nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2022‒08‒29
23 papers chosen by
Georg Man

  1. The Finance–Growth Nexus inAsia : A Meta-Analytic Approach By Anwar, Amar; Iwasaki, Ichiro
  2. Financial Development and Growth in the Caucasus and Central Asia By Mr. Tigran Poghosyan
  3. Financial Sector and Economic Growth in India By Ms. TengTeng Xu; Ms. Margaux MacDonald
  4. Credit and Saving Constraints in General Equilibrium: A Quantitative Exploration By Granda-Carvajal, Catalina; Hamann, Franz; Tamayo, Cesar E.
  5. Has there been a change in household saving behavior in the low inflation and interest rate environment? By Oinonena, Sami; Virén, Matti E. E.
  6. Does Economic Uncertainty Foster Migrant Remittances? A Macro-Perspective from 53 Developing Countries By Charles Mawusi; Mohamed Abdallah; Mazhar Mughal
  7. Financial inclusion in Nigeria: an overview By Ozili, Peterson Kitakogelu
  8. Democratic Republic of the Congo: Selected Issues By International Monetary Fund
  9. Labor informality and financial inclusion transitions: Evidence from Peru By Gasmi, Farid; Aurazo, Jose
  10. Public Debt and Economic Growth from the Perspective of Private Investment By Puonti, Päivi
  11. Fiscal Consolidation and Firm Level Productivity: Evidence from Advanced Economies By Maxwell Tuuli; Ngo Van Long
  12. Manipulating Credit: Government Popularity as Driver of Credit Cycles By Etienne Lepers
  13. Overborrowing and Systemic Externalities in the Business Cycle Under Imperfect Information By Juan Herreño; Carlos Rondón-Moreno
  14. The Great Moderation and the Financial Cycle By Friedrich Lucke
  15. The economic impact of the NPLcoverage expectations in the euro area By Budnik, Katarzyna; Dimitrov, Ivan; Groß, Johannes; Kusmierczyk, Piotr; Lampe, Max; Vagliano, Gianluca; Volk, Matjaz
  16. Heterogeneous global booms and busts By Farboodi, Maryam; Kondor, Peter
  17. On Foreign Drivers of EMEs Fluctuations By Gent Bajraj; Jorge Lorca; Juan M. Wlasiuk
  18. Inequality and the Structure of Countries’ External Liabilities By Tobias Krahnke; Philipp Harms; Mathias Hoffmann; Miriam Kohl
  19. Monetary Union, Asymmetric Recession, and Exit By Keuschnigg, Christian
  20. Financial, Institutional and Macroeconomic Determinants of Cross-Country Portfolio Equity Flows By António Afonso; José Alves; Krzysztof Beck; Karen Jackson
  21. Cross-border flights to safe assets in bond markets: evidence from emerging market economies By Janus, Jakub
  22. Contagion as a Dealmaker? The Effect of Financial Spillovers on Regional Lending Programs By Alexandra Fotiou; Alica Ida Bonk; Georgios Manalis
  23. Role of Finance in Dixit-Stiglitz-Krugman Model of International Trade By Sugata Marjit; Meghna Dutta; Moushakhi Roy

  1. By: Anwar, Amar; Iwasaki, Ichiro
    Abstract: This paper features a meta-analysis of the effects of financial development and liberalization on macroeconomic growth in Asia. A meta-synthesis of 748 estimates extracted from 75 previous works indicates that the growth-enhancing effect of finance reaches an economically meaningful scale in the region. Synthesis results also reveal that the finance–growth nexus in South Asia is stronger than that in East Asia. Publication selection bias is examined using both linear and nonlinear techniques, and our results show that there is a possibility of publication bias in the literature. After applying advanced and up-to-date metaanalysis methods, we find that the collected estimates contain significant underlying empirical evidence of the impact of finance on economic growth for both Asia and its subregions.
    Keywords: financial development, economic growth, meta-analysis, publication selection bias, Asia
    JEL: E44 G10 O11 O16 D53
    Date: 2022–08
  2. By: Mr. Tigran Poghosyan
    Abstract: This paper presents stylized facts on financial development in the CCA countries relative to their EM and LIC peers and assesses how financial development can boost growth in the CCA. Drawing on IMF’s multidimensional index of financial development, we find that CCA countries have made progress following the independence in early 1990s. However, the progress was uneven across the CCA, resulting in a divergence of financial development over time and mixed performance relative to EM and LIC peers. Financial institutions have progressed the most, while financial markets remain underdevelped in most CCA countries except Kazakhstan. In terms of sub-indicators of financial development, financial access has expanded markedly, while the depth of financial intermediation has remained largely shallow and efficiency of financial intermediation has fluctuated over time. Standard growth regressions suggest that CCA countries with relatively lower level of financial development have scope to boost annual growth rates between 0.5-2.5 percent by reaching the level of financial development of frontier CCA countries.
    Keywords: Caucasus and Central Asia; financial development; output growth
    Date: 2022–07–08
  3. By: Ms. TengTeng Xu; Ms. Margaux MacDonald
    Abstract: India’s financial sector has faced many challenges in recent decades, with a large, negative, and persistent credit to GDP gap since 2012. We examine how cyclical financial conditions affect GDP growth using a growth-at-risk (GaR) approach and analyze the link between bank balance sheets, credit growth, and long-term growth using bank-level panel regressions for both public and private banks. We find that on a cyclical basis, a negative shock to credit or a rise in macro vulnerability all shift the distribution of growth to the left, with lower expected growth and higher negative tail risks; over the long term, the results indicate that higher credit growth, arising from better capitalized banks with lower NPLs, is associated with higher GDP growth.
    Keywords: India; Credit and Leverage; Macro-financial Linkages; Growth-at-Risk; Panel Regressions.
    Date: 2022–07–08
  4. By: Granda-Carvajal, Catalina; Hamann, Franz; Tamayo, Cesar E.
    Abstract: In this paper we build an incomplete-markets model with heterogeneous households and firms to study the aggregate effects of saving constraints and credit constraints in general equilibrium. We calibrate the model using survey data from Colombia, a developing country in which informal saving and credit frictions are pervasive. Our quantitative results suggest that reducing savings costs increases selection into formal saving, but the effect on aggregate outcomes and welfare is dwarfed by that of a policy which ameliorates borrowing constraints. Such a policy improves resource allocation and increases returns to capital and labor, resulting in higher savings and welfare gains for both households and firms.
    Keywords: saving constraints; credit constraints; financial inclusion; misallocation; savings; formal and informal financial markets
    JEL: E21 E44 G21 O11 O16
    Date: 2022–08
  5. By: Oinonena, Sami; Virén, Matti E. E.
    Abstract: This paper examines whether the determinants of household saving have changed over time and whether they are the same across countries. Using a cross-country data for 34 OECD countries for the 1970-2019, we find that traditional saving rate specifications still perform strik ingly well and can explain the recent changes in household saving rates. As for the cross country differences in equilibrium saving rates, we have less success even though the basic estimating equation seems to fit reasonably well to individual country samples. We found that household saving is still very sensitive to changes in inflation and real income growth. Thus, decline in the household saving rate in the 1990s can mainly be attributed to these variables. Obviously, a decline of real interest rate has also pushed down the saving rate. Households seem to have reacted to changes in public sector as well as corporate sector saving so that there has been nontrivial degree of saving substitutability.
    Keywords: household saving,private saving,inflation,debt neutrality
    JEL: E21 G51
    Date: 2022
  6. By: Charles Mawusi (UB - Université de Bordeaux); Mohamed Abdallah (ESC PAU - Ecole Supérieure de Commerce, Pau Business School); Mazhar Mughal (ESC PAU - Ecole Supérieure de Commerce, Pau Business School)
    Abstract: The recent Global Financial Crisis and its resultant policy responses have induced a lot of uncertainty and as a consequence, reinforced research interest in economic uncertainty. Several empirical studies have since examined the effects of uncertainty with emphasis on its growth implications. Despite uncertainty being an integral part of migrants' decision-making process, its effect on remittances remains largely unknown. The present study employs a novel data on uncertainty and a system GMM approach to examine the effects of economic uncertainty on inward remittance of 53 developing countries over the period 1996-2018. The results show that heightened economic uncertainty induced a positive and statistically significant remittance response to developing and least-developed economies. This result is consistent with the altruistic behavior of migrants from developing economies, and further, suggests the importance of migrants' remittances in moderating the potential adverse effects of uncertainty.
    Keywords: Remittances,Uncertainty,GMM,Panel,Economic Policy JEL Codes: F24,D73,C23,F68
    Date: 2022–07–16
  7. By: Ozili, Peterson Kitakogelu
    Abstract: This paper analyse the level of financial inclusion in Nigeria using data from the global findex indicators. The findings reveal that Nigeria witnessed growth in several financial inclusion indicators in the early years of financial inclusion in 2014 but the benefits were not sustained in the later years especially in 2017. Nigeria’s level of financial inclusion is very low compared to the World average. In the population group analysis, it was observed that the female, poorest, male, older and uneducated population were worse-off in all indicators of financial inclusion in 2017. The implication of the observed decline in the level of financial inclusion in 2017 suggest that there are barriers to financial inclusion in the post-2014 years.
    Keywords: formal account, borrowing, sustainable development, Nigeria, financial inclusion, access to finance, financial institutions, credit cards, debit cards, account ownership, female, savings.
    JEL: G21 G23 G28 G29
    Date: 2022
  8. By: International Monetary Fund
    Abstract: Selected Issues
    Date: 2022–07–05
  9. By: Gasmi, Farid; Aurazo, Jose
    Abstract: Considered as a cornerstone of development, financial inclusion has become a universal goal, in particular for developing countries that happen to be characterized by a high degree of labor informality. Our aim in this paper is twofold. First, we study how labor informality affects financial inclusion in a static framework. Second, we argue that financial inclusion must be treated as a dynamic process and investigate the effect of movements between formal and informal jobs on the probabilities of entry to and exit from the financial system. We find evidence that financial inclusion is an auto-regressive process and that labor informality reduces the probability of entry to the financial system by 8% whereas it increases the probability of exit from it by 9.3%. As to transitions in the labor market, we find that, relative to workers who get stuck in informal jobs, for those who have and stay with formal jobs, the probability that they enter the financial system is higher by 9% and the probability that they exit from it is lower by 12%. As to the workers who move into labor formality, we find that they are more likely to enter the financial system by 9.7% and less likely to exit from it by 7.1%. Our results add to the many well documented spillover effects of labor formality in developing countries to encourage policies that promote it.
    Keywords: Financial inclusion; labor informality; transition probabilities; dynamic randomeffect panel probit
    JEL: C23 D14 E26 I31 O17
    Date: 2022–07–28
  10. By: Puonti, Päivi
    Abstract: Abstract Corporate investment is crucial for productivity growth. When economic growth is sluggish and productivity growth weak, the government is likely to compensate the shortage of tax revenues with debt. The aim of this research is to study the connection between public indebtedness and productivity growth from the point of view of private investment. According to existing economic research, public debt crowds out private investment slowing down both economic and productivity growth. Our statistical analysis suggests that public debt crowds out private investment and hampers economic growth in Finland, as the share of the corporate sector in the economy decreases with the increase in public indebtedness. Public debt boosts public investment in addition to other expenditure categories, resulting in a leverage effect of private investment in the medium term. This crowding in effect compensates for the negative growth impact of crowding out. The impact occurs at business-cycle frequencies rather than in the long run. This is likely due to the relatively small share of public R&D investment.
    Keywords: Public debt, Private investment, Productivity, Crowding out
    JEL: E22 H63 O40 O47
    Date: 2022–08–16
  11. By: Maxwell Tuuli; Ngo Van Long
    Abstract: Productivity dispersion across countries has led to several studies on the determinants of firm level productivity and the role of macroeconomic policies in determining productivity. In this paper, we investigate the effect of fiscal consolidation on firm level productivity in 12 advanced economies by combining an updated dataset of fiscal consolidation measures with firm level productivity. We find that fiscal consolidation (i.e., discretionary tax hikes and spending cuts), is detrimental to firm level productivity in advanced economies. We also find that high levels of fiscal consolidation are particularly harmful to firm level productivity compared to lower levels of fiscal consolidation. Furthermore, we find that tax based fiscal consolidation hinders firm level productivity more compared to spending based fiscal consolidation. This implies that the size and composition of fiscal consolidation matter in understanding the relationship between fiscal consolidation and firm level productivity.
    Keywords: Fiscal consolidation; Taxes; Spending; Total Factor Productivity; firm level productivity; fiscal consolidation matter; fiscal consolidation measure; productivity dispersion; effect of fiscal consolidation; Productivity; Financial sector development; Global
    Date: 2022–07–01
  12. By: Etienne Lepers
    Abstract: This paper analyses the interaction between credit and political cycles, arguing that short-termist governments will seek to ride and amplify credit cycles for political gains. Specifically, it tests for the existence of political credit cycles not only before elections but throughout the term when executives seek to bolster support in periods of popularity drops. Compiling a unique database on government approval from opinion polls in 57 countries starting in 1980, it provides evidence that drops in popularity are systematically associated with larger future credit cycles, robust to a number of checks for confounding factors. Such credit manipulation appears to target credit to households specifically, is more prevalent in advanced, financialized, and indebted economies, and increases the likelihood of bad credit booms. Overall, this research points to the crucial importance of political cycles as drivers and sources of financial cycles and vulnerabilities.
    Keywords: credit booms, financial stability, political business cycle, government popularity, electoral cycles, credit subsidies, homeownership
    JEL: D72 E51 E58 G01 G18 I38 N20
    Date: 2022–07
  13. By: Juan Herreño; Carlos Rondón-Moreno
    Abstract: We study the interaction between imperfect information and financial frictions and its role in driving financial crises in small open economies. We use a model where households observe income growth but do not perceive whether the underlying shocks are permanent or transitory and borrowing is subject to a collateral constraint. The optimal macroprudential policy helps stabilize the economy by taxing debt procyclically. We show that the combination of imperfect information and borrowing constraints is a significant source of economic instability. The optimal tax under these conditions is six times larger than the tax in the perfect information limit.
    Date: 2022–03
  14. By: Friedrich Lucke
    Abstract: We show that the defining features of the Great Moderation were a shift from output volatility to medium- term fluctuations and a shift in the origin of those fluctuations from the real to the financial sector. We discover a Granger-causal relationship by which financial cycles attenuate short-term business cycle fluc- tuations while they amplify longer-term fluctuations at the same time. As a result, financial shocks system- atically drive medium-term output fluctuations whereas real shocks drive short-term output fluctuations. We use these results to argue that the Great Moderation and Great Recession both result from the same eco- nomic forces. On the theoretical front, we show that long-run risk is a critical ingredient of DSGE models with financial sectors that seek to replicate these shifts. Finally, we used this DSGE model to refine “good luck” and “good policy” hypothesis of the Great Moderation.
    Keywords: Great Moderation,Business Cycle,Financial Cycle,Frequency-Domain
    JEL: E00 E32 E44 E50
    Date: 2022–07
  15. By: Budnik, Katarzyna; Dimitrov, Ivan; Groß, Johannes; Kusmierczyk, Piotr; Lampe, Max; Vagliano, Gianluca; Volk, Matjaz
    Abstract: This paper looks at the macroeconomic impact of the two policies proposed by ECB Banking Supervision to tackle the high share of non-performing loans (NPLs) on the balance sheets of euro area banks. The first is the coverage expectations for new NPLs set out in the Addendum to the ECB’s NPL Guidance, which aim to prevent the build-up of new NPLs, and the second is the coverage expectations for legacy NPLs, which target the reduction of already existing stocks of NPLs. The impact assessment of the package is analysed via a semi-structural model, the Banking Euro Area Stress Test (BEAST). The coverage expectations for NPLs are found to be effective in reducing banks’ NPLs. The phase-in of the policies can temporarily reduce bank profitability owing to increased loan loss provisioning targets. However, over a longer time horizon, lower NPL ratios reduce uncertainty and enable banks to access cheaper funding in the markets, ultimately benefiting lending and output growth. Furthermore, the coverage expectations can also moderately but persistently reduce procyclicality in the banking system. JEL Classification: E37, E58, G21, G28
    Keywords: banking sector, impact assessment, loan loss provisions, Non-performing loans, real-financial feedback mechanism, regulatory policy
    Date: 2022–07
  16. By: Farboodi, Maryam; Kondor, Peter
    Abstract: We investigate the heterogeneous boom and bust patterns across countries that emerge as a result of global shocks. Our analysis sheds light on the emergence of core and periphery countries, and the joint determination of the depth of recessions and tightness of credit across countries. The model implies that interest rates are similar across core and periphery countries in booms, with larger credit and output growth in periphery countries. However, a common global shock that leads to a credit crunch across the globe gives rise to a sharper spike in interest rates and a deeper recession in periphery countries, while a credit flight to the core alleviates the adverse consequences in these countries.
    Keywords: international credit markets; global cycles; information frictions; (Starting Grant #336585
    JEL: E44 E43 E21 G15 E32
    Date: 2022–07–01
  17. By: Gent Bajraj; Jorge Lorca; Juan M. Wlasiuk
    Abstract: Global macroeconomic forces such as liquidity fluctuations in the US and commodity price cycles among others have been extensively documented as relevant drivers of economic activity for emerging market economies (EMEs). The dynamics of the interactions between those external forces and their ensuing effect on EMEs business cycles, however, are still relatively less explored. We embed a series of different contemporary interactions between a set of common, external drivers shaping EMEs cycles in order to assess their relative empirical importance through the lens of a dynamic factor model. Our results point toward quantitatively relevant effects induced by shocks to the global factors that we identify. Indeed, while shocks to our financial and commodity factors explain independently about 7 and 21% of GDP fluctuations, respectively, they unload rather differently on long term yields and exchange rates: the financial factor explains about half of exchange rate dynamics and more than a fifth of long rates, where our commodity factor ends up playing a much lesser role.
    Date: 2022–04
  18. By: Tobias Krahnke; Philipp Harms; Mathias Hoffmann; Miriam Kohl
    Abstract: In this paper, we present empirical evidence that higher income inequality is associated with a greater equity share in countries' external liabilities, and we develop a theoretical model that can explain this observation: In a small open economy with traded and nontraded goods, entry barriers depress entrepreneurial activity in nontraded industries and raise income inequality. The small number of domestic nontraded-goods firms leaves room for foreign firms to operate on the domestic market, and it reduces external borrowing. The model suggests that barriers to entrepreneurial activity could be conducive to attract equity-type capital inows. Our empirical results lend some support to this conjecture.
    Keywords: Portfolio Equity; Foreign direct investment; External debt; External liabilities; Income Inequality
    Date: 2022–07–08
  19. By: Keuschnigg, Christian
    Abstract: We propose a New Keynesian DSGE model of the Eurozone and analyze an asymmetric recession in a vulnerable member state characterized by a trilemma of high public debt, weak banks, and deteriorating competitiveness. We compare macroeconomic adjustment under continued membership with two exit scenarios that introduce flexible exchange rates and autonomous monetary policy. An exit with stable investor expectations could significantly dampen the short-run impact. Stabilization is achieved by a targeted monetary expansion combined with depreciation. However, investor panic may lead to escalation, aggravate the recession and delay the recovery.
    Keywords: Currency union, exchange rate flexibility, fiscal consolidation, sovereign debt, banks
    JEL: E42 E44 E60 F30 F36 F45 G15 G21
    Date: 2022–08
  20. By: António Afonso; José Alves; Krzysztof Beck; Karen Jackson
    Abstract: We consider a new dataset that provides a description of the population of financial equity flows between developed countries from 2001 to 2018. We follow the standard practice of controlling for pull and push factors as well as gravity-style variables, while also accounting for the business cycle, public debt and sovereign ratings. Our key findings are as follows: (i) equity flows are more intense between countries at the same stage of the business cycle (ii) increased equity flows to countries with a relatively lower public debt deficit as a ratio of GDP (iii) financial and macroeconomic variables are important for big equity flows, while institutional variables are important for the small flows. Overall, this new dataset provides novel evidence on the importance of the business cycle, government debt and sovereign ratings scores.
    Date: 2022–07
  21. By: Janus, Jakub
    Abstract: This paper investigates cross-border flights to safety (FTS) in sovereign bond markets from the perspective of emerging market economies (EMEs). Accurate identification of such events provides a detailed picture of sharp changes in prices of international assets and potential sources of EMEs' financial fragility. We construct new measures of the FTS occurrence and magnitude by focusing on extreme movements in long-term bond markets vis-à-vis the US for a diverse group of 21 EMEs. An adaptable time-series anomaly detection algorithm is used to recognize patterns in daily data on bond returns from 2002 to 2021. The paper shows that the FTS episodes in the entire sample of EMEs turn out to be short-lived and map well into periods of international financial and economic downturns. We demonstrate the importance of global uncertainty shocks and the US dollar exchange rate fluctuations in driving FTS, with the relative importance of the latter factor increasing after the Global Financial Crisis. The results from panel data models indicate that a range of country-specific economic, financial, and political factors matter visibly more for the FTS magnitude than their mere occurrence. This supports the notion that flights from bond markets are triggered mainly by shocks originating outside of EMEs, but the magnitude of these events may materially depend on their domestic conditions, including macroeconomic stability and policy factors. However, the role of economic fundamentals in driving FTS seems to subside post-2010 at the expense of financial factors. As a by-product, we present a database on FTS episodes in bond markets.
    Keywords: emerging market economies; flight to safety; safe assets; bond markets; foreign-exchange markets; global risk
    JEL: E42 F32 F41 G15
    Date: 2022–07–25
  22. By: Alexandra Fotiou; Alica Ida Bonk; Georgios Manalis
    Abstract: The recent European sovereign debt crisis highlighted the critical role of regional lending arrangements. For the first time, European mechanisms were called to design financing programmes for member countries in trouble. This paper analyses how the risk of contagion, an essential characteristic of interlinked economies, shapes borrowing conditions. We focus on the role of spillovers as a channel of bargaining power that a country might have when asking for financial support from regional lending institutions. We build and present a new database that records both the dates on which official meetings took place, relevant statements were released and the timing of the announcements regarding loan disbursements. This database allows us to assess the defining role that announcements of future actions have in mitigating spillover costs. In addition, we study the design of lending arrangements within a recursive contract between a lender and a sovereign country. When accounting for spillover costs, arising from the borrower to the creditor, we find that it is in the lender's best interest to back-load consumption by giving more weight to future transfers in order to reduce contagion cost. Subsequently, we test and validate our theoretical predictions by assessing the effect of spillovers on loan disbursements to programme-countries and by juxtaposing lending conditions imposed by the IMF and the European mechanisms.
    Keywords: Regional lending mechanisms; currency-union; spillovers
    Date: 2022–07–08
  23. By: Sugata Marjit; Meghna Dutta; Moushakhi Roy
    Abstract: This paper introduces finance or credit in the Dixit-Stiglitz-Krugman (DSK) model of international trade. It identifies mechanisms by which finance can affect the main results of the conventional model. The key results are as follows. Perfect credit market does not affect number of varieties or output per variety, but it affects wage and interest rate, thus affecting income distribution. With a minimum wage and unemployment availability of credit affects number of varieties. With imperfect credit market, wealthier firms face lower cost of credit and produce greater number of varieties and given labour force less output per variety. Thus, availability of finance will determine a specific trade pattern between richer and poorer nations both with unemployment and imperfect credit market , a result in stark contrast with the conventional model with indeterminate pattern of trade.
    Keywords: product variety, factor mobility, unemployment, finance, trade
    JEL: F16 F20 J31
    Date: 2022

This nep-fdg issue is ©2022 by Georg Man. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.