nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2022‒06‒20
thirty-two papers chosen by
Georg Man

  1. Finance-Growth Nexus: Evidence from Angola By Manuel Ennes Ferreira; Jelson Serafim; João Dias
  2. Stock Market and Economic Growth: Evidence from Africa By Manuel Ennes Ferreira; João Dias; Jelson Serafim
  3. Expanding access to finance to boost growth and reduce inequalities in Mexico By Alessandro Maravalle; Alberto González Pandiella
  4. Foreign Direct Investment and Economic Growth in Kenya: An Empirical Investigation By Nicholas M. Odhiambo
  5. Why Do We Have Less Investment Than China and India? By Hafsa Hina
  6. Building Stronger Economic Institutions in Developing Countries, the Role of FDI By Assi Okara
  7. Does Foreign Direct Investment Promote Political Stability ? Evidence from Developing Economies By Assi Okara
  8. How Does a Transition Country Utilize Foreign Aid? Case Study Analyses of Vietnam and Myanmar By Mai, Nhat Chi
  9. Government Debt and Capital Accumulation in an Era of Low Interest Rates By N. Gregory Mankiw
  10. Reassessing the dependence between economic growth and financial conditions since 1973 By Tony Chernis; Patrick J. Coe; Shaun P. Vahey
  11. "Daily Growth at Risk: financial or real drivers? The answer is not always the same". By Helena Chuliá; Ignacio Garrón; Jorge M. Uribe
  12. Constructing Density Forecasts from Quantile Regressions: Multimodality in Macro-Financial Dynamics By James Mitchell; Aubrey Poon; Dan Zhu
  13. Big Recessions and Slow Recoveries By Juan Carlos Castro Fernández; Juan Carlos Castro Fernández
  14. Financial Crises and Expectation-driven Recessions By Juan Carlos Castro Fernández; Juan Carlos Castro Fernández
  15. Financial crises and shadow banks: A quantitative analysis By Rottner, Matthias
  16. A baseline stock-flow model for the analysis of macroprudential regulation for Latin America and the Caribbean By Esteban Ramon Perez Caldentey; Lorenzo Nalin; Leonardo Rojas
  17. Did Doubling Reserve Requirements Cause the 1937-38 Recession? New Evidence on the Impact of Reserve Requirements on Bank Reserve Demand and Lending By Charles W. Calomiris; Joseph R. Mason; David C. Wheelock
  18. Capital requirements, market structure, and heterogeneous banks By Müller, Carola
  19. How well can large banks in Canada withstand a severe economic downturn? By Andisheh (Andy) Danaee; Harsimran Grewal; Brad Howell; Guillaume Ouellet Leblanc; Xuezhi Liu; Xiangjin Shen; Mayur Patel
  20. So Far, So Good: Government Insurance of Financial Sector Tail Risk By Larry D. Wall
  21. Financial Markets and the Real Economy: A Statistical Field Perspective on Capital Allocation and Accumulation By Pierre Gosselin; A\"ileen Lotz; Marc Wambst
  22. Expectation-Driven Term Structure of Equity and Bond Yields By Ming Zeng; Guihai Zhao
  23. The Relevance of Banks to the European Stock Market By Andreas Kick; Horst Rottmann
  24. The rise of bond financing in Europe By Papoutsi, Melina; Darmouni, Olivier
  25. Alternative financing and investment in intangibles: evidence from Italian firms By Gabriele Beccari; Francesco Marchionne; Beniamino Pisicoli
  26. Supply Chain Network and Credit Supply By Kensuke Fukunaga; Daisuke Miyakawa
  27. Unstable Coins: The Early History of Central Bank Analog Currencies By William Roberds
  28. Effects of inflation (consumer price index) and other macroeconomic variables on bank deposits: Evidence from Pakistan By Mushtaq, Saba; Mushtaq, Faiza
  29. A tale of two global monetary policies By Agrippino, Silvia Miranda; Nenova, Tsvetelina
  30. A basic macroeconomic agent-based model for analyzing monetary regime shifts By Florian Peters; Doris Neuberger; Oliver Reinhardt; Adelinde Uhrmacher
  31. The double materiality of climate physical and transition risks in the euro area By Gourdel, Régis; Monasterolo, Irene; Dunz, Nepomuk; Mazzocchetti, Andrea; Parisi, Laura
  32. The sustainable practices of multinational banks as drivers of financial inclusion in developing countries By Úbeda, Fernando; Mendez, Alvaro; Forcadell, Francisco Javier

  1. By: Manuel Ennes Ferreira; Jelson Serafim; João Dias
    Abstract: This study examines the relationship between financial development and economic growth in Angola for the period of Q12002 to Q42018. The results show that there is evidence of a long-run relationship between financial development and real GDP per capita, when using the Bound test approach for cointegration. Furthermore, the results of the Error Correction Model (ECM) indicate that financial development has a negative impact on GDP growth when considering credit to private and broad money as proxies for financial development. On the other hand, the degree of intermediation has a positive impact on GDP growth. The Toda–Yamamoto causality test was carried out, which indicates a unidirectional causality relationship, running from real GDP per capita to a purely financial development proxy, which shows demand-following responses. Consequently, policymakers should adopt policies that sustain the benefits of financial developments for economic growth.
    Keywords: Autoregressive-distributed Lag, Economic growth, financial development, Angola
    JEL: C32 E44 O55
    Date: 2022–05
  2. By: Manuel Ennes Ferreira; João Dias; Jelson Serafim
    Abstract: We assessed the impact of stock market development on growth in Africa. It uses annual data from a panel of 9 countries in Africa over the period 1992–2017. Panel Vector Autoregressive econometrics technique is used in data analysis. Our main findings are that stock market development has a positive effect on economic growth. Investment, human capital, and openness also positively influence economic growth in Africa. The inflation and government expenditure affect economic growth negatively. The paper also finds that using the impulse response function, economic growth reacts to the stock market for 8 years and goes back to the initial level.
    Keywords: Stock market, Economic growth, Panel vector autoregressive
    JEL: G00 O16 C23
    Date: 2022–05
  3. By: Alessandro Maravalle; Alberto González Pandiella
    Abstract: The access to formal financial services in Mexico is particularly low. Access is also significantly unequal across income levels, gender, between rural and urban areas and across regions. SMEs access to bank credit is low, hampering firms’ ability to grow and innovate. The use of cash and informal credit is still widespread, especially in rural areas, where financial infrastructure is underdeveloped. The diffusion of digital financial services is slowly advancing but remains low, hindered by a relatively low level of financial literacy and a digital divide. Expanding access to finance would enable Mexican households to invest in education and health, and better manage income shocks and smooth consumption. It would also enable Mexican firms to invest more, increase productivity and create formal jobs. Low-income households, small firms and more disadvantaged regions would particularly benefit, as it would unlock new economic opportunities for them. Boosting competition in the banking sector would facilitate SMEs access to credit by lowering interest rate margins. Upgrading the regulatory framework of the financial system would help increase competition and quality of financial services. The potential of the fintech sector is yet to be materialised, which would further increase competition and bring financial services to wider segments of the population. Strengthening financial education and digital literacy would facilitate a larger and better use of traditional and digital financial services.
    Keywords: competition, credit, digital, financial education, financial inclusion, FinTech, SMEs
    JEL: D18 G2 G41 G51 G52 G53 O32
    Date: 2022–06–03
  4. By: Nicholas M. Odhiambo
    Abstract: In this paper, the casual relationship between foreign direct investment (FDI) and economic growth in Kenya during the period 1980-2018 is examined. In an attempt to address the omission-of-variable bias, which has been detected in some previous studies, two variables, namely money supply and trade, are used as intermittent variables, thereby leading to a system of multivariate Granger-causality equations. Using the ARDL bounds testing approach, the results show that there is a unidirectional causal flow from economic growth to FDI in Kenya. These results apply, irrespective of whether the causality is conducted in the short run or in the long run. Based on these results, it can be concluded that the current burgeoning FDI inflows that Kenya has attracted in recent years are largely driven by the strong economic growth and prudent macroeconomic policies that the country has been pursuing in recent decades. To our knowledge, this may be the first study of its kind to examine in detail the causal relationship between FDI and economic growth in Kenya in recent years. Policy implications are discussed.
  5. By: Hafsa Hina (Pakistan Institute of Development Economics)
    Abstract: Pakistan has experienced macroeconomic instability since the early seventies. Because of the country’s persistent macroeconomic uncertainty, savings and private investment have been discouraged, resulting in low aggregate investment and volatile output levels. It has one of the lowest investment-to-GDP ratios that is 15 percent, about half of the South Asian average of 30 percent. Here we will review the evidence from Pakistan to inform policymaking and local research about.
    Keywords: Public Investment, Foreign Direct Investment, Saving
    Date: 2021
  6. By: Assi Okara (CERDI - Centre d'Études et de Recherches sur le Développement International - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne)
    Abstract: Foreign Direct Investment flows to developing economies have increased significantly over the last decades, bringing about important changes in the developing world. This paper is interested in the institutional aspect of these changes, a dimension weakly investigated in the development literature. More precisely, it explores how the quality of economic institutions in developing countries responds to changes in FDI inflows. The results, based on extensive data on FDI for a large sample of developing countries over the period 1990-2009, show that economic institutions improve in countries with larger FDI flows. On average, a 10-point increase in FDI inflows as a percent of GDP is associated with a 0.9-point increase in the quality of economic institutions. The results also show that this effect is driven by FDI flows from developed economies while no significant link is detected for FDI from developing economies. Furthermore, they indicate that the positive institutional impact of total FDI is likely to be mitigated in countries where the natural resources sector represents a major driver of FDI. The findings suggest that the quality of the institutions in FDI origin countries matters in the FDI/economic institutions relationship in the developing world. Overall, the results are robust to a series of sensitivity tests including the introduction of additional control variables, the exclusion of outliers, the test of income group and regional effects, and heterogeneity analysis based on the level of institutional development of the origin countries.
    Keywords: economic institutions,property rights,FDI,developing countries
    Date: 2022–02
  7. By: Assi Okara (CERDI - Centre d'Études et de Recherches sur le Développement International - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne)
    Abstract: This paper investigates the potential of Foreign Direct Investment (FDI) to counter socio-political instability, one of the most pressing challenges faced by developing countries. Socio-political (in)stability is approached from an institutional perspective and linked to one particular type of FDI, greenfield FDI, for its more direct socio-economic externalities and their influences on greed and grievance. The issue of causality is primarily addressed using a gravity-based instrumental variable for FDI, taking advantage of bilateral greenfield projects data. The empirical results using data over the period 2003-2017 for a large sample of developing countries show that FDI favors institutional development not only in terms of overall socio-political stability but also human rights compliant socio-political stability. The results are robust to a range of specifications and alternative identification strategies, as well as to a series of sensitivity tests. Overall, this study highlights the promotion of political stability as another channel through which FDI can contribute to development.
    Keywords: Greenfield FDI,institutions,political stability,developing countries
    Date: 2022–02
  8. By: Mai, Nhat Chi
    Abstract: The purpose of this study is to analyze the diplomatic strategies of Japan in engagement with two Southeast Asian nations in response to China’s Foreign Policy on the Belt and Road Initiative. In particular, this paper examines how Vietnam and Myanmar, which are transition countries, utilize Chinese aid and Japan’s Official Development Assistance, focusing on changes in domestic politics. We thus explore questions as to whether Vietnam and Myanmar are intensively investing in sectors directly linked to economic growth, or distributing foreign aid to the political sector necessary to build democratic institutions. We will track these developments across a timescale divided into before and after the respective transitions of economy and/or politics in both countries. This is diachronic approach enables us track differentiation in where and the ways in which foreign aid is used. As a result, Vietnam has been utilizing foreign aid toward objectives economic growth without introducing any change to the political system. Both Myanmar and Vietnam, moreover, are actively embracing foreign policy competition between China and Japan to their own respective advantage.
    Date: 2022–05–07
  9. By: N. Gregory Mankiw
    Abstract: This essay discusses the reasons for and implications of the decline in real interest rates around the world over the past several decades. It suggests that the decline in interest rates is largely explicable from trends in saving, growth, and markups. In this environment, greater government debt is likely not problematic from a budgetary standpoint. But a Ponzi-like scheme of perpetual debt rollover might fail, and such a failure would make an already-bad state of the world even worse. In addition, even if a perpetual debt rollover succeeds, the increased debt could still crowd out capital, reducing labor productivity, real wages, and consumption.
    JEL: E13 E22 E62 H41 H63
    Date: 2022–05
  10. By: Tony Chernis; Patrick J. Coe; Shaun P. Vahey
    Abstract: Adrian, Boyarchenko and Giannone (2019, ABG) adapt Quantile Regression (QR) methods to examine the relationship between U.S. economic growth and financial conditions. We confirm their empirical findings, using their methodology and their pre-2016 sample. Mindful of the importance of the Covid-19 pandemic, we extend the sample to 2021:3 and find attenuation of the key estimated coefficients using ABG’s empirical methods. Given the pandemic observations, we provide robust QR analysis of dependence based on ranked data, and explain the relationship with extant copula modelling methods.
    Keywords: Vulnerable Growth, Quantile Regression, Copula Modelling
    Date: 2022–04
  11. By: Helena Chuliá (Riskcenter, Institut de Recerca en Economia Aplicada (IREA), Departament d’Econometria, Estadística i Economia Aplicada, Universitat de Barcelona (UB).); Ignacio Garrón (Departament d’Econometria, Estadística i Economia Aplicada, Universitat de Barcelona (UB).); Jorge M. Uribe (Faculty of Economics and Business Studies, Open University of Catalonia.)
    Abstract: We estimate Growth-at-Risk (GaR) statistics for the US economy using daily regressors. We show that the relative importance, in terms of forecasting power, of financial and real variables is time varying. Indeed, the optimal forecasting weights of these types of variables were clearly different during the Global Financial Crisis and the recent Covid-19 crisis, which reflects the dissimilar nature of the two crises. We introduce the LASSO and the Elastic Net into the family of mixed data sampling models used to estimate GaR and show that these methods outperform past candidates explored in the literature. The role of the VXO and ADS indicators was found to be very relevant, especially in out-of-sample exercises and during crisis episodes. Overall, our results show that daily information for both real and financial variables is key for producing accurate point and tail risk nowcasts and forecasts of economic activity.
    Keywords: Vulnerable growth, Quantiles, Machine learning, Forecasting, Value at risk. JEL classification: E27, E44, E66.
    Date: 2022–06
  12. By: James Mitchell; Aubrey Poon; Dan Zhu
    Abstract: Quantile regression methods are increasingly used to forecast tail risks and uncertainties in macroeconomic outcomes. This paper reconsiders how to construct predictive densities from quantile regressions. We compare a popular two-step approach that fits a specific parametric density to the quantile forecasts with a nonparametric alternative that lets the 'data speak.' Simulation evidence and an application revisiting GDP growth uncertainties in the US demonstrate the flexibility of the nonparametric approach when constructing density forecasts from both frequentist and Bayesian quantile regressions. They identify its ability to unmask deviations from symmetrical and unimodal densities. The dominant macroeconomic narrative becomes one of the evolution, over the business cycle, of multimodalities rather than asymmetries in the predictive distribution of GDP growth when conditioned on financial conditions.
    Keywords: Density Forecasts; Quantile Regressions; Financial Conditions
    JEL: C53 E32 E37 E44
    Date: 2022–05–09
  13. By: Juan Carlos Castro Fernández; Juan Carlos Castro Fernández
    Keywords: Financial crises, deep recessions, slow recoveries, local projections, debt overhang
    JEL: E37 E39 E44 G01
    Date: 2022–05–26
  14. By: Juan Carlos Castro Fernández; Juan Carlos Castro Fernández
    Keywords: Financial crises, financial frictions, expectations, debt overhang, news shocks, boom– bust cycles.
    Date: 2022–05–26
  15. By: Rottner, Matthias
    Abstract: Motivated by the build-up of shadow bank leverage prior to the financial crisis of 2007-2008, I develop a nonlinear macroeconomic model featuring excessive leverage accumulation and endogenous financial crises to capture the observed dynamics and to quantify the build-up of financial fragility. I use the model to illustrate that extensive leverage makes the shadow banking system runnable, thereby raising the vulnerability of the economy to future financial crises. The model is taken to U.S. data with the objective of estimating and analyzing the probability of a run in the years preceding the financial crisis of 2007-2008. According to the model, the estimated risk of a run was already considerable in 2005 and kept increasing due to the upsurge in leverage. Using counterfactual scenarios, I assess the impact of alternative monetary and macroprudential policy strategies on the estimated build-up of financial fragility.
    Keywords: Financial crises,leverage,credit boom,nonlinear estimation
    JEL: E32 E44 G23
    Date: 2022
  16. By: Esteban Ramon Perez Caldentey; Lorenzo Nalin; Leonardo Rojas
    Abstract: This paper provides a critical view of macroprudential regulation/policies found in mainstream and post-Keynesian economics. The paper provides a macroeconomic framework that can be used as a basis for the analysis of macroprudential guidelines and policies. It is based on on five main principles/guidelines: (i) financial fragility is endogenous and results from the normal functioning of market based economies driven by the profit motive; (ii) financial fragility can originate in the financial and real sectors of an economy; (iii) financial cycles are not necessarily driven by boom and busts and financial fragility need not originate in an economic boom; (iv) macroprudential policies should be viewed from a dynamic perspective, that is they must take into account the changes in the international financial architecture/structure and be region/country specific; and (v) macroprudential regulation/guidelines requires a truly macroeconomic framework. These principles are captured in the specification of a baseline stock-flow model for Latin America and the Caribbean with five sectors (government, central bank, financial sector, private sector, and external sector). The model is a tool that can be used for evaluating other macroprudential policies.
    Keywords: Debt, external constraint, external financial cycle, financial flows, Latin America and the Caribbean, microprudential and macroprudential regulation, stock-flow
    JEL: B59 E32 E52 F21 F41 G15
    Date: 2022–05
  17. By: Charles W. Calomiris; Joseph R. Mason; David C. Wheelock
    Abstract: In 1936-37, the Federal Reserve doubled member banks' reserve requirements. Friedman and Schwartz (1963) famously argued that the doubling increased reserve demand and forced the money supply to contract, which they argued caused the recession of 1937-38. Using a new database on individual banks, we show that higher reserve requirements did not generally increase banks' reserve demand or contract lending because reserve requirements were not binding for most banks. Aggregate effects on credit supply from reserve requirement increases were therefore economically small and statistically zero.
    Keywords: reserve requirements; reserve demand; excess reserves; money multiplier
    JEL: E51 E58 G21 G28 N12 N22
    Date: 2022–05–04
  18. By: Müller, Carola
    Abstract: Bank regulators interfere with the efficient allocation of resources for the sake of financial stability. Based on this trade-off, I compare how different capital requirements affect default probabilities and the allocation of market shares across heterogeneous banks. In the model, banks' productivity determines their optimal strategy in oligopolistic markets. Higher productivity gives banks higher profit margins that lower their default risk. Hence, capital requirements indirectly aiming at highproductivity banks are less effective. They also bear a distortionary cost: Because incumbents increase interest rates, new entrants with low productivity are attracted and thus average productivity in the banking market decreases.
    Keywords: bank competition,bank regulation,Basel III,capital requirements,heterogeneous banks,leverage ratio
    JEL: G11 G21 G28
    Date: 2022
  19. By: Andisheh (Andy) Danaee; Harsimran Grewal; Brad Howell; Guillaume Ouellet Leblanc; Xuezhi Liu; Xiangjin Shen; Mayur Patel
    Abstract: We examine the potential impacts of a severe economic shock on the resilience of major banks in Canada. We find these banks would suffer significant financial losses but nevertheless remain resilient. This underscores the role well-capitalized banks and sound underwriting practices play in supporting economic activity in a downturn.
    Keywords: Financial institutions; Financial stability
    JEL: E E27 E37 E44 G1 G23
    Date: 2022–05
  20. By: Larry D. Wall
    Abstract: The US government has intervened to provide extraordinary support 16 times from 1970 to 2020 with the goal of preventing or mitigating (or both) the cost of financial instability to the financial sector and the real economy. This article discusses the motivation for such support, reviewing the instances where support was provided, along with one case where it was expected but not provided. The article then discusses the moral hazard and fiscal risks posed by the government's insurance of the tail risk along with ways to reduce the government's risk exposure.
    Keywords: financial stability; FDIC; Federal Reserve; Treasury; bailout; financial history
    JEL: F33 F36 G18 G21 G23 G28 G32 H12 H6 N22
    Date: 2021–11–08
  21. By: Pierre Gosselin (IF); A\"ileen Lotz (IRMA); Marc Wambst (IRMA)
    Abstract: This paper provides a general method to directly translate a classical economic framework with a large number of agents into a field-formalism model. This type of formalism allows the analytical treatment of economic models with an arbitrary number of agents, while preserving the system's interactions and microeconomic features of the individual level.We apply this methodology to model the interactions between financial markets and the real economy, described in a classical framework of a large number of heterogeneous agents, investors and firms. Firms are spread among sectors but may shift between sectors to improve their returns. They compete by producing differentiated goods and reward their investors by paying dividends and through their stocks' valuation. Investors invest in firms and move along sectors based on firms' expected long-run returns.The field-formalism model derived from this framework allows for collective states to emerge. We show that the number of firms in each sector depends on the aggregate financial capital invested in the sector and its firms' expected long-term returns. Capital accumulation in each sector depends both on short-term returns and expected long-term returns relative to neighbouring sectors.For each sector, three patterns of accumulation emerge. In the first pattern, the dividend component of short-term returns is determinant for sectors with small number of firms and low capital. In the second pattern, both short and long-term returns in the sector drive intermediate-to-high capital. In the third pattern, higher expectations of long-term returns drive massive inputs of capital.Instability in capital accumulation may arise among and within sectors. We therefore widen our approach and study the dynamics of the collective configurations, in particular interactions between average capital and expected long-term returns, and show that overall stability crucially depends on the expectations' formation process.Expectations that are highly reactive to capital variations stabilize high capital configurations, and drive low-to-moderate capital sectors towards zero or a higher level of capital, depending on their initial capital. Inversely, low-to moderate capital configurations are stabilized by expectations moderately reactive to capital variations, and drive high capital sectors towards more moderate level of capital equilibria.Eventually, the combination of expectations both highly sensitive to exogenous conditions and highly reactive to variations in capital imply that large fluctuations of capital in the system, at the possible expense of the real economy.
    Date: 2022–05
  22. By: Ming Zeng; Guihai Zhao
    Abstract: Recent findings on the term structure of equity and bond yields pose serious challenges to existing models of equilibrium asset pricing. This paper presents a new equilibrium model of subjective expectations to explain the joint historical dynamics of equity and bond yields (and their yield spreads). The movements of equity and bond yields are driven mainly by subjective expectations of dividend and gross domestic product (GDP) growth. Yields on short-term dividend claims are more volatile because the expected short-term dividend growth mean-reverts to its less volatile long-run counterpart. The procyclical slope of equity yields is due to the countercyclical slope of dividend growth expectations. The correlation between equity returns/yields and nominal bond returns/yields switched from positive to negative after the late 1990s, owing mainly to a stronger correlation between expectations of real GDP growth and real dividend growth and only partially to procyclical inflation. Dividend strip returns are predictable, and the predictive power decreases with maturity as a result of predictable forecast errors and revisions. The model is also consistent with the data in generating persistent and volatile price-dividend ratios and excess return volatility.
    Keywords: Asset pricing; Financial markets; Interest rates
    JEL: G00 G12 E43
    Date: 2022–05
  23. By: Andreas Kick; Horst Rottmann
    Abstract: Banks have always played an ambivalent role in financial markets. On the one hand, they provide essential services for the market; on the other hand, problems in the banking sector can send shock waves through the entire economy. Given this prominent role, it is not surprising that Pereira and Rua (2018) found that the health of the banking sector exerts an influence on stock returns in the US. Understanding the relationship between banks and their impact on the asset prices of non-financials is essential to evaluate the risk emanating from an unhealthy banking sector and should be considered in new regulatory requirements. The aim of this study is to determine if the health of European banks is of such importance for the European stock market so that spillover effects are visible. Our results show that none of our banking-health variables have explanatory power on the cross-section of European stock returns. These findings contrast those for the US. The reasons may be manifold, from an unimportant liquidity provisioning channel over reduced room for actions due to regulatory requirements up to a moral hazard situation in Europe, where investors strongly rely on the governmental bailouts of distressed banks.
    Keywords: asset pricing, banking, spillover, errors-in-variables, individual stocks, distance-to-default
    JEL: G12 G21
    Date: 2022
  24. By: Papoutsi, Melina; Darmouni, Olivier
    Abstract: Using large panel data of public and private firms, this paper dissects the growth of bond financing in the Euro Area through the lens of the cross-section of issuers. In recent years, the composition of bond issuers has shifted, with the entry of many smaller and riskier issuers. New issuers invest and grow, instead of simply repaying bank loans. Moreover, holdings of ‘buy-and-hold’ bond investors are large in aggregate but small for weaker issuers. Nevertheless, the bond investors’ sell-off after March 2020 was largely directed at bonds of larger, safer issuers. This micro-evidence can shed light on the implications of corporate bonds market development for smaller firms and financial stability. JEL Classification: G21, G32, E44
    Keywords: bond investors, Corporate bond market, debt structure, disintermediation, ECB, financial fragility, monetary policy, quantitative easing
    Date: 2022–05
  25. By: Gabriele Beccari (University of Rome Tor Vergata. Dipartimento di Economia e Finanza); Francesco Marchionne (Indiana University, Kelley School of Business); Beniamino Pisicoli (University of Rome Tor Vergata. Dipartimento di Economia e Finanza)
    Abstract: This paper uses the Italian 2012 reform that introduced minibonds, a financial instrument specifically designed for SMEs, to check whether more accessible market-based finance promotes investment in intangibles. We apply a propensity score matching to address selection bias, run diff-in-diff estimates over 1,454 different samples to test our hypotheses, and use a meta-analysis to summarize the results. We find that minibond-issuing firms increase investments in intangible assets, a component difficult to finance via bank credit, more than other firms and investments in tangibles. Two mechanisms are at work: minibond issuances increase financial resources available to the firm (financial effect) and, above all, signal an improvement in business practices (reputational effect). These effects are more intense for smaller, more opaque, and bank-dependent firms. Our results are not affected by model dependence or endogeneity issues and are robust to different specifications.
    Keywords: intangibles; corporate bonds; bank dependence; minibonds; market-based finance; SMEs; investment
    JEL: G10 G23 G32 O30
    Date: 2022–05
  26. By: Kensuke Fukunaga (Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, Senior Analyst, UTokyo Economic Consulting Inc., E-mail:; Daisuke Miyakawa (Associate Professor, Hitotsubashi University Business School (E-mail:
    Abstract: How do supply chain networks affect credit supply? To answer this question, we empirically detect clusters of firms by using firm-to- firm transaction data, then measure banks' exposures to those clusters and borrowing firms by using bank-to-firm lending data. Through the panel estimations controlling for unobservable factors potentially affecting credit demand and supply, first, we find that the higher portfolio concentration of banks on the clusters of firms lowers credit supply to less creditworthy firms. Second, we also find that such a pattern is more apparent for banks lending to creditworthy firms. These results suggest that the change in real network propagates to credit supply through banks' risk management.
    Keywords: Credit supply, supply chain network, cluster detection
    JEL: D22 E44 G11 G21
    Date: 2022–05
  27. By: William Roberds
    Abstract: Recently, there has been much discussion as to whether central bank digital currencies (CBDCs) should be introduced, and if so, how they should be designed. This article offers a historical perspective on this discussion, with a survey of early public bank (proto-central bank) "analog currencies"—circulating banknotes. Public banknotes were an experimental product when they were first issued in sixteenth-century Naples, but by the late nineteenth century, such notes could be found in most European countries. In between came all sorts of implementation difficulties: egregious insider fraud, a real estate finance bubble, hyperinflation, rampant counterfeiting, and complete institutional collapse. Despite these many misfires, central bank–issued notes eventually became the default form of payment in virtually every country worldwide.
    Keywords: central bank digital currency; banknotes
    JEL: E58 N13
    Date: 2022–03–03
  28. By: Mushtaq, Saba; Mushtaq, Faiza
    Abstract: Effect of inflation (CPI) and other macroeconomic variable on bank deposits is the empirical issue in many countries but in Pakistan there is no significant work have been done about this relationship. This paper investigates the effect of different macroeconomic variables on bank deposits in Pakistan by using time series data from 1960 to 2010.Least square method and multiple regression model was used to analyze the data. The results clearly indicate that there is a negative relationship between inflation and bank deposits. Other macroeconomic variable which includes broad money, deposit rates, GDP and per capita income have positive impact on bank deposits. It is concluded that by efficient fiscal and monetary policy we can manage this macroeconomic variable in order to increase bank deposits. Per capita income can be increase by different policies and by reducing unemployment. Banks can play a vital role with the help of Government in order to manage these macroeconomic variables by using different policies and step to minimize the effects of these variables.
    Keywords: Bank deposits, Inflation (Consumer Price Index), Per Capita Income, Broad Money, GDP, Deposit rate
    JEL: E6 G21
    Date: 2022–05–16
  29. By: Agrippino, Silvia Miranda (Bank of England); Nenova, Tsvetelina (London Business School)
    Abstract: We compare the macroeconomic and financial spillovers of the unconventional monetary policies of the Fed and the ECB. Monetary policy tightenings in the two areas are followed by a contraction in global activity and trade, a retrenchment in global capital flows, a fall in global stock markets, and a rise in risk aversion. Bilateral spillovers are also powerful. Fed and ECB monetary policies propagate internationally through the same channels – trade and risk-taking – but the magnitude of ECB spillovers is smaller. We postulate that the relative importance of the euro and the US dollar in the international financial system can help to explain such asymmetries, and produce tentative evidence that links the strength of the ECB spillovers to € exposure in trade invoicing and the pricing of financial transactions.
    Keywords: Unconventional monetary policy; high-frequency identification; international spillovers; Fed; ECB
    JEL: E52 F42 G15
    Date: 2022–04–14
  30. By: Florian Peters; Doris Neuberger; Oliver Reinhardt; Adelinde Uhrmacher
    Abstract: In macroeconomics, an emerging discussion of alternative monetary systems addresses the dimensions of systemic risk in advanced financial systems. Monetary regime changes with the aim of achieving a more sustainable financial system have already been discussed in several European parliaments and were the subject of a referendum in Switzerland. However, their effectiveness and efficacy concerning macro-financial stability are not well-known. This paper introduces a macroeconomic agent-based model (MABM) in a novel simulation environment to simulate the current monetary system, which may serve as a basis to implement and analyze monetary regime shifts. In this context, the monetary system affects the lending potential of banks and might impact the dynamics of financial crises. MABMs are predestined to replicate emergent financial crisis dynamics, analyze institutional changes within a financial system, and thus measure macro-financial stability. The used simulation environment makes the model more accessible and facilitates exploring the impact of different hypotheses and mechanisms in a less complex way. The model replicates a wide range of stylized economic facts, including simplifying assumptions to reduce model complexity.
    Date: 2022–05
  31. By: Gourdel, Régis; Monasterolo, Irene; Dunz, Nepomuk; Mazzocchetti, Andrea; Parisi, Laura
    Abstract: The analysis of the conditions under which, and extent to which climate-adjusted financial risk assessment affects firms’ investment decisions in the low-carbon transition, and the realisation of the climate mitigation trajectories, still represent a knowledge gap. Filling this gap is crucial to assess the “double materiality” of climate-related financial risks. By tailoring the EIRIN Stock-Flow Consistent model, we provide a dynamic balance sheets assessment of climate physical and transition risks for the euro area, using the climate scenarios of the Network for Greening the Financial System (NGFS). We find that an orderly transition achieves important co-benefits already in the mid-term, with respect to carbon emissions abatement, financial stability, and economic output. In contrast, a disorderly transition can harm financial stability, thus limiting firms’ capacity to invest in low-carbon activities that could decrease their exposure to transition risk and help them recover from climate physical shocks. Importantly, investors’ climate sentiments, i.e. their anticipation of the impact of the carbon tax across NGFS scenarios, play a key role for smoothing the transition in the economy and finance. Our results highlight the importance for financial supervisors to consider the role of firms and investors’ expectations in the low-carbon transition, in order to design appropriate macro-prudential policies for tackling climate risks. JEL Classification: B59, Q50
    Keywords: climate physical risk, climate transition risk, double materiality, Network for Greening the Financial System scenarios, Stock-Flow Consistent model
    Date: 2022–05
  32. By: Úbeda, Fernando; Mendez, Alvaro; Forcadell, Francisco Javier
    Abstract: Lack of access to banking is a major problem that contributes to inequality in the developing world. For this reason, financial inclusion is a crucial objective of the Sustainable Development Goals (SDGs). In this study, we investigate the impact of the sustainable practices of multinational banks (MNBs) on financial inclusion. Drawing from a sample of 24 developing countries and 28,089 individuals, we obtain robust evidence about the positive effect of sustainable practices on financial inclusion. We find that MNBs increase the use of mobile bank accounts in the developing world. We also find that when these MNBs follow sustainable practices, the use of mobile bank accounts positively intensifies. These findings are consequential because mobile banking is one of the most powerful means to achieve financial inclusion in the developing world.
    Keywords: sustainable banking; finance inclusion; mobile banking accounts; sustainable development goals
    JEL: G00 G20 G21 Q01 Q56 D63
    Date: 2022

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