nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2022‒09‒26
nineteen papers chosen by
Georg Man

  1. Productivity growth effects of structural reforms: Evidence from developing countries By Kwamivi Gomado
  2. Growth expectations and the dynamics of firm entry By Enisse Kharroubi
  3. Economic Growth after Debt Surges By João Tovar Jalles; Paulo Medas
  4. The impact of foreign direct investment on financial development in Asian countries By Tran, Viet Nhu Anh; Huynh, Cong Minh
  5. Reforming International Investment Agreements: The Case of China and Foreign Direct Investment By Christian Bellak; Markus Leibrecht; Julien Chaisse
  6. Do competition and market structure matter for sensitivity of bank profitability to business cycle? By Ma³gorzata Olszak; Iwona Kowalska
  7. Does bank competition matter for the effects of macroprudential policy on procyclicality of lending? By Ma³gorzata Olszak; Iwona Kowalska
  8. The Holt-Winters filter and the one-sided HP filter: A close correspondence By Rodrigo Alfaro; Mathias Drehmann
  9. Nowcasting Brazilian GDP with Electronic Payments Data By Raquel Nadal Cesar Gonçalves
  10. Trade Credit and Sectoral Comovement during Recessions By Jorge Miranda-Pinto; Gang Zhang
  11. Do Recessions Occur Concurrently Across Countries? A Multinomial Logistic Approach By Poon, Aubrey; Zhu, Dan
  12. Macroeconomic Determinants of Corporate Credit Spreads: Evidence from Canada By Nusrat Jahan
  13. Country Size and Exposure to International Economic Shocks: New Evidence from the Financial Crisis By Brunhart, Andreas
  14. A Macroeconomic Perspective on Taxing Multinational Enterprises By Sebastian Dyrda; Guangbin Hong; Joseph B Steinberg
  15. The Slaughter of the Bison and Reversal of Fortunes on the Great Plains By Feir, Donn. L.; Gillezeau, Rob; Jones, Maggie E. C.
  16. Big Techs vs Banks By Leonardo Gambacorta; Fahad Khalil; Bruno Maria Parigi
  17. Investing in Bank Lending Technology: IT Spending in Banking By Zhiguo He; Sheila Jiang; Douglas Xu; Xiao Yin
  18. Broadband Internet and the Stock Market Investments of Individual Investors By Hans K. Hvide; Tom G. Meling; Magne Mogstad; Ola L. Vestad
  19. A trade-off from the future: How risk aversion may explain the demand for illiquid assets By Ferraz, Eduardo; Mantilla, César

  1. By: Kwamivi Gomado
    Abstract: Which structural reforms affect labour productivity growth in developing countries? This paper answers this question by combining the local projections method and the inverse probability weighted regression adjustment (LP-IPWRA) method. We find that financial reforms, trade reforms, and product market reforms boost labour productivity growth. By documenting the main channels, our results reveal that the reforms studied stimulate labour productivity growth by inducing dynamic efficiency, productive efficiency, and allocative efficiency.
    Keywords: Labour productivity, Reforms, Business cycles, Developing countries, Credit cycles
    Date: 2022
  2. By: Enisse Kharroubi
    Abstract: How do aggregate conditions affect the dynamics of firm entry? Do recessions force more firms out, allowing for more firms to enter subsequently? Or does this process require other circumstances to thrive? I look into these questions using sectoral data on firm entry and exit for the main economies of the Euro Area over 2009-2019. My main finding is that expected, rather than current, GDP growth shapes the dynamics of firm entry. Specifically, I find that entry increases with past exits at the sector-level, but only when aggregate GDP growth is forecasted to be strong. Also, with strong growth forecasts, past entry developments weight less on the subsequent sectoral entry dynamics. Periods of low entry and high exit, can therefore be followed by strong entry subsequently, when the economy is expected to grow strongly. These findings are robust to the inclusion of several controls. This includes the quality of insolvency proceedings, firms' ability to obtain credit or the presence of barriers to entry. Finally, I show that expectations of private and public investment drive the impact of growth expectations on the dynamics of firm entry.
    Keywords: firm entry, exit, growth expectations, private and public investment
    JEL: D25 D84 E32 E62 H32 M13
    Date: 2022–08
  3. By: João Tovar Jalles; Paulo Medas
    Abstract: Debt levels, both private and public, were already at record highs before the Covid-19 pandemic, and surged further in 2020. The high indebteness raises concerns whether it will undermine future growth prospects. This paper contributes to the ongoing debate by examining what happens to economic growth after debt surges. We apply a local projection method to a new dataset of debt surges in 190 countries between 1970 and 2020. How results show that the relationship between debt surges and economic growth are complex. Debt surges tend to be followed by weaker economic growth and persistently lower output. However, this negative relationship does not always hold. Surges in public debt tend to have the most negative impact on future growth prospects. This is particularly the case if the economy is already operating with a large positive output gap. Debt surges also tend to be followed by weaker economic growth if the initial debt levels are high, especially for private debt surges. Our results also show how debt surges impact future growth. Public debt surges are associated with especially weaker private and public investment, although both private and public consumption are also negatively affected. Surges in corporate debt are followed by lower private and public investment.
    Keywords: Public debt; private debt; economic growth; potential GDP; investment; panel data; local projection; nonlinearities
    JEL: C33 H63 E20 F44
    Date: 2022–09
  4. By: Tran, Viet Nhu Anh; Huynh, Cong Minh
    Abstract: This paper empirically studies the impact of foreign direct investment (FDI) on financial development from 37 Asian nations covering the period 2001-2020 from a panel data set. The findings show that FDI has a positive impact on financial development, implying the spill-over effect of FDI in Asian financial markets. Furthermore, this study discovers that trade openness and population growth have a positive impact on financial development, while inflation affects financial development negatively. However, it is found that there is no relationship between government consumption and financial development in the Asian context.
    Keywords: Asian countries; Financial development; FDI; Panel data
    JEL: B22 F21 G20 O16 O53
    Date: 2022–08–24
  5. By: Christian Bellak (Department of Economics, Vienna University of Economics and Business); Markus Leibrecht (Shanghai Ocean University); Julien Chaisse (City University of Hong Kong)
    Abstract: The paper contributes to the debate on the effects of reforms of bilateral investment treaties on Foreign Direct Investment. So far studies show mixed empirical evidence as to the existence of positive effects on Foreign Direct Investment, pointing to rather small impacts. However, isolating the impact of a reform of bilateral investment treaties on Foreign Direct Investment is plagued by methodological issues as well as data restrictions. This paper adds to the literature as it mitigates some of these limitations by focusing on a particular reform-step in China’s international treaty policy, namely the substitution of a first-generation bilateral investment treaty with a much more “investor-friendly” third-generation bilateral investment treaty. Our basic findings, derived from a two-way fixed-effects framework, suggest that the more investor-friendly third-generation bilateral investment treaties indeed increase Foreign Direct Investment stocks in China. These findings are of policy relevance not only for capital importing countries, but also from the viewpoint of China’s increasing relevance as an outward investor in countries included in the Belt and Road initiative.
    Keywords: China, Foreign Direct Investment, Bilateral Investment Treaties, Reform
    JEL: D22 E52 D31 E23 E32
    Date: 2022–07
  6. By: Ma³gorzata Olszak (Department of Banking and Money Markets, Faculty of Management, University of Warsaw); Iwona Kowalska (Department of Mathematics and Statistical Methods, Faculty of Management)
    Abstract: The aim of this paper is to determine what is the effect of competition on cyclicality of bank profitability. To answer this question we apply robust fixed effects estimator to unbalanced panel of individual bank level data covering the period of 2004-2015 in over 100 countries. In our study we control for market power and market structure, as proxies for competitive environment and for net interest margin (NIM), return on assets (ROA) and return on equity (ROE) to proxy bank profitability. Our results show that decreased competition is related with an increase in procyclicality of net interest margin. This effect, however, does not hold in high-income countries. As for the ROA and ROE we find comparable results, but the effect is not always statistically significant. Market structure does affect profitability in a statistically signficant way, but seems to be important for procyclicality of ROA and ROE. We also find that the link between competition and procyclicality of profitability is non-linear and inversely U-shaped. Thus, both high and low competition intensity may reduce procyclicality of profitability.
    Keywords: profitability, procyclicality, competition, market structure
    JEL: E32 G21 G28 G32
    Date: 2021
  7. By: Ma³gorzata Olszak (Department of Banking and Money Markets, Faculty of Management, University of Warsaw); Iwona Kowalska (Department of Mathematics and Statistical Methods, Faculty of Management)
    Abstract: Competition is an inherent and natural environment under which banks operate and extend loans. Despite the extensive debate on the impact of bank competition on risk-taking and procyclicality, there is no evidence of its role in the effects of macroprudential policy on loans’ growth and on the sensitivity of lending to the business cycle. Using over 70,000 bank-level observations in 109 countries in 2004-2015 we find that increased competition strengthens the countercyclical effects of MPI in terms of reduced loans’ growth. Bank lending is procyclical in perfectly competitive industry. However, any decrease in the intensity of competition in countries not applying macroprudential policy instruments is related with increased procyclicality of lending. Sensitivity of lending to business cycle in countries implementing macroprudential policy depends on the type of macroprudential policy instrument and on the length of the use of instruments. We show that extended duration of use of cyclical macroprudential instruments is associated with increased procyclicality of lending. In a perfectly competitive environment we find increased procyclicality of credit in countries using cyclical instruments and decreased procyclicality of credit in countries applying balance-sheet oriented instruments. Under imperfectly competitive banking sector we find the opposite effects of macroprudential instruments on procyclicality of credit.
    Keywords: loans growth, macroprudential policy, competition intensity, procyclicality of lending
    JEL: E32 G21 G28 G32
    Date: 2021
  8. By: Rodrigo Alfaro; Mathias Drehmann
    Abstract: We show that the trend of the one-sided HP filter can be asymptotically approximated by the Holt-Winters (HW) filter. The later is an elegant, moving average representation and facilitates the computation of trends tremendously. We confirm the accuracy of this approximation empirically by comparing the one-sided HP filter with the HW filter for generating credit-to-GDP gaps. We find negligible differences, most of them concentrated at the beginning of the sample.
    Date: 2022–08
  9. By: Raquel Nadal Cesar Gonçalves
    Abstract: Electronic payments data are usually available on a more timely basis than other coincident economic indicators and can be disaggregated into the level of economic divisions, by number of transactions and value, being potentially useful to anticipate the pace of economic activity. This paper seeks to measure how data from electronic payment instruments contribute to improving the nowcasting accuracy of GDP and its sectoral components. To do so, the nowcasting accuracy of complete models, with economic indicators and payments data, is compared with the accuracy of base models, without payments data, in two horizons: right after the closure of the quarter to be predicted, when payments data are already available; and about 15 days before the GDP release, when data from other coincident economic indicators are also known. The results show payments data contribute significantly to improving GDP nowcast accuracy in both horizons, but mainly just after the closure of the quarter.
    Date: 2022–08
  10. By: Jorge Miranda-Pinto; Gang Zhang
    Abstract: We show that sectoral comovement did not change for any post-war US recession, with the only exception of the Great Recession. Using sector-level and firm-level data, we argue that this large increase was driven mainly by the endogenous response of firm-to-firm credit (trade credit). We then develop a multisector model with inputoutput linkages, financial frictions, and endogenous supply of trade credit and show that the financial shocks after Lehman Brothers’ collapse triggered a response of trade credit that can qualitatively and quantitatively account for the large shift in comovement. A model with fixed trade-credit, subject to the same productivity and financial shocks, generates no increase in comovement and implies a 20% smaller decline in GDP than in the endogenous case. In contrast, we show that trade credit in the other previous recessions acted as a cushion that mitigated negative sectoral spillovers.
    Date: 2022–08
  11. By: Poon, Aubrey (Örebro University School of Business); Zhu, Dan (Monash University)
    Abstract: We develop a novel multinomial logistic model to detect and forecast concurrent recessions across multi-countries. The key advantage of our proposed framework is that we can detect recessions across countries using the additional informational content from the cross-country panel feature of the data. Furthermore, in a simulation study, we show that our proposed model accurately captures the true underlying probabilities. Finally, we apply our proposed framework to a US and UK empirical application. In terms of recession forecastability, the multinomial logistic model with both countries’ interest rate spread and the weekly US NFCI as the set of exogenous predictors was the best performing model. For the counterfactual analysis, we found that a previous US recession will increase the probability of a recession occurring jointly in the US and the UK. However, a tightening of the US NFCI and a negative interest rate spread in both countries only increases the probability of a recession exclusively in the US and UK, respectively.
    Keywords: Recession prediction; multinomial logistic; cross-country; mixed frequency; Bayesian estimation
    JEL: C22 C25 E32 E37
    Date: 2022–09–07
  12. By: Nusrat Jahan (Department of Economics, Carleton Univeristy)
    Abstract: How important are macroeconomic factors relative to financial factors in explaining the variation in corporate credit spreads in the Canadian bond market? The answer to this question is of great significance in managing the risk associated with fixed-income securities and also in preventing the negative consequences that widening of spread has on real activity. I find that although the macroeconomic determinants both in their levels and volatilities have significant effects on credit spread, their contribution in explaining the variations in spreads is actually quite small. Much of the variation in spreads are attributed to the unobserved bond-specific heterogeneity, which reaffirms the existence of a - credit spread puzzle. Classification
    Date: 2022–08–07
  13. By: Brunhart, Andreas
    Abstract: The international Financial Crisis shock of 2008/09 is used as case study with a worldwide data set of 210 states to examine potential resilience factors with special focus on country size, along with other pre-crisis determinants. The cross-country analysis suggests an increasing partial effect of smaller country size on vulnerability with a larger impact magnitude of the Financial Crisis shock. States below a population of around 10 million featured a higher exposure compared to larger states and very small states suffered the most from being more vulnerable. With respect to impact persistence, significant evidence can be found that the shock persistence was prolonged by smaller state size. Also, small states were impacted earlier on average, but the faster shock transmission was mainly linked to their higher GDP per capita and lower pre-crisis GDP growth.
    Keywords: Resilience,Small states,Financial crisis,Cross-country regression,Resilienz,Kleinstaaten,Finanzkrise,Länder-Querschnittsregression
    JEL: C21 E02 E32 G01
    Date: 2022
  14. By: Sebastian Dyrda; Guangbin Hong; Joseph B Steinberg
    Abstract: We develop a framework to study the macroeconomic implications of taxing multinational enterprises (MNEs) that shift profits to subsidiaries in low-tax jurisdictions by transferring ownership of non-rival intangible capital. We first prove analytically that profit shifting increases intangible investment, leading to higher profits and output at the MNE level. We then calibrate our model so that it reproduces salient country-level facts about production, trade, FDI, and, most importantly, profit shifting. We use our calibrated model to evaluate the consequences of two proposals by the OECD and G20 governments to reduce profit shifting by MNEs: allocating the rights to tax some of an MNE's profits to the countries in which it sells its products; and a 15% minimum global corporate income tax. We show that these policies would reduce profit shifting by more than two-thirds, but would also reduce intangible investment and output in high-tax regions. This highlights a key tension for policymakers: profit shifting erodes high-tax countries' tax bases, but also boosts economic activity, and thus policies that reduce profit shifting have harmful macroeconomic side effects.
    Keywords: Multinational enterprise; transfer pricing; profit shifting; base erosion; intangible capital; corporate tax
    JEL: E6 F23 H25 H27
    Date: 2022–09–01
  15. By: Feir, Donn. L. (University of Victoria); Gillezeau, Rob (University of Victoria); Jones, Maggie E. C. (University of Victoria)
    Abstract: In the late nineteenth century, the North American bison was brought to the brink of extinction in just over a decade. We demonstrate that the loss of the bison had immediate, negative consequences for the Native Americans who relied on them and ultimately resulted in a permanent reversal of fortunes. Once amongst the tallest people in the world, the generations of bison-reliant people born after the slaughter lost their entire height advantage. By the early twentieth century, child mortality was 16 percentage points higher and the probability of reporting an occupation 29.7 percentage points lower in bison nations compared to nations that were never reliant on the bison. Throughout the latter half of the twentieth century and into the present, income per capita has remained 28% lower, on average, for bison nations. This persistent gap cannot be explained by differences in agricultural productivity, self-governance, or application of the Dawes Act. We provide evidence that this historical shock altered the dynamic path of development for formerly bison-reliant nations. We demonstrate that limited access to credit constrained the ability of bison nations to adjust through respecialization and migration.
    Keywords: North American Bison, Buffalo, extinction, economic history, Native Americans, indigenous, income shock, intergenerational mobility
    JEL: I15 J15 N31 N32 O10
    Date: 2022–08
  16. By: Leonardo Gambacorta; Fahad Khalil; Bruno Maria Parigi
    Abstract: We study an economy in which large technology companies, big techs, provide credit to firms operating on their platforms. We focus on two advantages that big techs have with respect to banks: better information on their clients and better enforcement of credit repayment since big techs can exclude a defaulting firm from their ecosystem. While big techs have both superior enforcement and complete and private information of the firm type big techs can encroach on banks' turf only if they guarantee some privacy to firms by tempering their drive to collect information about firm characteristics and leaving some rents to them. The way big techs share information i.e. by providing information publicly or in a private way entails different outcomes in terms of efficiency.
    Keywords: big techs, credit markets, privacy, information sharing
    JEL: E51 G23 O31
    Date: 2022–08
  17. By: Zhiguo He; Sheila Jiang; Douglas Xu; Xiao Yin
    Abstract: This paper studies the economics behind the investment in information technologies (IT) by U.S. commercial banks in the past decade. By linking banks’ IT spending to their lending technologies, we analyze the distinctive natures of banks’ dealings with information across various lending activities. Investment in communication IT is shown to be associated more with improving banks’ ability of soft information production and transmission, while investment in software IT helps enhance banks’ hard information processing capacity. We exploit polices that affect geographic regions differentially to show causally that banks respond to an increased demand for small business credit (mortgage refinance) by increasing their spending on communication (software) IT spending. We also find that the entry of fintech induces commercial banks to increase their investment in IT—more so in the software IT category.
    JEL: G21 G51 O12 O32
    Date: 2022–08
  18. By: Hans K. Hvide; Tom G. Meling; Magne Mogstad; Ola L. Vestad
    Abstract: We study the effects of broadband internet use on the investment decisions of individual investors. A public program in Norway provides plausibly exogenous variation in internet use. Our instrumental variables estimates show that internet use causes a substantial increase in stock market participation, driven primarily by increased fund ownership. Existing investors tilt their portfolios towards funds, thereby obtaining more diversified portfolios and higher Sharpe ratios, and do not increase their trading activity in stocks. Overall, access to high-speed internet seems to spur a “democratization of finance”, with individuals making investment decisions that are more in line with the advice from portfolio theory.
    JEL: D04 D14 D15 G00 G11 G40
    Date: 2022–08
  19. By: Ferraz, Eduardo; Mantilla, César
    Abstract: We use a three-period model adopting a recursive definition of consumption to explore the optimal delegation that a present self, aware that her near-future self is present-biased but better informed, will make to protect her far-future self against income shocks. The model captures the present self's trade-off between using commitment mechanisms, restricting the near-future self's agency through illiquid savings, and profiting from the near-future self's better information about future shocks. Our main result states that agents with higher risk aversion can cover better against utility losses from time-inconsistent consumption through the commitment mechanism. Given the evidence of women being more risk-averse than men, this result provides the micro-foundation for the gender gap in adopting financial commitment devices, especially among single individuals.
    Keywords: commitment devices; dynamic inconsistency; Epstein-Zin preferences; present bias
    JEL: D11 D81 D90 G40
    Date: 2022–09

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