nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2022‒09‒19
fifteen papers chosen by
Georg Man

  1. Macrofinancial determinants of default probability using copula: A case study of Indonesian banks By Maulana Harris Muhajir
  2. Are Public Sector Banks in India a Government Failure? -A Comparative Empirical Analysis of Public Sector and Private Sector Banks in India. By Sahil Chopra
  3. Financial Failure and Depositor Quality: Evidence from Building and Loan Associations in California By Todd Messer
  4. Uncertainty, Shock Prices and Debt Structure: Evidence from the U.S.-China Trade War By Ali K. Ozdagli; Jianlin Wang
  5. Overreaction and Diagnostic Expectations in Macroeconomics By Pedro Bordalo; Nicola Gennaioli; Andrei Shleifer
  6. Patent collateral and access to debt By Bracht, Felix; Czarnitzki, Dirk
  7. Assessing the Use of Land as Collateral for Accessing Credit from Institutional Sources in Rural India By Prerna Prabhakar; Nishika Pal; Deepak Sanan; Somnath Sen
  8. Social cohesion and firms' access to finance in Africa By Yabibal Mulualem Walle
  9. The role of the financial constraint in STW policy success during and after the Great Recession By Nathan Vieira
  10. The Journey of a Remittance in the US-Mexico Corridor: From My Salary to My Family By Batiz-Lazo, Bernardo; González-Correa, Ignacio
  11. Effects of Intergovernmental Transfers on Income and Poverty Rates: Evidence from the Philippines By Cheng-Tao Tang; Chun Yee Wong; Orelie Bathan Delas Alas
  12. Effets non linéaires de la politique budgétaire sur la croissance économique au Cameroun By Ngah Ntiga, Louis-Henri
  13. Revisiting The Determinants Of Sovereign Bond Yield Volatility. By Carlos Alberto Piscarreta Pinto Ferreira
  14. BoC–BoE Sovereign Default Database: What’s new in 2022? By David Beers; Elliot Jones; Karim McDaniels; Zacharie Quiviger
  15. How Credit Improves the Exchange Rate Forecast By Martin Casta

  1. By: Maulana Harris Muhajir (Neoma Business School)
    Abstract: In the aftermath of the global financial crisis of 2008, macrofinancial linkages have gained more attention from policymakers as primary issues of financial system stability. A clearer understanding of probability of default (PD) drivers may help predict if a bank will default on its portfolio liabilities. This presentation develops a method to assess a bank's PD based on a multivariate copula distribution to capture nonlinear relationships between variables with complex data structures. Then we use the generalized method of moments (GMM) to observe the relationship between PD to bank performance (bank-specific indicators) and the macroeconomic indicators. Our findings illustrate some critical links between PD and macroeconomic environments. For example, empirical evidence suggests that bank-specific indicators such as the CET 1 ratio, inefficiency ratio, and deposit ratio appear to be negatively and statistically significant to a bank's PD. When we examined the structural and macroeconomic variables, we found that the policy rate, the real exchange rate, economic growth, and the unemployment rate may reduce the PD. We also found that central state-owned banks tend to have a higher risk than other bank groups and that regional state-owned banks in the central region have the greatest likelihood of default.
    Date: 2022–08–11
  2. By: Sahil Chopra
    Abstract: To extend banking services to the Indian rural sector, an act was passed in 1976 and then in 1980 to nationalize the banks. Giving the name to such an approach as social banking. Banking sector in India, therefore, has been bifurcated into public sector banks, private sector banks, foreign banks, regional rural banks, urban cooperative banks and rural cooperative banks. Many studies have assessed the performance of private and public sector banks. Such research has evaluated the performance of private and public sector banks by estimating bank-specific and macroeconomic parameters. However, not many quantitative literatures are available which have estimated the impact of ownership on bank performance by considering ownership as one of the bank-specific independent variables to evaluate the impact of ownership on bank profitability. This paper seeks to fill this gap by examining the determinants of profitability on the account of ownership, and it uses an independently constructed dataset containing all commercial public and private sector banks in India as on April 2020. The data ranges from 2004 to 2020. The justification to measure the impact of ownership comes from the theory of Government failure, which mainly points out how government intervention can result in costly solutions. Therefore, by adding the independent variable in an already established model, we can assess the impact of ownership. Banks’ characteristics are collected from respective banks’ websites, and the hypotheses are tested by estimating an econometric model, i.e. a pooled OLS model. The results are promising: the banking industry as a whole is not performing well, however government owned banks are showcasing the worst performances. The reason for this can be the huge amount of loans sanctioned in priority sectors and fraudulent cases which may be due to the presence of interest groups, corruption and inefficiency of employees in public sectors.
    Keywords: Government Failure, Empirical Analysis, Public Sector Banks, Panel Data, Pooled OLS model
    JEL: C30 H83 I38
    Date: 2022–07
  3. By: Todd Messer
    Abstract: Flightiness, or depositor sensitivity to liquidity needs, can be an important determinant of financial distress. I leverage institutional differences that attract depositors with varying flightiness across building and loan associations in California during the Great Depression. A new type of plan, the Dayton plan, involved less restrictive savings plans and lower withdrawal penalties. Dayton plans in California were more likely to close during the Great Depression. Archival evidence on lending rates and returns supports the flightiness mechanism.
    Keywords: Bank Failures; Banks, credit unions, and other financial institutions; Building and Loan; Great Depression
    JEL: N22 G23 G21
    Date: 2022–08–08
  4. By: Ali K. Ozdagli; Jianlin Wang
    Abstract: Using the recent U.S.-China trade war as a laboratory, we show that policy uncertainty shocks have a significant impact on stock prices. This impact is less negative for firms that heavily rely on bank debt whereas non-bank debt does not have a mitigating effect. Moreover, the mitigating effect of bank debt is concentrated among zombie firms. A zombie firm that derives half of its capital from bank debt has no negative stock price reaction to increased uncertainty. These results are consistent with bank debt providing insurance for zombie firms in bad economic times.
    Keywords: Policy uncertainty; asset prices; debt structure; zombie firms; trade war
    JEL: E44 F13 G12 G20 G30
    Date: 2022–08–19
  5. By: Pedro Bordalo; Nicola Gennaioli; Andrei Shleifer
    Abstract: We present the case for the centrality of overreaction in expectations for addressing important challenges in finance and macroeconomics. First, non-rational expectations by market participants can be measured and modeled in ways that address some of the key challenges posed by the rational expectations revolution, most importantly the idea that economic agents are forward-looking. Second, belief overreaction can account for many long-standing empirical puzzles in macro and finance, which emphasize the extreme volatility and boom-bust dynamics of key time series, such as stock prices, credit, and investment. Third, overreaction relies on psychology and is disciplined by survey data on expectations. This suggests that relaxing the assumption of rational expectations is a promising strategy, helps theory and evidence go together, and offers a unified view of a great deal of data.
    JEL: D9 E03 E44 G02
    Date: 2022–08
  6. By: Bracht, Felix; Czarnitzki, Dirk
    Abstract: We investigate how intangible capital in form of intellectual property, such as patents, might mitigate financing constraints. While scholars have already argued that patents might have a signalling value reducing information asymmetries between borrowers and lenders, we quantify the value of using patents as collateral with regard to capital access. Although this mechanism of patents in financing further R&D is not new, we are the first to provide a treatment effects study of patent collateral and access to capital. We make use of mandatory collateral registry data in Sweden and the Netherlands to construct panels combining firm-level financial data and patent measures. Estimating conditional difference-in-difference regressions on firms' debt allows deducting treatment effects of using patents as collateral. We find that patent pledging enables Swedish (Dutch) firms to borrow about 21% (26%) more than in the counterfactual situation in which no patents would have been used as collateral. We also find that the collateral value of patents is higher than their signalling value, and a back-of-the-envelope scenario calculation shows that Dutch (Swedish) firms could raise more than € 7 (€ 10) billion additional debt capital if the complete patent portfolios would be pledged, all else constant.
    Keywords: Financing Constraints,Collateral,Intangible Assets,Patents,Treatment Effects Estimation
    JEL: O30 O34 G31
    Date: 2022
  7. By: Prerna Prabhakar (National Council of Applied Economic Research); Nishika Pal (National Council of Applied Economic Research); Deepak Sanan (National Council of Applied Economic Research); Somnath Sen (National Council of Applied Economic Research)
    Abstract: Data on access to credit in rural India is mostly available from periodic large-scale surveys and some primary research in different parts of India. The growth of institutional sources of credit was quite dramatic during the first four decades after Independence. There appears to have been a regression since then. There is some evidence to show that land as collateral is a frequent requirement for institutional lenders. There is also some scattered evidence that land is more likely to be used as collateral by larger landholders and a clear title favours extension of loans. However, there is very little data on the extent to which these hypotheses hold well across States. Textual records [copies of Record of Rights (RoRs)] gathered for the construction of the NCAER Land Records and Services Index (N-LRSI) 2020 offered an opportunity to understand the situation in different States with respect to the issues mentioned above. This paper assesses the data gathered for six Indian States/Union Territories (UTs): Chhattisgarh, Gujarat, Himachal Pradesh, Madhya Pradesh, Uttar Pradesh, and Uttarakhand. The paper highlights the extent to which various hypotheses prevalent in the literature are borne out by the evidence obtained through the sample data gathered for the States/UTs that are the subject of this paper. While adding to the knowledge on the subject, it will help enhance an understanding of both the subject and policy making in the area of rural credit
    Keywords: : Collateral, Credit, Land Records, RoRs, N-LRSI, Joint ownership, Khatas, Khasras, Landholding
    Date: 2022–08–03
  8. By: Yabibal Mulualem Walle
    Abstract: Social cohesion has recently gained increasing attention in academic and policy circles. Apart from being a necessary feature of stable societies per se, social cohesion is also a key factor for sustainable economic development. One potential means through which social cohesion could foster economic development is by enhancing financial development. In this paper, we examine whether social cohesion is significantly associated with firms' access to finance in Africa. To this end, we use a recently constructed dataset on social cohesion in Africa, which is based on the Afrobarometer survey and the Varieties of Democracy database. The dataset contains indices for the three pillars of social cohesion - trust, inclusive identity and cooperation for the common good. Combining this dataset with that of the World Bank Enterprise Surveys, we build a sample which covers more than 12,500 firms and 27 African countries. Our results show that all three components of social cohesion are positively associated with at least one measure of firms' access to external finance. In particular, trust - but not inclusive identity and cooperation for the common good - is significantly associated with the likelihood that firms have a checking or savings account, or are financially constrained. When we measure access to finance with respect to having a line of credit or a loan from a financial institution, all the three pillars of social cohesion, including inclusive identity and cooperation for the common good, are related to access to finance. The results are robust to addressing endogeneity concerns using a heteroskedasticity-based identification strategy. Overall, our results suggest that improving social cohesion (e.g. through social protection, education, strengthening civil society organisations) could do more than hold society together; it could also promote access to finance, growth of firms, and thus economic development and job creation.
    Keywords: access to finance,social cohesion,trust,cooperation for the common good,identity,Africa
    Date: 2022
  9. By: Nathan Vieira (Aix-Marseille Université, AMSE)
    Abstract: Just one year after the subprime crisis, and despite being one of the most impacted countries in the world, Germany displayed the highest GDP growth rate among EU countries and maintained it at its level for two years. Combined with a surprisingly small variation in unemployment rates over this period, some press articles have nicknamed the impressive German economic recovery the "second German miracle". In this presentation, I produce empirical evidence of the role played by short-time work in the "German miracle". By exploiting firm-level data, I show that short-time work programs should target firms facing huge financial constraints and difficult business conditions. To these conditions, short-time work programs can preserve employment during a crisis and allow a greater take-up afterward.
    Date: 2022–08–01
  10. By: Batiz-Lazo, Bernardo; González-Correa, Ignacio
    Abstract: We describe cross border payments between families in the US-Mexico corridor including a map of the technological infrastructure.
    Keywords: remittances, fintech, Mexico, USA
    JEL: E42 L81 N2 N8
    Date: 2022–08
  11. By: Cheng-Tao Tang (IUJ Research Institutey, International University of Japan); Chun Yee Wong (IUJ Research Institutey, International University of Japan); Orelie Bathan Delas Alas
    Abstract: This paper investigates the effects of intergovernmental transfers on the development outcomes by exploiting a formula-based transfer scheme among the Philippine municipalities and cities. The results suggest that the household disposable income per capita increases 9.6 percent in the long run as a result of extra transfers of 1000 Philippine pesos per capita in the Philippine local governments. However, the poverty rate increases by around 5 percentage points in the long run. The income gains, associated with higher poverty rate, mainly occur in small and less-developed LGUs (i.e., municipalities). Furthermore, there exist a large stimulatory effect on local spending and a small effect on local tax revenue reduction due to extra grant transfers.
    Keywords: Intergovernmental transfer, income, poverty, instrumental variable, the Philippines
    Date: 2022–08
  12. By: Ngah Ntiga, Louis-Henri
    Abstract: The objective of this paper is to examine the non-linear effects of fiscal policy on economic growth in Cameroon conditional on external public debt. The results confirm the existence of non-linearities in the "fiscal policy - economic growth" relationship. Through the modelling logic of Hansen (2000) of threshold models, it was observed that the optimal threshold of the external debt in Cameroon is -38.98% of GDP. Thus, in a critical regime, fiscal policy does not favour economic growth. Moreover, when the level of of external debt exceeds the threshold of 12.014% of GDP (which corresponds to the current situation in Cameroon), tax revenues have recessionary effects on growth while current expenditure has expansionary effects. These results point out to the public authorities that excessive indebtedness can lead to disparities in the economy and that it is time to find other sources of financing than external debt, such as internal debt and oil revenues. Finally, the state should consider increasing current expenditure such as personnel costs in order to achieve growth and substantially reduce the tax rates that generate tax revenues.
    Keywords: Fiscal policy, Economic growth, Threshold models
    JEL: E62 F43
    Date: 2022–04–27
  13. By: Carlos Alberto Piscarreta Pinto Ferreira
    Abstract: Although there is an extensive literature regarding volatility in the financial markets, to our knowledge, few empirical studies specifically focus on the drivers of volatility of sovereign bond yields. This empirical paper aims to fill part of this gap and to provide more up to date empirical insights. We add to previous work by examining the issue simultaneously in a broad number of advanced economies. Our analysis shows that sovereign bond unconditional volatility exhibits mean-reversion and persistence. Bond yield volatility responds to proximate market movements and global risk. However, that response is found to be uneven across geographies, asymmetric in some cases and possibly time-varying. Macro and policy uncertainty impact depends on the specific uncertainty measures used and rarely is very meaningful.
    Keywords: Volatility, Bond Market, Public Debt, Sovereign Risk, Panel Data, Fixed Effects
    JEL: C23 E44 G11 G15 H63
    Date: 2022–07
  14. By: David Beers; Elliot Jones; Karim McDaniels; Zacharie Quiviger
    Abstract: The BoC–BoE database of sovereign debt defaults, published and updated annually by the Bank of Canada and the Bank of England, provides comprehensive estimates of stocks of government obligations in default.
    Keywords: Debt management; Development economics; Financial stability; International financial markets
    JEL: F3 F34 G1 G10 G14 G15
    Date: 2022–08
  15. By: Martin Casta
    Abstract: This paper presents a simple reduced-form error correction model for forecasting nominal exchange rates. The model is inspired by the classical monetary model of exchange rates. However, the commonly used monetary aggregates were replaced by loans to corporations. The reason for this change is that our goal is to focus on corporate deposits, for which corporate loans act as a proxy. For presentational purposes, we focus on eight major trading currency pairs: AUD/USD, CAD/USD, CHF/USD, EUR/USD, GBP/USD, NZD/USD, SEK/USD and JPY/USD, for which we use data from approximately the last two decades. We empirically show statistically and economically significant exchange rates forecastability in the medium and long run, and we also present some findings on predictability even in the short run. In short, our results suggest that corporate loans are a significant driver behind exchange rate movements.
    Keywords: Exchange rates, forecasting, forecast evaluation
    JEL: C5 F31 F32 F37
    Date: 2022–08

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