nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2022‒09‒12
thirty-two papers chosen by
Georg Man

  1. Is Finance Good for Growth? New Evidence from China By Jingzhu Chen; Yuemei Ji
  2. China's Financial System and Economy: A Review By Zhiguo He; Wei Wei
  3. Does foreign direct investment spur economic growth? New empirical evidence from Sub-Saharan African countries By Odhiambo, Nicholas M
  4. Is foreign direct investment losing clout in development By Berger, Axel; Ragoussis, Alexandros
  5. Exchange Rates and the Speed of Economic Recovery: The Role of Financial Development By Boris Fisera
  6. Financial frictions and productivity: Firm-level evidence from Kazakhstan By Zarina Adilkhanova
  7. Asset Holdings, Information Aggregation in Secondary Markets and Credit Cycles By Henrique S. Basso
  8. Risk and State-Dependent Financial Frictions By Martin Harding; Rafael Wouters
  9. Skewed SVARs: tracking the structural sources of macroeconomic tail risks By Carlos Montes-Galdón; Eva Ortega
  10. Rational Sentiments and Financial Frictions By Paymon Khorrami; Fernando Mendo
  11. Assessing Structure-Related Systemic Risk in Advanced Economies By O'Brien, Martin; Wosser, Michael
  12. Rightsizing Bank Capital for Small, Open Economies By McInerney, Niall; O'Brien, Martin; Wosser, Michael; Zavalloni, Luca
  13. Macroprudential policy and the role of institutional investors in housing markets By Muñoz, Manuel A.; Smets, Frank
  14. Macroprudential regulation of investment funds By di Iasio, Giovanni; Kaufmann, Christoph; Wicknig, Florian
  15. Latent fragility: conditioning banks' joint probability of default on the financial cycle By Bochmann, Paul; Hiebert, Paul; Schüler, Yves S.; Segoviano, Miguel
  16. Interbank credit exposures and financial stability By Schneorson, Oren
  17. The certification role of the EU-wide stress testing exercises in the stock market. What can we learn from the stress tests (2014-2021)? By Durrani, Agha; Ongena, Steven; Ponte Marques, Aurea
  18. Is the financial market driving income distribution? – An analysis of the linkage between income and wealth in Europe By Kavonius, Ilja Kristian; Törmälehto, Veli-Matti
  19. Economic crisis, global financial cycles, and state control of finance: public development banking in Brazil and South Africa By Naqvi, Natalya
  20. The structural power of finance meets financialization By Dafe, Florence; Hager, Sandy; Naqvi, Natalya; Wansleben, Leon
  21. Portfolio shocks and the financial accelerator in a small open economy By Ortiz, Marco; Miyahara, Ken
  22. Reserve Accumulation and Capital Flows: Theory and Evidence from Non-Advanced Economies By Juan Pablo Ugarte
  23. Real sector macroeconomic stabilization and structural resilience in Africa By Krantz, Sebastian
  24. The optimal quantity of CBDC in a bank-based economy By Burlon, Lorenzo; Montes-Galdón, Carlos; Muñoz, Manuel A.; Smets, Frank
  25. BigTech credit and monetary policy transmission: Micro-level evidence from China By Huang, Yiping; Li, Xiang; Qiu, Han; Yu, Changhua
  26. The Macroeconomic Consequences of Natural Rate Shocks: An Empirical Investigation By Stephanie Schmitt-Grohé; Martín Uribe
  28. Brexit and the Fintech Revolution in Europe - Lessons from the Bulgarian Digital Finance Cluster By Deyan Radev; Georgi Penev
  29. Saving Constraints, Inequality, and the Credit Market Response to Fiscal Stimulus By Jorge Miranda-Pinto; Daniel Murphy; Kieran James Walsh; Eric R. Young
  30. Attention Allocation and Heterogenous Consumption Responses By Yulei Luo; Jun Nie; Penghui Yin
  31. Working Capital Management, Financial Constraints, and Exports. Evidence from European and US Manufacturers By Jose Manuel Mansilla-Fernandez; Juliette Milgram Baleix
  32. Financial Markets and Green Innovation By Aghion, Philippe; Boneva, Lena; Breckenfelder, Johannes; Laeven, Luc; Olovsson, Conny; Popov, Alexander; Rancoita, Elena

  1. By: Jingzhu Chen; Yuemei Ji
    Abstract: We study the relationship between finance and growth using a sample of 275 Chinese cities during 2009-2018. We exclude a large amount of bank loans to local governments through the local government financing vehicles (LGFVs). This allows us to construct a new and better financial development index which measures the level of loans extended by banks to enterprises and households. Estimates from both GMM and Instrument Variables approaches indicate that financial development in the form of higher loan to GDP ratio leads to lower economic growth rate. We find that discrimination in bank lending, housing market bubbles and an unbalanced growth between real and financial sectors account for this negative relationship between finance and growth.
    Keywords: China, financial development, economic growth, banks, city
    JEL: O16 O18 O53 G21 N25
    Date: 2022
  2. By: Zhiguo He; Wei Wei
    Abstract: China's financial system has been integral to its spectacular economic growth over the past 40 years. We review the recent literature on China's financial system and its connections to the Chinese economy based on the categories of Aggregate Financing to the Real Economy (AFRE), a broad measure of the nation's yearly flow of liquidity accounting for unique features of China's financial system. While early work on China's financial system emphasizes the state-owned enterprise (SOE) reform, the recent literature explores other more market-based financing channels—including shadow banking—that grew rapidly after 2010 and have become important components of AFRE. These new financing channels are not only intertwined with each other, but more importantly often ultimately tied back to the dominant banking sector in China. Understanding the mechanisms behind these channels and their intrinsic connections is crucial to alleviate capital allocation distortion and mitigate potential systemic financial risk in China.
    JEL: G10 G20 G30 O16 O17 O33 P34
    Date: 2022–08
  3. By: Odhiambo, Nicholas M
    Abstract: In this study we re-examine the relationship between foreign direct investment (FDI) and economic growth in 27 sub-Saharan African (SSA) countries during the period 1990?2019. Unlike some previous studies, we clustered SSA countries into two groups, namely low-income and middle-income countries. We also employed three panel data techniques in a stepwise fashion, namely the dynamic ordinary least squares (DOLS), the fully modified ordinary least squares (FMOLS), and heterogeneous Granger non-causality approaches. Our results show that while the positive impact of FDI on economic growth is supported by both DOLS and FMOLS techniques in low-income countries, in middle-income countries only the DOLS technique supports this finding. This shows that the impact of FDI may be sensitive to the level of income of the recipient country. Overall, the results show that FDI inflows play a larger role in stimulating economic growth in low-income SSA countries than in middle-income SSA countries. These findings are also corroborated by heterogeneous Granger non-causality results. However, these findings are not surprising, given that many low-income countries tend to be more dependent on inward FDI inflows to stimulate their economic growth than middle-income countries. Policy recommendations are discussed.
    Keywords: FDI, economic growth, sub-Saharan African countries, panel data analysis
    Date: 2022–08
  4. By: Berger, Axel; Ragoussis, Alexandros
    Abstract: Over the last decade, only a single projection of foreign direct investment (FDI) flows by the United Nations influential "World Investment Report" has proposed a negative outlook in the medium term. Based partly on surveys of business executives, these forecasts reflect expectations of investment growth which, however, have repeatedly failed to materialise. In fact, FDI flows to developing countries have remained stagnant over the past decade. Such wishful thinking is nurtured by a long series of positive narratives and facts about foreign investment. FDI has been one of the pillars of international development efforts for over 70 years. Its promise has not been limited to critical finance, but extends to longer term competitiveness through access to better technology, managerial know-how and, above all, prosperity through more and better paid jobs in the formal sector. From the old prescriptions of the so-called Washington Consensus to the hopeful Addis Ababa Action Agenda, the dominant development narrative has therefore favoured a rather indiscriminate pursuit of investment volume. This brief calls for rethinking of narratives and policies that help to improve the impact of FDI, based on secular trends that challenge our expectations. Four such trends stand out: First, while other sources of finance for development have grown considerably over the last decades, foreign investment has not followed the trend. Second, the kind of investment that is associated with stronger gains and longer term commitment in host economies - greenfield FDI - has also been in consistent decline as a share of total investment, while mergers and acquisitions and project finance have gained in importance. Third, the top 100 multinational enterprises (MNEs), accounting for nearly a quarter of global FDI stock, rely less on employment today than they used to in order to grow their foreign presence. Job creation, knowledge transfer and spillovers are therefore less likely to materialise through the presence of mega-firms and their corresponding investment at scale. Fourth, the growth of Chinese outward FDI within a strategic expansionary political agenda stands to change rules and attitudes towards foreign investment moving forwards. We argue that, collectively, these trends invite a renewed conversation around the kind of foreign investment we want and expectations of this source of finance for development. These facts obscure neither the broad benefits of FDI to developing countries, nor the value proposition of FDI attraction. Rather, they raise questions about expectations, priorities and the alignment of investment policy with the realities experienced across developing countries. To that end, we propose four priorities that stand to make a difference in the current context. We call for policy-makers to: 1) Place additional emphasis on retention of investment and linkages with the domestic economy. 2) Try new approaches for FDI attraction that focus on improving domestic investment facilitation frameworks. 3) Be selective as to investment sources and activities in order to mitigate political risks and align inward investment better with sustainable development. 4) Add evidence to improve our understanding of investment and inform decision-making. Overall, it is critical to engage in a serious multi-stakeholder conversation around expectations, actors and solutions that respond to the investment reality of today.
    Date: 2022
  5. By: Boris Fisera (Faculty of Social Sciences, Charles University, Prague & Institute of Economic Research, Slovak Academy of Sciences, Bratislava)
    Abstract: We study the influence of the exchange rate on the speed of economic recovery in a sample of 67 developed and developing economies over the years 1989-2019. First, using a cross-sectional sample of 341 economic recoveries, we study the effect of nominal depreciation and real undervaluation on the length of economic recovery. Our findings indicate that both nominal depreciation and real undervaluation increase the speed of economic recovery. However, this finding only holds for smaller depreciations/ undervaluations. Second, we use an interacted panel VAR (IPVAR) model to investigate the effect of real undervaluation on the speed of economic recovery after external shock. While we once again find evidence that undervalued domestic currency increases the speed of economic recovery, its positive effect seems limited in size. Furthermore, we also explore the role of financial development in influencing the effectiveness of undervalued domestic currency in stimulating the economic recovery. We find that the higher level of financial development seems to limit the negative effect of an overvalued currency on the speed of economic recovery, but not to influence the effect of an undervalued currency on economic recovery.
    Keywords: Economic recovery, exchange rate, currency depreciation, real undervaluation, financial development, interacted panel VAR (IPVAR)
    Date: 2022–08
  6. By: Zarina Adilkhanova (NAC Analytica, Nazarbayev University)
    Abstract: This paper studies the effect of financial frictions on firm-level total factor productivity in Kazakhstan using a large data set on medium and large enterprises from 2009 to 2017. We explain the effect of financial frictions on productivity growth and the microeconomic channels through which they may transmit to the real economy. The results demonstrate that productivity growth is vulnerable to debt growth due to the rising financial friction, which is helpful in understanding of reasons why financial crises lead to a persistent decline in economic activity.
    Keywords: Total Factor Productivity (TFP); Financial Frictions; Debt Growth
    JEL: D24 G30 O16
    Date: 2021–12
  7. By: Henrique S. Basso (Banco de España)
    Abstract: Imperfect information aggregation in secondary credit markets has significant consequences for economic cycles. As banks put more weight on mark-to-market gains, they find it optimal to refrain from revealing information about adverse shocks. Consequently, default risk is mispriced, and loan volumes, and thus investment, are not appropriately reduced. Overinvestment lowers the price of capital, leading households to increase consumption without decreasing labour supply, generating a boom. Due to mispricing, banks subsequently face bigger losses and capital depletion. Output then decreases sharply due to credit supply shortages. In a model calibrated to the US economy, these instances of market dysfunction are crucial in amplifying credit cycles.
    Keywords: information revelation, credit markets, mark-to-market, mispricing, bank compensation
    JEL: E32 E50 G01 G14
    Date: 2022–03
  8. By: Martin Harding; Rafael Wouters
    Abstract: We augment a standard New Keynesian model with a financial accelerator mechanism and show that financial frictions generate large state-dependent amplification effects. We fit the model to US data and show that show that, when shocks drive the model far away from the steady state, the nonlinear model produces much stronger propagation of shocks than the linearized model. We document that these amplification effects are due to endogenous variation in financial conditions and not due to other nonlinearities in the model. Motivated by these findings, we propose a regime-switching dynamic stochastic general equilibrium framework where financial frictions endogenously fluctuate between moderate (low risk) and severe (high risk), depending on the state of the economy. This framework allows for efficient estimation with many state variables and improves fit with respect to the linear model.
    Keywords: Central bank research; Credit and credit aggregates; Financial stability; Monetary policy
    JEL: E52 E58
    Date: 2022–08
  9. By: Carlos Montes-Galdón (European Central Bank); Eva Ortega (Banco de España)
    Abstract: This paper proposes a vector autoregressive model with structural shocks (SVAR) that are identified using sign restrictions and whose distribution is subject to time-varying skewness. It also presents an efficient Bayesian algorithm to estimate the model. The model allows for the joint tracking of asymmetric risks to macroeconomic variables included in the SVAR. It also provides a narrative about the structural reasons for the changes over time in those risks. Using euro area data, our estimation suggests that there has been a significant variation in the skewness of demand, supply and monetary policy shocks between 1999 and 2019. This variation lies behind a significant proportion of the joint dynamics of real GDP growth and inflation in the euro area over this period, and also generates important asymmetric tail risks in these macroeconomic variables. Finally, compared to the literature on growth- and inflation-at-risk, we found that financial stress indicators do not suffice to explain all the macroeconomic tail risks.
    Keywords: Bayesian SVAR, skewness, growth-at-risk, inflation-at-risk
    JEL: C11 C32 C51 E31 E32
    Date: 2022–03
  10. By: Paymon Khorrami; Fernando Mendo
    Abstract: We provide a complete analysis of previously undocumented sunspot equilibria in a canonical dynamic economy with imperfect risk sharing. Methodologically, we employ stochastic stability theory to establish existence of this broad class of sunspot equilibria. Economically, self-fulfilling fluctuations are characterized by uncertainty shocks: changing beliefs about volatility trigger asset trades, which impacts productive efficiency and justifies the degree of uncertainty. We show how rational sentiment helps resolve two puzzles in the macro-finance literature: (i) financial crises emerge suddenly, featuring (quantitatively) hard-to-explain volatility spikes and asset-price declines; (ii) asset-price booms, with below-average risk premia, predict busts and financial crises.
    Date: 2021–10
  11. By: O'Brien, Martin (Central Bank of Ireland); Wosser, Michael (Central Bank of Ireland)
    Abstract: We examine the role that economic size, the degree of trade and financial openness, dependancy on inward foreign direct investment and various aspects of banking system concentration play in determining systemic risk across advanced economies. Across the three systemic risk measures evaluated, we find that small, financially open and FD Idependent economies with more concentrated banking systems are more susceptible to severe tail risk outcomes and higher costs of crises than the average advanced economy. Small and financially open economies appear more likely to experience a systemic banking crisis than their counterparts. In most instances, the joint presence of these structural characteristics combine to further increase systemic risk levels and do not offset each other. Our findings suggest that a more activist macroprudential policy stance may be warranted for countries sharing these characteristics, so that the level of resilience is commensurate to the higher level of risk.
    Keywords: Systemic Risk, systemic banking crises, macroprudential policy, macrof inancial structure, macroprudential policy, financial stability.
    JEL: E5 G01 G21 G28
    Date: 2022–06
  12. By: McInerney, Niall (Central Bank of Ireland); O'Brien, Martin (Central Bank of Ireland); Wosser, Michael (Central Bank of Ireland); Zavalloni, Luca (Central Bank of Ireland)
    Abstract: In a macroeconomic cost versus benefit framework, we determine the appropriate Tier 1 capital ratio for the banking system of advanced economies. Of particular interest is the appropriate bank capital range for countries sharing similar macrofinancial structural characteristics, during times of normal prevailing risk conditions. The characteristics considered include the relative size of the economy, trade and financial openness, the degree to which the country is FDI-dependent and various measures of banking system concentration. We find that, when the prevailing systemic risk environment is neither elevated nor subdued and other critical modelling parameters are set to plausible levels, an appropriate level for the Tier 1 capital ratio in advanced economies can lie in the range of 12% to 20%, with our benchmark estimate being 16%. When considering the additional risk inherent with being a small, open, FDI-reliant economy with a concentrated banking system, this range and benchmark can be up to 1.25 percentage points higher.
    Keywords: optimal bank capital, macroprudential policy, macro-financial structure, systemic risk, financial crises, financial regulation.
    JEL: E5 G01 G17 G28 R39
    Date: 2022–06
  13. By: Muñoz, Manuel A.; Smets, Frank
    Abstract: Since the onset of the Global Financial Crisis, the presence of institutional investors in housing markets has steadily increased over time. Real estate funds (REIFs) and other housing investment •rms leverage large-scale buy-to-rent real estate investments that enable them to set prices in rental markets. A significant fraction of this funding is being provided in the form of non-bank lending - which is not subject to regulatory LTV ratios - and REIFs are generally not constrained by leverage limits. We develop a quantitative DSGE model that incorporates the main features of the REIF industry and identify leakages of existing macroprudential policy: (i) already existing countercyclical LTV rules on residential mortgages trigger a credit reallocation towards the REIF sector that can amplify financial and business cycles; while (ii) "non-existent" countercyclical LTV rules on lending to REIFs are particularly effective in taming such cycles. Due to the different mechanisms through which they operate, both types of LTV rules complement each other and jointly yield larger welfare gains (for savers and borrowers) than in isolation. JEL Classification: E44, G23, G28
    Keywords: leakages, leverage, loan-to-value ratios, real estate funds, rental housing
    Date: 2022–08
  14. By: di Iasio, Giovanni; Kaufmann, Christoph; Wicknig, Florian
    Abstract: The investment fund sector, the largest component of the non-bank financial system, is growing rapidly and the economy is becoming more reliant on investment fund financial intermediation. This paper builds a dynamic stochastic general equilibrium model with banks and investment funds. Banks grant loans and issue liquid deposits, which are valuable to households. Funds invest in corporate bonds and may hold liquidity in the form of bank deposits to meet investor redemption requests. Without regulation, funds hold insufficient deposits and must sell bonds when hit by large redemptions. Bond liquidation is costly and eventually reduces investment funds’ intermediation capacity. Even when accounting for side effects due to a reduction of deposits held by households, a macroprudential liquidity requirement improves welfare by reducing bond liquidation and by increasing the economy’s resilience to financial shocks akin to March 2020. JEL Classification: E44, G18, G23
    Keywords: liquidity regulation, macroprudential policy, non-bank financial intermediation
    Date: 2022–08
  15. By: Bochmann, Paul; Hiebert, Paul; Schüler, Yves S.; Segoviano, Miguel
    Abstract: We propose the CoJPoD, a novel framework explicitly linking the cross-sectional and cyclical dimensions of systemic risk. In this framework, banking sector distress in the form of the joint probability of default of financial intermediaries (reflecting contagion from both direct and indirect interconnectedness) is conditioned on the financial cycle (reflecting the buildup and unwinding of system-wide balance sheet leverage). An empirical application to large systemic banks in the euro area, US and UK illustrates how the unravelling of excess leverage can magnify banking sector distress. Capturing this dependence of banking sector distress on prevailing financial imbalances can enhance risk surveillance and stress testing alike. An empirical signaling exercise confirms that the CoJPoD outperforms the individual capacity of either its unconditional counterpart or the financial cycle in signaling financial crises particularly around their onset - suggesting scope to increase the precision with which macroprudential policies are calibrated. JEL Classification: C19, C54, E58, G01, G21
    Keywords: financial crises, financial cycle, multivariate density optimization, portfolio credit risk, systemic risk
    Date: 2022–08
  16. By: Schneorson, Oren
    Abstract: This paper investigates how interbank credit exposures affect financial stability. Policy makers often see such exposures as undermining stability by exacerbating cascading losses through the financial system. I develop a model that features a trade-off between cascading losses and risk-sharing. In contrast to previous studies I find that reducing interbank connectivity may destabilize the financial system via the bank-run channel. This is because it decreases the risk-sharing benefits of interbank connectivity. A bank-run model features two islands that are connected via a long term debt claim. Varying the size of this claim (interbank connectivity), I study how the decision to `run on the bank' is affected. I run a simulation of the model, calibrated to the U.S. banking system between 1997-2007. I find that large bankruptcy costs are required to trump the risk-sharing benefits of interbank credit exposures. JEL Classification: G01, G21, G28
    Keywords: bank runs, credit risk, derivatives, financial stability
    Date: 2022–08
  17. By: Durrani, Agha; Ongena, Steven; Ponte Marques, Aurea
    Abstract: What is the impact of stress tests on bank stock prices? To answer this question we study the impact of the publication of the EU-wide stress tests in 2014, 2016, 2018, and 2021 on the first (λ) and second (δ) moment of equity returns. First, we study the effect of the disclosure of stress tests on (cumulative) excess/abnormal returns through a one-factor market model. Second, we study whether both returns and volatility of bank stock prices changes upon the disclosure of stress tests through a structural GARCH model, developed by Engle and Siriwardane (2018). Our results suggest that the publication of stress tests provides new information to markets. Banks performing poorly in stress tests experience, on average, a reduction in returns and an increase in volatility, while the reverse holds true for banks performing well. Banks performing moderately have rather a small effect on both mean and variance process. Our findings are corroborated by the observed rank correlation between bank abnormal returns or equity volatility and stress test performance, which experiences a steady increase after each publication event. These results suggest that the publication of stress tests improves price discrimination between 'good' and 'bad' banks, which can be interpreted as a certification role of the stress tests in the stock market. JEL Classification: G11, G14, G21, G28
    Keywords: excess return, financial stability, stock markets, stress tests, volatility
    Date: 2022–08
  18. By: Kavonius, Ilja Kristian; Törmälehto, Veli-Matti
    Abstract: Globalisation has a major impact on the levels and distribution of wealth. The financial markets are highly integrated, and valuations of financial assets follow international patterns, which has contributed to large increases in financial wealth over the past 25 years. Nonetheless, this has not led to an equally large increase in property income because the rates of return have decreased during the same era. Moreover, changes in functional income distribution (capital/labour shares) have not been fully transmitted to the distribution of primary income between households because other institutional sectors – particularly the government sector – hold considerable amounts of financial assets. At least in the short term, the decrease in rates of return seems to contradict claims that, due to an increase in both financial and inherited wealth, we are entering an era of increasing income inequality. In this article, the link between financial wealth and pre-tax household income distribution is scrutinised for three European countries using a conceptually fully consistent macro framework. First, national balance sheets are combined with the related income flows. After this, income flows that are not property income but are considered part of national income (e.g., wages and salaries) are added, the national income flows are broken down by institutional sector and the household sector income flows separated. Finally, distributional household micro data are used to break down the aggregate household sector income flows by income decile. The article utilises this framework to analyse the evolution of rates of return and capital and labour shares as well as how the property income flows created by financial wealth have affected household primary income distribution. JEL Classification: D10, D31, D32, E21, G51
    Keywords: functional distribution, households, income distribution, national income, wealth
    Date: 2022–08
  19. By: Naqvi, Natalya
    JEL: N0 F3 G3
    Date: 2022
  20. By: Dafe, Florence; Hager, Sandy; Naqvi, Natalya; Wansleben, Leon
    JEL: F3 G3 J1
    Date: 2022
  21. By: Ortiz, Marco; Miyahara, Ken
    Abstract: We study a small open economy with two salient properties: an entrepreneurial sector that borrows in foreign currency and is subject to costly state-verification and risk averse FX market intermediaries. This economy thus features a financial accelerator, an endogenous expected cost of capital, and foreign exchange dynamics dependent on the open position of financial intermediaries. we aim to quantitatively assess the extent to which portfolio shocks can reproduce contractionary depreciations and how central bank's optimal simple rules can improve welfare in a stylized economy.
    Keywords: Exchange rate dynamics, exchange rate intervention, financial accelerator, incomplete financial markets
    JEL: F3 F31 F34 F41 G15
    Date: 2022–08–15
  22. By: Juan Pablo Ugarte
    Abstract: Capital flows can have destabilizing effects in economies connected to the global financial system. Research has shown that external factors tend to explain most of these movements during episodes of financial turmoil, while country-specific determinants are able to explain heterogeneity throughout the recovery. This paper seeks to understand how reserve accumulations affect real and financial variables. For this purpose, a theoretical framework based on an extended version of the Mundell-Fleming model is presented and its predictions are tested with empirical evidence. Our results suggest that, under a flexible exchange rate regime, an accumulation of reserves generates net capital inflows with limited effects on the real economy. Specifically, we find that an accumulation of reserves of 1% of GDP would increase net capital flows about 0.81%.
    Date: 2021–09
  23. By: Krantz, Sebastian
    Abstract: Over the past 30 years (1990-2019), African economies have experienced remarkable improvements in real macroeconomic conditions, characterized by higher and more stable real per-capita growth rates, and lower and more stable inflation. This paper documents and seeks to explain these changes at the aggregate and sectoral levels. Sectoral analysis shows a particularly strong reduction in growth volatility, of more than 50%, in the agricultural sector, and a gradual stabilization in services. On the expenditure side, private consumption and investment have also stabilized considerably. Most of the decline in aggregate growth volatility is due to within-sector changes in volatility, structural change explains less than 5%. Correlates of African stabilization are firstly a more favorable external environment through lower levels of external debt, higher levels of FDI and remittances, and improved terms of trade (ToT), as well as lower volatility of ToT and financial flows. These developments were complemented by better exchange rate management (resulting in lower exchange rate and inflation volatility) and more fiscal stability through the adoption of fiscal rules. Domestic financial deepening and higher levels of reserves, both official and by banks, as well as slightly higher national savings, further increased Africa's resilience to shocks. Regarding structural characteristics, the quality of the institutional and business environment appears to be the most important factor for stability, followed by the intensity and volatility of financial flows, trade intensity and diversification, natural resource dependence, natural disaster and conflict incidence. Some of these factors encourage deeper investigations, for example how improvements in business conditions in multiple African economies interacted with broader macroeconomic stabilization.
    Keywords: macoeconomic stability,structural resilience,growth,inflation,volatility,structural change,economic structure,institutions,macroeconomic policy
    JEL: O11 E30 E60
    Date: 2022
  24. By: Burlon, Lorenzo; Montes-Galdón, Carlos; Muñoz, Manuel A.; Smets, Frank
    Abstract: We provide evidence on the estimated effects of digital euro news on bank valuations and lending and find that they depend on deposit reliance and design features aimed at calibrating the quantity of CBDC. Then, we develop a quantitative DSGE model that replicates such evidence and incorporates key selected mechanisms through which CBDC issuance could affect bank intermediation and the economy. Under empirically-relevant assumptions (i.e., central bank collateral requirements and imperfect substitutability across CBDC, cash and deposits), the issuance of CBDC yields non-trivial trade-offss and effects through an expansion of the central bank balance sheet and profits. The issuance of CBDC exerts a smoothing effect on lending and real GDP by stabilizing deposit holdings. Such "stabilization effect" improves the well-known liquidity services/disintermediation trade-off induced by CBDC and permits to rank different types of CBDC rules according to individual and social preferences. Welfare-maximizing CBDC policy rules are effective in mitigating the risk of bank disintermediation and induce significant welfare gains. JEL Classification: E42, E58, G21
    Keywords: bank intermediation, central bank digital currency, DSGE models
    Date: 2022–07
  25. By: Huang, Yiping; Li, Xiang; Qiu, Han; Yu, Changhua
    Abstract: This paper studies monetary policy transmission through BigTech and traditional banks. By comparing business loans made by a BigTech bank with those made by traditional banks, it finds that BigTech loans tend to be smaller, and the BigTech bank grants credit to more new borrowers compared with conventional banks in response to expansionary monetary policy. The BigTech bank's advantages in information, monitoring, and risk management are the potential mechanisms. The analysis also finds that BigTech and traditional bank credits to firms that have already borrowed from these banks respond similarly to changes in monetary policy. Overall, BigTech credit amplifies monetary policy transmission mainly through the extensive margin. In addition, monetary policy has a stronger impact on the real economy through BigTech lending than traditional bank loans.
    Keywords: bank lending,financial technology,monetary policy transmission
    JEL: E52 G21 G23
    Date: 2022
  26. By: Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: Much of the empirical literature on the natural rate of interest has focused on estimating its path. This paper addresses the question of how exogenous movements in the natural rate of interest affect aggregate activity and inflation in the short and long runs. To this end it proposes a semi-structural model of output, inflation, and the policy interest rate inspired by the DSGE literature but with fewer identification and cross-equation restrictions. It then estimates it on U.S. data over the period 1900 to 2021. We find that a permanent decline in the natural rate of interest has a large negative effect on the trend of output and is contractionary and deflationary in the short run. When the economy is constrained by the zero lower bound (ZLB), these results are consistent with the secular stagnation hypothesis. However, we find that negative natural rate shocks depress the trend of output even when the economy is away from the ZLB. Thus, the results of this paper call for a more general theory of the trend effects of natural rate shocks.
    JEL: E30 E4
    Date: 2022–08
  27. By: Sheilla Nyasha; Nicholas M. Odhiambo; Mercy T. Musakwa
    Abstract: This study has empirically investigated the impact of bank development on unemployment in Kenya, based on time-series data spanning from 1991 to 2019. Using the ARDL bounds testing approach, the results of the study have revealed that in Kenya, the impact of bank development on unemployment, though time-invariant, depends largely on the proxy used to measure the level of bank development. Consistent with expectations, bank development – as proxied by liquid liabilities, bank deposits, deposit money bank assets and the banking development index – has been found to have a negative impact on unemployment in Kenya. However, when bank development is proxied by the domestic credit to private sector by banks, its impact on unemployment was found to be statistically insignificant. These results were found to apply consistently in the long run and in the short run.
  28. By: Deyan Radev (Faculty of Economics and Business Administration at Sofia University); Georgi Penev (Bulgarian Fintech Association, Sofia, Bulgaria)
    Abstract: This paper provides insights into the drivers of the resilience of the Fintech sector in Emerging Europe by analyzing the performance of 128 Bulgarian Fintech companies in the period 2000-2021. Our results show that larger and better capitalized Fintech companies which outsource their non-core activities and focus on their main competitive strengths tend to have higher operating income and profit. We also find substantial positive real-economy effects as these companies hire actively on the labor market to maintain their growth. The results are primarily driven by the post-Brexit period of 2016-2019. These results have important managerial and policy implications and provide interesting directions for future research.
    Keywords: Brexit, fintech, regional clusters, resilience, emerging markets
    JEL: G01 R00 R11 P25
    Date: 2022–08
  29. By: Jorge Miranda-Pinto; Daniel Murphy; Kieran James Walsh; Eric R. Young
    Abstract: We document substantial heterogeneity in the interest rate response to fiscal stimulus (IRRF) across OECD economies. The IRRF is negative in half of the OECD countries, and it declines with income inequality. To interpret this evidence we de-velop a model in which moderately low-income households take on debt to maintain a consumption threshold (saving constraint). Now debt-burdened, these households use additional income to deleverage. In more unequal economies with more saving constrained households, increases in government spending tighten credit conditions less (relax credit conditions more), leading to smaller increases (larger declines) in the interest rate.
    Date: 2021–10
  30. By: Yulei Luo; Jun Nie; Penghui Yin
    Abstract: Recessions often have detrimental effects on both employment and equity returns, forcing individuals to make decisions about how to balance risks to their labor and capital income. In this paper, we study how individuals allocate their limited attention between capital income and labor income risks in a two-period consumption-saving model with recursive utility. Specifically, we examine how the optimal attention and consumption-saving decisions are influenced by individuals’ attention capacity, wealth endowments, income risks, and preferences for risk and time. We show that our model can generate results that are consistent with several novel facts regarding how differences in individuals’ wealth levels and beliefs about their unemployment risks influenced their consumption during the Great Recession. Furthermore, we find that the welfare loss due to limited attention is significantly larger for households with lower wealth; allowing these households to flexibly allocate their attention can significantly reduce this welfare loss.
    Keywords: Capital income risks; Labor income risks; Optimal attention allocation; Consumption and saving decisions
    JEL: C61 D83 E21
    Date: 2022–07–29
  31. By: Jose Manuel Mansilla-Fernandez (Universidad Publica de Navarra); Juliette Milgram Baleix (Universidad de Granada, Departamento de Teoría e Historia Económica)
    Abstract: This paper investigates the effect of firms’ working capital management, measured by the cash conversion cycle (CCC) on exports, on both the intensive and extensive margins. By using Heckman’s two-stage model for the treatment of sample selection bias, we find that the longer the CCC, the lower firms’ likelihood of exporting and the lower the volume of their exports. This phenomenon is economically more relevant for financially constrained firms than for unconstrained firms. The results are robust to the propensity score matching, the transition sample and the placebo analyses. Finally, these results can be extrapolated in the context of the Covid-19 crisis because of the decline in trading conditions and firms’ shortage of liquidity.
    Keywords: Cash conversion cycle, Covid-19 crisis, exports, financial constraints, working capital management
    JEL: G01 G21 G32 H63
    Date: 2022–08–15
  32. By: Aghion, Philippe; Boneva, Lena; Breckenfelder, Johannes; Laeven, Luc; Olovsson, Conny; Popov, Alexander; Rancoita, Elena
    Abstract: Fulfilling the commitments embedded in the Paris Agreement requires a climate-technologyrevolution. Patented innovation of low-carbon technologies is lower in the EU than in selectedpeers, and very heterogeneous across member states. We motivate this fact with anendogenous model of directed technical change with government policy and financialmarkets. Variations in carbon taxes, R&D investment, and venture capital investment explaina large share of the variation in green patents per capita in the data. We discuss implicationsfor policy, concluding that governments can play a catalytic role in stimulating greeninnovation while the role of central banks is limited. JEL Classification: E5, G1, O4, Q5
    Keywords: central banks, climate change, directed technical change, financial markets, public policy
    Date: 2022–07

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