nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2022‒09‒05
twenty papers chosen by
Georg Man

  1. The macroeconomic effects of Basel III regulations with endogenous credit and money creation By Li, Boyao
  2. Macroeconomic Effects of Dividend Taxation with Investment Credit Limits By Matteo Ghilardi; Roy Zilberman
  3. Firm net worth, external finance premia and monitoring cost - estimates based on firm-level data By Gregor Bäurle; Sarah M. Lein; Elizabeth Steiner
  4. Macroeconomic Forecasting using Filtered Signals from a Stock Market Cross Section By Nicolas Chatelais; Arthur Stalla-Bourdillon; Menzie D. Chinn
  5. Application of machine learning models and interpretability techniques to identify the determinants of the price of bitcoin By José Manuel Carbó; Sergio Gorjón
  6. The impact of stock market development on unemployment: Empirical evidence from South Africa By Nyasha, Sheilla; Odhiambo, Nicholas M; Musakwa, Mercy T
  7. Sentimiento en el Informe de Estabilidad Financiera del Banco Central de Chile By J. Sebastián Becerra; Alejandra Cruces
  8. Distressed firms, zombie firms and zombie lending: a taxonomy By Laura Álvarez; Miguel García-Posada; Sergio Mayordomo
  9. International Sovereign Spread Differences and the Poverty of Nations By Farzana Alamgir; Alok Johri
  10. When is Sovereign Debt Odious? A Theory of Government Repression, Growth Traps, and Growth Boosts By Viral V. Acharya; Raghuram Rajan; Jack Shim
  11. The structural and productivity effects of infrastructure provision in developed and developing countries By Orea, Luis; Álvarez-Ayuso, Inmaculada; Servén, Luis
  12. Exploring the Impact of Agricultural Investment on Economic Growth in France By Bakari, Sayef; El Weriemmi, Malek
  13. Exchange arrangements and economic growth. What relationship is there? By Cruz-Rodríguez, Alexis
  14. Capital flows and monetary policy trade-offs in emerging market economies By Paolo Cavallino; Boris Hofmann
  15. Cross-border financial centres By Pamela Pogliani; Philip Wooldridge
  16. Pre-Positioning and Cross-Border Financial Intermediation By Nicholas K. Tabor; Jeffery Y. Zhang
  17. Help in a Foreign Land: Internationalized Banks and Firms’ Export By Brancati, Emanuele
  18. Subprime empire: on the in-betweenness of finance By Schuster, Caroline; Kar, Sohini
  19. A Learning and Control Perspective for Microfinance By Christian Kurniawan; Xiyu Deng; Adhiraj Chakraborty; Assane Gueye; Niangjun Chen; Yorie Nakahira
  20. Climate Change and Financial Policy: A Literature Review By Benjamin Dennis

  1. By: Li, Boyao
    Abstract: When banks create credit and money endogenously, how do Basel III regulations affect the macroeconomy? This study develops a simple monetary circuit model based on the stock-flow consistent framework. It analytically solves for the equilibrium where banks comply with the capital adequacy ratio or net stable funding ratio. The growth rates can decompose into the money creation processes. The primary component is lending, which depends on bank spreads (or profitability) and regulatory rules. Moreover, this study reveals a channel through which credit and money creation affect economic growth. Debt ratios of firms are related to their animal spirits and the economy’s growth rates, and this relationship implies conditions for firms using debt and going bankrupt. Finally, results reveal that regulations can transfer risk from banks to firms. These findings shed new light on banks’ macroeconomic roles and the effects of bank regulations.
    Keywords: Money creation; Basel III; Economic growth; Leverage; Banking macroeconomics
    JEL: E12 E51 G28
    Date: 2022–07–15
  2. By: Matteo Ghilardi; Roy Zilberman
    Abstract: We analyze the effects of dividend taxation in a general equilibrium business cycle model with an occasionally-binding investment credit limit. Permanent dividend tax reforms distort capital investment decisions in the binding long-run equilibrium, but are neutral otherwise. Temporary unexpected tax cuts stimulate shortterm real activity in the credit-constrained economy, yet produce contractionary macroeconomic outcomes in the slack regime. The occasionally-binding constraint reconciles the `traditional' and `new' views of dividend taxation, and highlights the importance of measuring the firm's initial borrowing position before enacting tax reforms. Finally, permanently lower dividend taxes dampen financial business cycles, and help to explain macroeconomic asymmetries.
    Keywords: Dividend Taxation; Occasionally-Binding Borrowing Constraints; Investment; Business Cycles.; borrowing position; tax relief; dividend distribution; dividend tax rate; dividend tax adjustment; tax environment; benchmark system; dividend tax shock; dividend tax cut; tax adjustment; dividend tax system; Dividend tax; Credit; Corporate income tax; Collateral; Stocks
    Date: 2022–07–01
  3. By: Gregor Bäurle; Sarah M. Lein; Elizabeth Steiner
    Abstract: Based on a large panel of balance sheets and income statements of Swiss nonfinancial firms from 1998 to 2016, we estimate the sensitivity of the cost of external finance to firm net worth using exogenous variation in net worth. We find that firm net worth is inversely related to the external finance premium, consistent with models featuring financial frictions as in Bernanke, Gertler, and Gilchrist (1999). Through the lens of their costly state verification setup, we provide a range for the monitoring cost implied by our estimated sensitivity of the cost of external finance to net worth. Our implied estimate of the monitoring cost ranges between 15 and 20 percent, consistent with an economically significant financial friction.
    Keywords: External finance premium, net worth, firm-level balance sheet data, costly state verification
    JEL: E32 E22 E44
    Date: 2022
  4. By: Nicolas Chatelais; Arthur Stalla-Bourdillon; Menzie D. Chinn
    Abstract: After the Covid-shock in March 2020, stock prices declined abruptly, reflecting both the deterioration of investors’ expectations of economic activity as well as the surge in aggregate risk aversion. In the following months however, whereas economic activity remained sluggish, equity markets sharply bounced back. This disconnect between equity values and macro-variables can be partially explained by other factors, namely the decline in risk-free interest rates, and, for the US, the strong profitability of the IT sector. As a result, an econometrician trying to forecast economic activity with aggregate stock market variables during the Covid-crisis is likely to get poor results. The main idea of the paper is thus to rely on sectorally disaggregated equity variables within a factor model to predict future US economic activity. We find, first, that the factor model better predicts future economic activity compared to aggregate equity variables or to usual benchmarks used in macroeconomic forecasting (both in-sample and out-of-sample). Second, we show that the strong performance of the factor model comes from the fact that the model filters out the “expected returns” component of the sectoral equity variables as well as the foreign component of aggregate future cash flows, and that it also overweights upstream and “value” sectors that are found to be closely linked to the future state of the US business cycle.
    JEL: E17 G14 G17
    Date: 2022–07
  5. By: José Manuel Carbó (Banco de España); Sergio Gorjón (Banco de España)
    Abstract: So-called cryptocurrencies are becoming more popular by the day, with a total market capitalization that exceeded $3 trillion at its peak in 2021. Bitcoin has emerged as the most popular among them, with a total valuation that reached an all-time high of $68,000 in November 2021. However, its price has historically been subject to large and abrupt fluctuations, as the sudden drop in the months that followed once again proved. Since bitcoin looks all set to continue growing while largely concentrating its activity in unregulated environments, concerns have been raised among authorities all over the world about its potential impact on financial stability, monetary policy, and the integrity of the financial system. As a result, building a sound and proper regulatory and supervisory framework to address these challenges hinges upon achieving a better understanding of both the critical underlying factors that influence the formation of bitcoin prices and the stability of such factors over time. In this article we analyse which variables determine the price at which bitcoin is traded on the most relevant exchanges. To this end, we use a flexible machine learning model, specifically a Long Short Term Memory (LSTM) neural network, to establish the price of bitcoin as a function of a number of economic, technological and investor attention variables. Our LSTM model replicates reasonably well the behaviour of the price of bitcoin over different periods of time. We then use an interpretability technique known as SHAP to understand which features most influence the LSTM outcome. We conclude that the importance of the different variables in bitcoin price formation changes substantially over the period analysed. Moreover, we find that not only does their influence vary, but also that new explanatory factors often seem to appear over time that, at least for the most part, were initially unknown.
    Keywords: Bitcoin, machine learning, LSTM, interpretability techniques
    JEL: C40 C45 G12 G15
    Date: 2022–04
  6. By: Nyasha, Sheilla; Odhiambo, Nicholas M; Musakwa, Mercy T
    Abstract: In this paper, the impact of stock market development on unemployment in South Africa has been empirically examined using time-series data from 1980 to 2019. The study was motivated by the high level of structural unemployment facing the country, on the one hand, and a well-developed stock market, which compares favourably with those in advanced economies, on the other hand. The study aims to add value to the finance-unemployment literature by using a range of stock market development proxies, namely stock market capitalisation, the total value of stocks traded, and the turnover ratio. Based on the autoregressive distributed lag (ARDL) bounds testing approach, the results of the study revealed that in South Africa, stock market development has a negative impact on unemployment. These results were found to hold, irrespective of the stock market development proxy used and whether the analysis was conducted in the long run or in the short run. Based on these results, it can be concluded that the stock market unambiguously promotes job creation in South Africa. The study, therefore, recommends that policymakers should continue with the implementation of policies aimed at promoting stock market development in order to create more jobs, while at the same time ensuring that other structural challenges facing the labour market are also addressed.
    Keywords: Financial development; stock market development; market-based financial development; unemployment; South Africa, ARDL
    Date: 2022–08
  7. By: J. Sebastián Becerra; Alejandra Cruces
    Abstract: The purpose of the Financial Stability Report (FSR) is to report, on a semi-annual basis, recent macroeconomic and financial events that could affect the financial stability of the Chilean economy, such as the evolution of the indebtedness of the main credit users, the performance of the capital market, and the capacity of the financial system and the international financial position to adapt adequately to adverse economic situations. Together with the above, the FSR presents the policies and measures aimed at the normal functioning of the financial system, in order to promote knowledge and public debate on these issues. In this work, a methodology of text mining and sentiment analysis is proposed to estimate the tone of the FSR. Two products are generated from this work, a financial stability dictionary in Spanish and a Financial Sentiment Index. Based on OLS estimates, it is observed that a more optimistic tone of the FSR is in line with higher economic and credit activity, lower volatility in local and foreign financial asset prices, a more capitalized banking sector and lower political and economic uncertainty.
    Date: 2021–11
  8. By: Laura Álvarez (Banco de España); Miguel García-Posada (Banco de España); Sergio Mayordomo (Banco de España)
    Abstract: This papers develops a taxonomy of financially distressed and zombie firms using a rich dataset that combines detailed firm-level and bank-firm level information in Spain. A distressed firm exhibits both cash-flow and balance-sheet insolvency whereas a zombie firm is a distressed company that has received new credit. We carry out several analyses to test the validity of these definitions. For instance, we find that being distressed is negatively correlated with the probability of receiving new credit. However, the main bank of a distressed firm is more reluctant to restrict the supply of credit to such firm than a bank with no previous exposure to the company, which may reflect the incentives of the former to engage in loan evergreening. This financial support contributes to keeping zombie firms afloat for a longer period than distressed firms. Moreover, the contraction in capital, employment and sales is much larger in distressed firms than in zombie firms.
    Keywords: taxonomy of firms, distressed firms, zombie firms, credit supply, loan evergreening, real effects
    JEL: G21 G32 G33 L25
    Date: 2022–05
  9. By: Farzana Alamgir; Alok Johri
    Abstract: We find that national poverty head-count ratios and country default risk (measured as sovereign bond spreads) are positively correlated. For example, a nation with 40 percent of the population below the poverty line faces an average spread that is 120 basis points higher than a nation with 10 percent of extremely poor households. This correlation is robust to the inclusion of a number of country specific variables including the country’s Gini coefficient and its per capita GDP. We build a sovereign default model that can help explain this correlation that incorporates two types of households – those earning average income and those at the poverty line. The government runs a social safety net which taxes the average income household in order to transfer consumption to the poor. A political constraint that ensures that all households wish to participate in the safety net program constrains the fiscal choices of the government. The novel aspects of the model are calibrated using South African data on household income dynamics, its poverty line and aggregate social transfer rate while the usual calibration targets in the literature are also deployed. A variant of this benchmark economy with a more poor households displays higher default risk than the benchmark economy. The interaction of international borrowing terms with the social safety net and with the political constraint account for this result. Defaults occur when too large a fraction of taxes will be needed for debt repayment and this occurs more often in economies with a larger proportion of the poor. We show that the correlation between the proportion of poor and level of spreads survives even after controlling for the increase in inequality implied by increasing the proportion of poor households. This is achieved by simultaneously increasing the income of the poor. We show that the worse borrowing terms faced by the benchmark economy with higher poverty come with welfare losses due to the lower debt that it can afford and that it would default much less frequently if it faced the same terms as the low-poverty economy.
    Keywords: sovereign default; country spreads; poverty rates
    JEL: F34 F41 G15 H63
    Date: 2022–08
  10. By: Viral V. Acharya; Raghuram Rajan; Jack Shim
    Abstract: We examine the dynamics of a country’s growth, consumption, and sovereign debt, assuming that the government is myopic and wants to maximize short-term, self-interested spending. Surprisingly, government myopia can increase a country’s access to external borrowing. In turn, access to borrowing can extend the government’s effective horizon; the government’s ability to borrow hinges on it convincing creditors they will be repaid, which gives it a stake in generating future revenues. In a high-saving country, the lengthening of the government’s effective horizon can incentivize it to tax less, resulting in a “growth boost", with higher steady-state household consumption than if it could not borrow. However, in a country that saves little, the government may engage in more repressive policies to enhance its debt capacity. This could lead to a “growth trap” where household steady-state consumption is lower than if the government had no access to debt. We discuss the effectiveness of alternative debt policies, including declaring debt odious, debt forgiveness, and debt ceilings. We also analyse the impact of unanticipated shocks on the country’s welfare.
    JEL: A0 A1 A11 A13 A14 F0 F02 G0 G00 L0 O0 P0
    Date: 2022–07
  11. By: Orea, Luis (University of Oviedo); Álvarez-Ayuso, Inmaculada (Universidad Autónoma de Madrid); Servén, Luis (Centro de Estudios Monetarios y Financieros)
    Abstract: In this paper, we provide an empirical assessment of the effects of infrastructure provision on structural change and aggregate productivity using industry-level data for a set of developed and developing countries over 1995-2010. A distinctive feature of our empirical strategy is that it allows the measurement of the resource reallocation directly attributable to infrastructure provision. To achieve this, we propose a two-level top-down decomposition of aggregate productivity that combines and extends several strands of the literature. In our empirical application, we find significant production losses attributable to misallocation of inputs across firms, especially among African countries. Our empirical application also shows that infrastructure provision has stimulated aggregate TFP growth through both within and between-industry productivity gains.
    Keywords: Productivity growth; Resource allocation; Stochastic frontier analysis; Structural change
    JEL: C20 D24 O18 O47
    Date: 2022–02–03
  12. By: Bakari, Sayef; El Weriemmi, Malek
    Abstract: According to the World Bank (2021), agriculture is the main source of income for 80% of the world's poor. This sector therefore plays a key role in reducing poverty, increasing incomes, and improving food security. The aim of this paper is to study the impact of agricultural investment on economic growth in France. To attempt our goal, annual data was collected during the period 1978 – 2020 and was estimated by ARDL model. Empirical results indicate that in the long run and in the short run agricultural investment has a positive impact on France’s economic growth. These results argue that investments in the agricultural sector are an essential determinant of economic growth in France and motivate the need to adopt sound policies to further strengthen this sector.
    Keywords: Agricultural Investment, Economic Growth, Cointegration, ARDL Model, France.
    JEL: O47 O52 Q10 Q18
    Date: 2022
  13. By: Cruz-Rodríguez, Alexis
    Abstract: This article provides empirical support for the hypothesis that different exchange rate regimes have an impact on economic growth in advanced, emerging and developing countries. The effects of different exchange rate arrangements on economic growth are examined through least squares dummy variable regressions using panel data on 125 countries during the post-Bretton Woods period (1974-1999). Also, this article addresses the issue of measurement errors in the classification of exchange rate regimes by using four different classification schemes. Three de facto and one de jure classifications are used. Consequently, the sensitivity of these results to alternative exchange rate classifications is also tested. The empirical findings indicate that developing countries with fixed regimes tend to have a higher economic growth.
    Keywords: Exchange rate regimes, economic growth
    JEL: F31 F33 O47
    Date: 2022–07–25
  14. By: Paolo Cavallino; Boris Hofmann
    Abstract: We lay out a small open economy model incorporating key features of EME economic and financial structure: high exchange rate pass-through to import prices, low pass-through to export prices and shallow domestic financial markets giving rise to occasionally binding leverage constraints. As a consequence of the latter, a sudden stop with large capital outflows can give rise to a financial crisis. In the sudden stop, the central bank faces an intratemporal trade-off as output declines while inflation rises. In normal times, there is an intertemporal trade-off as the risk of a future sudden stop forces the central bank to factor financial stability considerations into its policy conduct. The optimal monetary policy leans against capital flows and domestic leverage. Macroprudential, capital flow management and central bank balance sheet policies can help to mitigate both intra- and intertemporal trade-offs. Fiscal policy also plays a key role. A higher level of public debt and a weaker fiscal policy imply greater leverage and hence greater tail risk for the economy.
    Keywords: capital flows, monetary policy trade-offs, emerging market economies
    JEL: E5 F3 F4
    Date: 2022–07
  15. By: Pamela Pogliani; Philip Wooldridge
    Abstract: Financial centres that cater predominantly to non-residents – which we refer to as cross-border financial centres (XFCs) –are important intermediaries of cross-border financial flows. For analysing capital flows and international interconnectedness, it can be useful to distinguish countries that are home to XFCs from other countries. We improve on previous methodologies for identifying such centres by constructing a measure focussed on the intermediation activity inherent to XFCs and explicitly taking into account the non-normal distribution of this measure across countries when detecting outliers. We also minimise volatility in the set of countries identified as XFCs over time by de-trending the data and pooling years. Our methodology identifies a core set of 12 countries as XFCs over the 1995-2020 period, but the countries vary with time and different measures of activity.
    Date: 2022–07
  16. By: Nicholas K. Tabor; Jeffery Y. Zhang
    Abstract: The benefits of cross-border financial activity are wide-ranging, from greater competition and more efficient markets to broader and more stable access to capital. During normal economic times, the official sector and private sector share an incentive to foster such cross-border financial activities. During a financial crisis, however, the short-term alignment of official- and private-sector incentives can diverge—sometimes significantly. We present a game-theoretic model of the underlying trade-offs and discuss lessons for international financial regulators, placing them in the context of the 2008 financial crisis, when challenges in cross-border cooperation both channeled and amplified financial stress. We also discuss the critical unfinished business of post-crisis regulatory measures to improve oversight of internationally active financial institutions.
    Keywords: Bank Capital; Bank Liquidity; Cross-Border Finance; Market Fragmentation; Pre-Positioning
    JEL: F02 F59 F34 F00 F36 F30
    Date: 2022–08–09
  17. By: Brancati, Emanuele (Sapienza University of Rome)
    Abstract: The lack of information is a relevant obstacle to the export activity of small and medium enterprises. This paper analyzes whether banks can support firms’ export by reducing informational asymmetries about foreign markets. We exploit a large sample of Italian firms for which we merge custom data with information on their lender banks. We identify a shock exogenous to firms’ export decisions by relying on preexisting lending relationships and exploiting the acquisition of a firm’s domestic bank by an internationalized banking group. Our results show that, after the acquisition, firms have a significantly higher probability of starting export in countries where the consolidated bank has a foreign branch, which proxies for the amount of information accumulated that can be shared with client firms. Conversely, the effect on the intensive margins of previously-exporting companies is largely insignificant. We interpret these findings as evidence of information spillovers that mainly reduce firms’ fixed entry costs in a foreign market. The analysis also shows that other channels, such as bank credit availability or trade-finance supply, are unlikely to drive our results.
    Keywords: firms, export, informational barriers, banks
    JEL: F23 F14 G21 G00
    Date: 2022–07
  18. By: Schuster, Caroline; Kar, Sohini
    Abstract: In the decade since the 2008 global financial crisis, much of the debate has been over whom to blame: reckless speculative finance or irresponsible (often low-income) borrowers. This essay takes up this set of moral arguments about what the poor can and should be able to afford by examining subprime logics at a global scale: subprime empire. Predatory lending in heartland America and development-oriented microcredit in places such as India and Paraguay appear not just to be geographically disparate but also to have different moral valences. After closer inspection, however, we argue that subprime lending and microfinance are two sides of the same coin. Our analysis of microfinance allows us to understand what is happening in the “in-between” as capital flows between financial investors and poor borrowers. By comparing financialization in India and Paraguay, we document and theorize the making of subprime empires that rely on actors within marginal financial sites to stabilize the evaluative frameworks and social interdependencies that make profits flow. We argue that the forms of financial capture and conversion in the “financial in-between” reproduce imperial dynamics by naturalizing the limited expectations of economic subjects of the global south and erasing the violence inherent in these forms of economic redistribution that maintain those expectations as such.
    JEL: F3 G3 N0
    Date: 2021–08–01
  19. By: Christian Kurniawan; Xiyu Deng; Adhiraj Chakraborty; Assane Gueye; Niangjun Chen; Yorie Nakahira
    Abstract: Microfinance in developing areas such as Africa has been proven to improve the local economy significantly. However, many applicants in developing areas cannot provide adequate information required by the financial institution to make a lending decision. As a result, it is challenging for microfinance institutions to assign credit properly based on conventional policies. In this paper, we formulate the decision-making of microfinance into a rigorous optimization-based framework involving learning and control. We propose an algorithm to explore and learn the optimal policy to approve or reject applicants. We provide the conditions under which the algorithms are guaranteed to converge to an optimal one. The proposed algorithm can naturally deal with missing information and systematically tradeoff multiple objectives such as profit maximization, financial inclusion, social benefits, and economic development. Through extensive simulation of both real and synthetic microfinance datasets, we showed our proposed algorithm is superior to existing benchmarks. To the best of our knowledge, this paper is the first to make a connection between microfinance and control and use control-theoretic tools to optimize the policy with a provable guarantee.
    Date: 2022–07
  20. By: Benjamin Dennis
    Abstract: This article reviews the rapidly proliferating economic literature on climate change and financial policy. We find: (1) enduring challenges in estimating the statistical properties of a changed climate; (2) emerging evidence of financial markets pricing in climate-related risks; and (3) a range of significant institutional distortions preventing such pricing from being complete. Finally, we argue that geographic regions may be an especially fruitful unit of analysis for understanding the financial impact of climate change.
    Keywords: Climate change; Climate-finance; Climate-related risk
    JEL: G20 Q54 G10
    Date: 2022–07–29

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.