nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2022‒08‒15
thirty-one papers chosen by
Georg Man

  1. Financialization Historically Contemplated By Tsaliki, Persefoni; Tsoulfidis, Lefteris
  2. A Study of the Non-Banking Finance Companies in India By Rajeswari Sengupta; Lei Lei Son; Harsh Vardhan
  3. Understanding SME Trade Finance in ASEAN: An Overview By Tony Cavoli; David Christian; Rashesh Shrestha
  5. SONOMA: a Small Open ecoNOmy for MAcrofinance By Mariano Croce; Mohammad R. Jahan-Parvar; Samuel Rosen
  6. Capital Market Performance and Macroeconomic Dynamics in Nigeria By Oladapo Fapetu; Segun Michael Ojo; Adekunle Alexander Balogun; Adeoba Adepoju Asaolu
  7. Household credit-financed consumption and the debt service ratio: tackling endogenous autonomous demand in the Supermultiplier model By Joana David Avritzer; Lídia Brochier
  8. Public debt, growth, and threshold effects: A comparative analysis based on income categories By Princewill U. Okwoche; Eftychia Nikolaidou
  9. Análisis sobre la incidencia de la deuda pública en el crecimiento económico de Ecuador durante el periodo 1990-2019 By Jimenez, Ivett; Alvarado, Rafael
  10. Effect of remittances on the macroeconomy: A Structural VAR study of Nepal By Sudyumna Dahal
  11. Demographic Transition, Industrial Policies and Chinese Economic Growth By Michael Dotsey; Wenli Li; Fang Yang
  12. Countercyclical capital buffer: building the resilience or taming the rapid financial cycle? By Widiantoro, Dimas Mukhlas
  13. Higher capital requirements and credit supply: evidence from Italy By Maddalena Galardo; Valerio Vacca
  14. Spillover Effects from External Shocks on Bank Credit Risk: Evidence from Cointegration Analysis for Albania By Esida Gila-Gourgoura; Eftychia Nikolaidou
  15. ASEAN’s newer member countries in two financial crises: Impact, response and lessons By Jayant Menon
  16. Correspondent banking, systematic risk, and the Panic of 1893 By Cotter, Christopher; Rousseau, Peter L
  17. Restoring confidence in troubled financial institutions after a financial crisis By Charles W. Calomiris; Mark A. Carlson
  18. Global Stagflation By Ha, Jongrim; Kose, Ayhan M.; Ohnsorge, Franziska
  19. Monetary Growth and Financial Sector Wages By Michael Patrick Curran; Matthew J. Fagerstrom; Ryan Zalla
  20. Finance and the Reallocation of Scientific, Engineering and Mathematical Talent By Marin, Giovanni; Vona, Francesco
  21. Global shocks and international policy coordination By Ashima Goyal; Rupayan Pal
  22. The role of non-bank financial institutions in the intermediation of capital flows to emerging markets By Alessandro Moro; Alessandro Schiavone
  23. The BRI: Trade integration and stock market synchronization. A review of empirical findings By Heß, Alexander; Hindermann, Christoph Michael
  24. Effect of Aid for Trade flows on the Accession to the World Trade Organization By Gnangnon, Sèna Kimm
  25. Cultural Origins of Investment Behavior By Andreas Ek; Gunes Gokmen; Kaveh Majlesi
  26. FinTech, General Purpose Technology und Wohlfahrt By Treu, Johannes
  27. FinTech lending and equity and debt platforms around the world and in Italy By Salvatore Cardillo; Antonio Ilari; Silvia Magri; Giorgio Meucci; Mirko Moscatelli; Dario Ruzzi
  28. Bank non-performing loans in the Fintech era By Ozili, Peterson K
  29. Do national development factors affect cryptocurrency adoption? By Bhimani, Alnoor; Hausken, Kjell; Arif, Sameen
  30. Climate-related Financial Stability Risks for the United States: Methods and Applications By Celso Brunetti; John Caramichael; Matteo Crosignani; Benjamin Dennis; Gurubala Kotta; Donald P. Morgan; Chaehee Shin; Ilknur Zer
  31. The rising tide lifts some interest rates: climate change, natural disasters, and loan pricing By Ricardo Correa; Ai He; Christoph Herpfer; Ugur Lel

  1. By: Tsaliki, Persefoni; Tsoulfidis, Lefteris
    Abstract: This article examines the extent to which financialization is a new phase of capital accumulation characterized by its own economic laws in which the real (production) economy adjusts accordingly. In order to examine this hypothesis, we invoke the share of the financial sector in the GDP of the USA, as the best meaningful metric to approximate the expansion of the financialization over time. Our findings suggest that the financialization phenomena of the post-1982 years are comparable to those of the “roaring 1920s”. The observed differences are quantitative, in the main, and although they suggest the presence of regularities; nevertheless, they do not suggest an altogether different stage of a finance-led capitalism.
    Keywords: Financialization, profit rate, interest rate, long-cycles, financial fragility
    JEL: B50 G20 G30 N12 O15 O16
    Date: 2021–12–11
  2. By: Rajeswari Sengupta (Indira Gandhi Institute of Development Research); Lei Lei Son (Asian Development Bank); Harsh Vardhan (SP Jain Institute of Management & Research)
    Abstract: In late 2018, the default by a major non-banking financial company (NBFC) in India led to a credit crunch in the Indian economy. The crisis raises questions about the business model of the NBFCs, and the role they play alongside banks in the economy. In this paper we analyse the evolution of the NBFC sector in India over time and its importance in extending credit and discusses the factors that may have contributed to the 2018 crisis. We attempt to understand the advantages and disadvantages of the business model of NBFCs, and the drivers of their rapid rise and subsequent challenges in recent years. We also briefly discuss the potential impact of the Covid-19 pandemic on the NBFC sector. Drawing lessons from the past, NBFCs need to be strengthened to play an important role in India's financial landscape.
    Keywords: Non-banking financial company, financial intermediation, financial regulation, systemic risk, liquidity crunch
    JEL: G01 G23 G28
    Date: 2022–06
  3. By: Tony Cavoli (University of South Australia); David Christian (Economic Research Institute for ASEAN and East Asia (ERIA)); Rashesh Shrestha
    Abstract: SMEs are the most important source of employment in all ASEAN countries, but a lack of access to external sources of finance may limit their expansion and growth. In particular, the existence of a trade finance gap can curtail their participation in international trade. Countries in ASEAN and East Asia need to address this issue to include SMEs in their export-oriented growth strategy. This paper provides a framework for understanding the trade finance gap by examining the nature and strength of relationships between different actors in the trade finance ecosystem. We present an overview of the literature that studied the relationship between financial development and trade, the availability and use of various trade finance instruments in international trade, and some stylised facts about trade finance in ASEAN.
    Keywords: Trade Finance; International Financial Institutions; trade; financial crisis
    JEL: F19 F34 G21
    Date: 2022–02–22
  4. By: Mercy T. Musakwa (University of South Africa); Nicholas M. Odhiambo (University of South Africa)
    Abstract: In this study, we investigate the impact of tourism on financial development in Kenya using time series data from 1995 to 2017. The study uses the autoregressive distributed lag (ARDL) bound testing approach to cointegration and error correction model to examine this linkage. To increase the robustness of the results, the study uses two proxies of financial development, namely broad money (bank-based financial development proxy) and total value of stocks traded (market-based financial development proxy). Results show that tourism has an insignificant impact on financial development in Kenya – both in the short and in the long run. The results apply irrespective of whether the financial development is proxied by a bank-based financial development indicator or by a market-based financial development indicator. This finding points to the fact that, although tourism is one of the main sources of foreign exchange in Kenya, it has no direct impact on financial development. The findings from this study add value to policy makers in Kenya by revealing the insignificant impact tourism has on financial development, although it is contrary to other studies that found a positive contribution. Based on the findings, Kenya may not anchor its financial development policies on tourism.
    Date: 2022–06
  5. By: Mariano Croce; Mohammad R. Jahan-Parvar; Samuel Rosen
    Abstract: We develop a new small open economy model (SONOMA) in which domestic corporate debt and equities are affected by shocks to both external credit and equity markets. In a novel empirical analysis of several small-but-developed economies, we show that both external debt and equity shocks are important determinants of domestic economic fluctuations, corporate leverage, and net foreign asset positions. SONOMA replicates our empirical facts about asset prices, financial flows, and economic activity.
    Keywords: External Positions; Credit and Equity Shocks; Asset Pricing
    JEL: F30 F40 G15
    Date: 2022–07–14
  6. By: Oladapo Fapetu; Segun Michael Ojo; Adekunle Alexander Balogun; Adeoba Adepoju Asaolu
    Abstract: The study examined the relationship between capital market performance and the macroeconomic dynamics in Nigeria, and it utilized secondary data spanning 1993 to 2020. The data was analyzed using vector error correction model (VECM) technology. The result revealed a significant long run relationship between capital market performance and macroeconomic dynamics in Nigeria. We observed long run causality running from the exchange rate, inflation, money supply, and unemployment rate to capital market performance indicator in Nigeria. The result supports the Arbitrage Pricing Theory (APT) proposition in the Nigerian context. The theory stipulates that the linear relationship between an asset expected returns and the macroeconomic factors whose dynamics affect the asset risk can forecast an asset's returns. In other words, the result of this study supports the proposition that the dynamics in the exchange rate, inflation, money supply, and unemployment rate influence the capital market performance. The study validates the recommendations of Arbitrage Pricing Theory (APT) in Nigeria.
    Date: 2022–07
  7. By: Joana David Avritzer; Lídia Brochier
    Abstract: The paper develops a Supermultiplier model where household debt-financed consumption is the autonomous component of demand driving growth. However, instead of taking autonomous consumption growth as exogenous - as usually done in canonical Supermultiplier models - we assume households’ debt service ratio partially determines it. More precisely, we define a consumption function that captures: (i) the fact that households’ demand for credit may depend on the burden interest payments have on their income (wages) and (ii) that credit conditions may also affect the pace of household expenditures. There are two equilibria in the model: one with a lower debt ratio and higher growth rate; and the other with a higher debt ratio and lower growth rate. Both equilibria are locally stable for the chosen set of parameters, yet the system converges to the steady state with a lower household debt ratio and higher growth rate. Both real and financial variables affect the steady growth path in the model, with the wage share and firms’ propensity to invest having a positive effect on growth while the interest rate has a negative one.
    Keywords: demand-led growth, Supermultiplier, household debt, consumption, endogenous autonomous demand
    JEL: B50 C61 E11 G15 O41
    Date: 2022–08
  8. By: Princewill U. Okwoche (School of Economics, University of Cape Town); Eftychia Nikolaidou (School of Economics, University of Cape Town)
    Abstract: Whether or not public debt stifles economic growth remains a relevant research question. An equally relevant follow-up question is whether there is a certain threshold, applicable to all countries, above which debt becomes a drag on growth. Although there is generally no consensus, researchers seem to agree that the relationship between debt and growth is, at best, heterogenous across countries and groups. This study is motivated by the idea of parameter heterogeneity according to which the data generating process that characterizes each country’s growth process is not the same for all observations. Although previous studies have focused more on the asymmetric effect of debt on growth above and below a particular debt threshold, evidence shows that the level of debt is not the only plausible threshold variable. This study examines the influence of income per capita and countries’ historical categorization by income on the debt-growth nexus. It also examines the variation in the nexus across low, lower-middle, upper-middle, and high-income countries. Mainly, the study presents a debt threshold value of around 45% for all countries beyond which debt impacts negatively on growth. It also finds that the relationship between debt and growth varies considerably from one income group to another. Notably, the threshold of debt tends to rise as one moves up from low to high-income category. Given the negative relationship between debt and growth above the threshold, it is important for countries, particularly those in the lower income categories, to exercise some caution in the accumulation of debt.
    Date: 2022
  9. By: Jimenez, Ivett; Alvarado, Rafael
    Abstract: El presente estudio tiene como objetivo evaluar el impacto de la deuda pública sobre el crecimiento económico de Ecuador. Tomando en cuenta que la literatura en su mayoría demuestra que el excesivo endeudamiento público compromete el desempeño económico de los países en el largo plazo, por ello se aporta con evidencia actualizada sobre este tema. Con base a esto se utiliza econometría de series de tiempo implementando modelos de mínimos cuadrados ordinarios (MCO), un modelo de vectores autorregresivos (VAR) y técnicas de cointegración y causalidad. Los hallazgos empíricos establecen que el incremento de deuda pública está asociado con una reducción del crecimiento económico en el largo plazo. Además, se determina relación de cointegración entre las variables del estudio. Finalmente, se reconoce causalidad unidireccional que va del PIB per cápita hacia la deuda púbica. La implicación de política va encaminada a que el Estado fortalezca la calidad institucional del sector público para garantizar una administración e inversión eficiente de los recursos obtenidos mediante deuda, para reducir los niveles de endeudamiento y evitar una ralentización económica en el país.
    Keywords: Crecimiento económico; Deuda pública; Series de tiempo; Cointegración
    JEL: A1 C01 C22 H63
    Date: 2022–05–29
  10. By: Sudyumna Dahal
    Abstract: The paper examines the short-term macroeconomic impact of remittances using a case study of Nepal, one of the highest remittance-receiving countries in the world as a share of GDP. Despite the massive inflow of remittances during the turn of the century, the quantitative impact of remittances on the Nepali economy remains largely unexplored. Furthermore, macroeconomic modelling of the Nepali economy is at the infant stage primarily due to the unavailability of reliable data. Hence, using novel quarterly GDP data, this paper aims to fill both gaps by examining the effects of remittance and other macroeconomic variable shocks on the small open economy of Nepal between 2004 and 2019. Employing an SVAR model, the study finds that the impact of remittance shock on output (GDP) is not significant, but remittances significantly increased money supply and prices and appreciated the real exchange rate. These findings solve the price and exchange rate puzzles found in the earlier studies on Nepal. While foreign partners’ output primarily drives the remittance inflows to Nepal, the real exchange rate also plays a non-trivial role, but the domestic GDP or the interest rate do not appear to have a significant impact on the remittance inflows. Most of the macroeconomic variables do not respond to the policy rate; additionally, the reaction of money supply in response to a positive shock to inflation is not significant, which poses a further challenge to the policymakers in Nepal. Despite the monetary authorities in Nepal using money supply as the primary monetary policy tool, the transmission channel remains impaired.
    Keywords: remittance shock, Nepal, macro-economy, small open economy, structural VAR,
    JEL: F24 F62 O53 F22
    Date: 2022–07
  11. By: Michael Dotsey; Wenli Li; Fang Yang
    Abstract: We build a unified framework to quantitatively examine the demographic transition and industrial policies in contributing to China’s economic growth between 1976 and 2015. We find that the demographic transition and industrial policy changes by themselves account for a large fraction of the rise in household and corporate savings relative to total output and the rise in the country’s per capita output growth. Importantly, their interactions also lead to a sizable fraction of the increases in savings since the late 1980s and reduce growth after 2010. A novel and important factor that drives these dynamics is endogenous human capital accumulation, which depresses household savings between 1985 and 2010 but leads to substantial gains in per capita output growth after 2005.
    Keywords: Aging; Credit policy; Household saving; Output growth; China
    JEL: E21 J11 J13 L52
    Date: 2022–07–15
  12. By: Widiantoro, Dimas Mukhlas
    Abstract: Countercyclical capital buffer came in 2009 after Basel Committee proposed it through Basel III regulation to build banking resilience and tame the systemic risk due to excessive growth in the credit cycle. Basel committee proposed the credit to GDP gap or credit gap as the indicator of when such buffer is activated. In 2014, the European Central Bank recommended that European Economies adopt the countercyclical capital buffer or CCB in their macroprudential policies. However, in the implementation, every financial authority in EU markets imposed the CCB differently. Some groups use CCB to build resilience as their primary objective. At the same time, the other group attempted not only resilience but also to control the excessive credit growth as their primary objective. The next challenge in implementing CCB is the negative feedback on the usage of the credit gap as the indicator and guidance on setting the CCB rate. The input lies in the Hodrick-Prescott or HP filter containing polynomial drift with a structural break, creating a spurious result. There are two novelties in this paper. First, the paper attempts to see whether the differences in such purposes will affect the country's resilience and ability to tame excessive credit growth. Second, the paper will employ the boosted Hodrick-Prescott filter or bHP from Phillips and Shi (2021) and compare it to the original Hodrick-Prescott filter. The empirical analysis uses data from Germany as the resilience focus market and France focusing on resilience and taming the rapid financial cycle. Using quarterly data from 1999 to 2021, we find that the boosted HP filter significantly improves the accuracy of the credit gap and output gap by removing the polynomial drift in the original HP filter. By analyzing the speed of economic recovery after financial shock, Germany, which focuses primarily on building economic resilience, recovers faster than France. Later, we find no significant difference between the two markets in their ability to tame the financial cycle by analyzing the credit gap cycle after the CCB implementation shock. And last, we find that after 2014, Germany has been able to moderate credit procyclicality, better than the period before.
    Keywords: boosted Hodrick-Prescott filter, Output gap, Credit to GDP gap, Countercyclical capital buffer
    JEL: E61 E65
    Date: 2022–02–22
  13. By: Maddalena Galardo (Bank of Italy); Valerio Vacca (Bank of Italy)
    Abstract: We use a rich dataset on bank loans to Italian firms matched to information on firms’ and banks’ characteristics, and exploit the implementation of Basel III reforms in Italy to investigate the impact of higher risk-based capital requirements on credit supply. While we do not address the steady state impact of capital requirements, we find that the introduction of higher requirements is associated with credit tightening in the early years after the reform. Banks affected to a larger extent by the new requirements tighten credit supply towards risky firms in favour of sounder ones. We also show that banks with particularly strong or particularly weak pre-reform capital positions tighten the credit to a lesser extent, i.e., the lending supply response is U-shaped with respect to initial capital, as predicted by the forced safety effect (Bahaj and Malherbe 2020). Finally, firms borrowing more from less capitalized banks were only partially able to switch their lenders, experienced a worsening in lending conditions and invested less compared to other firms after Basel III implementation.
    Keywords: financial institutions, Basel III, capital requirements, forced safety effect, lending conditions
    JEL: G21 G28 G38
    Date: 2022–06
  14. By: Esida Gila-Gourgoura (School of Economics, University of Cape Town); Eftychia Nikolaidou (School of Economics, University of Cape Town)
    Abstract: Over the last fifteen years, the presence of European banking groups in the banking systems of Western Balkan countries, has negatively affected their financial stability through external economic/financial shocks. Albania is an example of a Western Balkan country, with a significant foreign capital presence in its banking system, including Italian capital. Furthermore, Albania is economically linked to Italy through trade channels and remittances arriving from Albanian immigrants in Italy. Given that Italy has been one of the main protagonists of the European debt crisis (2010-2012), the chance of negative spillover effects from the Italian debt crisis, transmitted to the Albanian banking system through banking and trade channels, is high. Despite this, no previous studies have attempted to incorporate these potential effects in the empirical analysis. Employing the ARDL approach to cointegration (and the VECM framework as a complementary method), this paper investigates the determinants of credit risk in the Albanian banking sector paying particular attention to the spillover effects from external shocks. Empirical findings suggest that the Italian debt crisis has a positive impact on bank credit risk in Albania over the period 1999Q1–2019Q4. Moreover, it is concluded that other country-specific factors such as the real effective exchange rate and the capital to assets ratio positively affect credit risk in Albania.
    Date: 2022
  15. By: Jayant Menon
    Abstract: ASEAN has been through two major financial crises in the last quarter century: the 1997-98 Asian Financial Crisis (AFC) and the 2008-09 Global Financial Crisis (GFC). Although there is a voluminous literature covering the original five members, it has largely ignored the newer members – Brunei Darussalam, Cambodia, Lao PDR, Myanmar and Vietnam (BCLMV). For the first time, a systematic analysis of the experience of the newer members of ASEAN relating to the AFC and the GFC focusing on impact, policy response and lessons is provided. Their participation in regional financial cooperation initiatives in helping prevent or mitigate the impact of future crises, and how these initiatives need to be enhanced to better serve them is also considered.
    Keywords: Asian Financial Crisis; Global Financial Crisis; ASEAN; Brunei Darussalam; Cambodia; Lao PDR; Myanmar; Vietnam.
    JEL: G01 F15 F32 F33 F34
    Date: 2021
  16. By: Cotter, Christopher; Rousseau, Peter L
    Abstract: During the U.S. National Banking Period (1863-1913), a network of correspondent banking relationships left the nation vulnerable to systemic risks, bank failures, and financial panics. We use comprehensive data on primary correspondent relationships for all national, state, savings, and private banks in the lead up to the Panic of 1893 to show that failures of both upstream and downstream correspondents increased the likelihood that a given bank would itself fail, and that these effects varied over the course of the Panic. Members of the New York Clearinghouse, despite a very low incidence of actual failure, also saw significant weakening of their balance sheets early in the Panic when their downstream respondents failed, and falling stock prices throughout the disruption. The results demonstrate a two-way system-wide weakness of the correspondent system that the Federal Reserve Act of 1914 presumably sought to remedy.
    Keywords: Interbank networks, correspondent banking, the Panic of 1893, bank contagion
    JEL: G01 G21 N21
    Date: 2022–05–19
  17. By: Charles W. Calomiris; Mark A. Carlson
    Abstract: After an unprecedented number of banks suspended operations in the during Panic of 1893, the head regulator of banks chartered by the United States government allowed about 100 banks to reopen after certifying their solvency. We evaluate whether actions by bank owners to change management, contract with depositors to extend liability maturity structure, write off bad assets, and/or inject capital affected bank survival and deposit retention. This historical episode is particularly informative because there was no expectation of government intervention. We find that contracting with depositors provided short-term benefits while dealing with bad assets was key for long-run viability.
    Keywords: Banking panics; Bank resolution; Market discipline; National Banking Era
    JEL: G21 G28 N21 N41
    Date: 2022–07–07
  18. By: Ha, Jongrim; Kose, Ayhan M.; Ohnsorge, Franziska
    Abstract: Global inflation has risen sharply from its lows in mid-2020, on rebounding global demand, supply bottlenecks, and soaring food and energy prices, especially since the Russian Federation’s invasion of Ukraine. Markets expect inflation to peak in mid-2022 and then decline, but to remain elevated even after these shocks subside and monetary policies are tightened further. Global growth has been moving in the opposite direction: it has declined sharply since the beginning of the year and, for the remainder of this decade, is expected to remain below the average of the 2010s. In light of these developments, the risk of stagflation—a combination of high inflation and sluggish growth—has risen. The recovery from the stagflation of the 1970s required steep increases in interest rates by major advanced-economy central banks to quell inflation, which triggered a global recession and a string of financial crises in emerging market and developing economies. If current stagflationary pressures intensify, they would likely face severe challenges again because of their less well-anchored inflation expectations, elevated financial vulnerabilities, and weakening growth fundamentals.
    Keywords: Inflation; growth; COVID-19; global recession; monetary policy; fiscal policy; disinflation
    JEL: E31 E32 E52 Q43
    Date: 2022–06–07
  19. By: Michael Patrick Curran (Department of Economics, Villanova School of Business, Villanova University); Matthew J. Fagerstrom (Department of Economics, Villanova School of Business, Villanova University); Ryan Zalla (Economics Department, University of Pennsylvania, 133 South 36th Street, Philadelphia, PA 19104, USA.)
    Abstract: We investigate the relation between monetary growth and compensation in the financial industry since the end of the Bretton Woods system. Estimating local projections, we find that the growth of the monetary base positively associates with a higher differential between financial and average wages. Our findings indicate that the effects are short lived, lending support to the temporary non-neutrality of money argued by David Hume and against the more permanent non-neutrality argued by Richard Cantillon. Our results help clarify debates on the non-neutrality of money going back to the eighteenth century. [This is the updated version of Working Paper #41.]
    Keywords: Cantillon Effect; Inequality; Money Non-neutrality; Financial Industry
    JEL: D31 E31 E52
    Date: 2022–07
  20. By: Marin, Giovanni; Vona, Francesco
    Abstract: The US financial sector has become a magnet for the brightest graduates in the science, technology, engineering and mathematical fields (STEM). We provide quantitative bases for this anecdotal fact for the US, over the period 1980-2019 and with a specific focus on the last decade where information on major fields of study is available. First, we show that long-run educational upgrading of finance was biased towards STEM graduates, especially for postgraduates, and accelerated in the last decade. Second, the STEM.upgrading also occurs within finance and business occupations, matching a task reorientation towards mathematics in those occupations. Third, STEM reallocation towards finance is more pronounced among experienced workers peaking at prime age. Fourth, the reallocation of STEM is associated with large wage premia in finance, which are heterogeneous across occupations, age groups, degrees and along the wage distribution. Returns to STEMs are higher than returns to other degrees in finance and become very high in finance and managerial occupations at the top of the distribution, especially for postgraduates.
    Keywords: Financial Economics, Labor and Human Capital
    Date: 2022–07–25
  21. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Rupayan Pal (Indira Gandhi Institute of Development Research)
    Abstract: We argue emerging markets (EMs) have become large enough to make it in advanced economies (AEs) own interest to reduce negative spillovers to EMs. It follows the potential for international cooperation in macroeconomic and prudential policy increases. But entrenched perceptions and historical advantages are obstacles. These blocks are explored as well as possibilities in macroeconomic policies and in prudential regulation. Export of capital is a major way AEs earn a share in EM income. AE macroeconomic policy and volatile capital outflows from AEs are a source of negative spillovers for EMs, but preventive prudential regulation is not adequate in AEs. More regulation is likely to reduce short-term returns to capital flows but not long-term, since with fewer crises both AE and EM income streams would rise. Moreover, there is some evidence excess capital flow volatility has adverse effects on AEs themselves. It follows universal macro-prudential polices would benefit both country groups. International conventions should be refocused on reducing the probability of crises, instead of protecting creditors by ensuring they do not suffer a loss in case a crisis occurs. Major source countries should develop prudential regulation of their non-bank financial sectors, including commodity futures markets. The IMF should remove restrictions on pre-emptive implementation of capital flow management and its use before other measures.
    Keywords: International policy coordination, Covid-19, Quantitative easing, Capital flows, advanced economies, Emerging markets
    JEL: F42 F59 F36
    Date: 2022–06
  22. By: Alessandro Moro (Bank of Italy); Alessandro Schiavone (Bank of Italy)
    Abstract: This paper compares the behaviour of banks with that of non-bank financial institutions (NBFIs) in the intermediation of portfolio flows to emerging market economies (EMEs). Our analysis shows that investment funds, a key component of NBFIs, tend to reduce their exposure to EMEs more than banks during periods of financial turmoil, such as the Covid-19 pandemic. Moreover, passive funds and exchange-traded funds (ETFs) are more responsive to global shocks than active funds. Global funds show a lower elasticity to financial volatility than regional funds, while the behaviours of institutional and retail funds are quite similar. Regarding the currency composition of portfolio investments in EMEs, investment funds cut their assets denominated in USD in response to global shocks more than those in other currencies. Finally, the portfolio inflows to EMEs with a higher share of portfolio liabilities held by investment funds rather than by banks and other financial intermediaries tend to be more sensitive to the global financial cycle.
    Keywords: financial intermediation, investment funds, emerging markets, capital flows, financial crisis
    JEL: F32 F36 G11 G15 G23
    Date: 2022–04
  23. By: Heß, Alexander; Hindermann, Christoph Michael
    Abstract: In the context of the Belt and Road Initiative (BRI), we review selected studies that explicitly or implicitly address the question of whether there occurs synchronization of stock markets between China and the BRI economies. Following this, we examine the extent to which this synchronization of stock markets may be driven by bilateral trade. This question is of particular interest to investors who wish to profit from the BRI while minimizing their risk through portfolio diversification. Our results show that there is plenty of supporting evidence that the stock markets of China and the BRI economies are synchronized, and that synchronization appears to be increasing since the launch of the BRI. We also find that bilateral trade is an important determinant for explaining stock market integration between China and the BRI countries. Based on these results, interregional diversification appears to be less efficient. Further research is needed to determine whether other forms of diversification, such as inter-industry diversification, would be more beneficial.
    Keywords: BRI,Belt and Road Initiative,Belt and Road Countries,China,Stock Market Synchronization,Stock Market Co-Movement,Stock Market Integration,Trade Integration,Trade Volume,Bilateral Trade,Portfolio Diversification,Investing
    Date: 2022
  24. By: Gnangnon, Sèna Kimm
    Abstract: Existing studies on the determinants of countries' accession to the World Trade Organization (WTO) have neglected the role that Aid for Trade (AfT) flows might have played in states' accession process to the WTO. The present study aims to fill this void in the literature by investigating the effect of AfT flows on the probability of acceding to the WTO. The analysis has used 29 countries (the so-called Article XII Members), with data spanning the period 2002-2019. We postulate that by promoting countries' participation in international trade and hence increasing the contribution of international trade to economic growth and development prospects, AfT flows would increase applicants' probability of joining the WTO. The empirical analysis has provided supported for this hypothesis and shown a positive effect of AfT flows on applicants' probability of joining the WTO. This finding applies to total AfT flows as well as to the three components of the latter, namely AfT interventions for economic infrastructure, AfT interventions for productive capacities, and AfT interventions related to trade policy and regulation.
    Keywords: Aid for Trade,Article XII Members,Accession to the WTO
    JEL: F13 F14
    Date: 2022
  25. By: Andreas Ek (Lund University); Gunes Gokmen (Lund University); Kaveh Majlesi (Monash University, Lund University, IZA, and CEPR)
    Abstract: There are large cross-country differences in the portfolio composition of individual investors. In this paper, we study the role of cultural heritage in explaining these differences by combining data on the asset allocation of second-generation immigrants in Sweden with the cultural attributes of their parents' countries of origin. Descendants of more risk-loving and less patient cultures take more idiosyncratic risk by keeping a higher share of their financial wealth in directly held stocks. They are also less likely to delegate their equity investment, as they assign a lower share of their wealth to mutual funds. We show that these findings are not driven by the selection of migrating parents, other country of origin attributes, or individual socio-economic characteristics. Our findings also provide an alternative explanation for under-diversification and lack of delegation among many individual investors.
    Keywords: culture, cultural transmission, delegation, diversification, investment behaviour
    JEL: G11 G40 G50 G51 Z10
    Date: 2022–07
  26. By: Treu, Johannes
    Keywords: Fintech,Finanztechnologie,Wohlfahrt,AS-AD Modell,General Purpose Technology,GPT
    JEL: G20 G23 O10 O30 O33 O49
    Date: 2022
  27. By: Salvatore Cardillo (Bank of Italy); Antonio Ilari (Bank of Italy); Silvia Magri (Bank of Italy); Giorgio Meucci (Bank of Italy); Mirko Moscatelli (Bank of Italy); Dario Ruzzi (Bank of Italy)
    Abstract: This paper provides evidence on Fintech platforms operating around the world and in Italy, in both lending and funding through debt and equity financing. The platforms act as facilitators, connecting borrowers with potential lenders (individual or institutional investors); with the required authorizations, they can also operate as direct lenders. Excluding China, the volume of transactions has continued to grow in recent years, reaching 113 billion dollars in 2020. Loans represent the main activity, while funding is mostly provided by institutional investors. In Italy too, there has been marked growth in the activities of these platforms, primarily those related to business lending and invoice trading. Despite the considerable growth observed in recent years, Fintech lending still represents a small share of overall loans in all the main countries. At international level, there is an open debate about the necessity to adopt a level playing field, in order to avoid regulatory arbitrage. Possible financial stability concerns regard the lack of official and comparable data across countries about the platforms’ activity.
    Keywords: fintech, crowdfunding, social lending, invoice trading, technological innovation, alternative finance
    JEL: G10 G51 L10 O33 Q55
    Date: 2022–06
  28. By: Ozili, Peterson K
    Abstract: This study investigates the behavior of bank non-performing loans in the Fintech era. Using data from 35 developed countries from 1998 to 2016, the findings show that non-performing loans are fewer in the second wave Fintech era. Also, bank non-performing loans are positively related to the state of the business cycle in the second wave Fintech era. Countries that have high supply of credit to the private sector experience high non-performing loans in the second wave Fintech era. The two-way interaction analysis show that non-performing loans are lower during times of economic boom and when there is higher credit supply in the second-wave Fintech era.
    Keywords: non-performing loan, financial innovation, disruptive technology, legal system, banks, Fintech, banks, credit risk, first wave Fintech era, second wave Fintech era.
    JEL: G21 M13
    Date: 2021–08–01
  29. By: Bhimani, Alnoor; Hausken, Kjell; Arif, Sameen
    Abstract: The adoption of cryptocurrencies is uneven across businesses, industries, and countries. Different forces drive cryptocurrency adoption (CA) dependent on the national level of development. We empirically assess the relationship between certain macro-national developmental indicators and cryptocurrency deployment across 137 countries. Linear regressions determine specific associations with cryptocurrency adoption. We report that CA correlates positively and in decreasing order with Education, the Human Development Index, the Network Readiness Index, the Gini index, Democracy, Regulatory Quality, and Gross Domestic Product, and negatively and in decreasing order with Control of Corruption, the Corruption Perception Index, and the Economic Freedom Index. We draw on our findings to point to policy implications tied to the usage of cryptocurrencies and blockchain technologies more widely and identify further research possibilities.
    Keywords: cryptocurrencies; blockchain; technology adoption; national development
    JEL: C50
    Date: 2022–08–01
  30. By: Celso Brunetti; John Caramichael; Matteo Crosignani; Benjamin Dennis; Gurubala Kotta; Donald P. Morgan; Chaehee Shin; Ilknur Zer
    Abstract: This report has two objectives: 1. Review the available literature on Climate-Related Financial Stability Risks (CRFSRs) as it pertains to the United States. Specifically, the literature review considers several modeling approaches and aims to 1.1 Identify financial market vulnerabilities (e.g., bank leverage), 1.2 Provide an assessment of those vulnerabilities (high/medium/low) as identified by the current literature, and 1.3 Evaluate the uncertainty surrounding these assessments based on interpretation of the findings and coverage of existing literature (high/low). 2. Identify methodologies to link climate risks to financial stability and possible research paths to assess U.S. CRFSRs. The report is structured in three parts. First, it characterizes the potential financial system vulnerabilities of climate change. Second, it describes the major methodologies adopted in studying the implications of climate change and provides an assessment of financial system vulnerabilities identified by the current literature. Third, it discusses how different methodologies can be further developed or combined to assess U.S. CRFSRs.
    Keywords: Climate change; Financial stability and risk
    Date: 2022–07–05
  31. By: Ricardo Correa; Ai He; Christoph Herpfer; Ugur Lel
    Abstract: We investigate how corporate loan costs are affected by climate change-related natural disasters. We construct granular measures of borrowers’ exposure to natural disasters and then disentangle the direct effects of disasters from the effects of lenders updating their beliefs about the impact of future disasters. Following a climate change-related disaster, spreads on loans of at-risk, yet unaffected borrowers, spike and are amplified when attention to climate change is high. Weaker borrowers with the most extreme exposure to these disasters suffer the highest increase in spreads. Importantly, there is no such effect from disasters that are not aggravated by climate change.
    Keywords: Banks; Climate change; Loan pricing; Natural disasters
    JEL: G21 Q51 Q54
    Date: 2022–06–02

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