviewing the results. Future research directions in this area could seek to broaden the suite of data items considered; conduct a targeted follow-up to further unpack the economic, financial, legal and cultural dynamics driving both inter- and intra-regional variation; or explicitly consider temporal dynamics through appraising longitudinal panels of deposit insurance metrics.
    Keywords: deposit insurance, bank resolution
    JEL: G21 G33
    Date: 2021–04
  22. By: Maria Alessia Aiello (Bank of Italy); Cristina Angelico (Bank of Italy)
    Abstract: Climate change poses severe systemic risks to the financial sector through multiple transmission channels. In this paper, we estimate the potential impact of different carbon taxes (€50, €100, €200 and €800 per ton of CO2) on the Italian banks’ default rates at the sector level in the short term using a counterfactual analysis. We build on the micro-founded climate stress test approach proposed by Faiella et al. (2021), which estimates the energy demand of Italian firms using granular data and simulates the effects of the alternative taxes on the share of financially vulnerable agents (and their debt). Credit risks stemming from introducing a carbon tax – during periods of low default rates – are modest on banks: on average, in a one-year horizon, the default rates of firms increase but remain below their historical averages. The effect is heterogeneous across different sectors and rises with the tax value; however, even assuming a tax of €800 per ton of CO2, the default rates are lower than the historical peaks.
    Keywords: climate change, carbon tax, climate stress test, banks’ credit risk
    JEL: Q43 Q48 Q58 G21
    Date: 2022–04

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