nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2022‒10‒03
twenty-one papers chosen by
Georg Man

  1. Interactions between Financial Constraints and Economic Growth By João Jerónimo; José Assis de Azevedo; Pedro Neves; Maria João Thompson
  2. Neoclassical Growth with Long-Term One-Sided Commitment Contracts By Dirk Krueger; Harald Uhlig
  3. Markups, Taxes, and Rising Inequality By Stéphane Auray; Aurélien Eyquem; Bertrand Garbinti; Jonathan Goupille-Lebret
  4. The Nexus between Domestic Investment and Economic Growth in Developed Countries: Do Exports matter? By Bakari, Sayef
  5. Relationship among Domestic Investment, Exports and Economic Growth: Evidence form the Case of Greece By Bakari, Sayef
  6. Split Personalities: The Changing Nature of Technology Shocks* By Christoph Görtz; Christopher Gunn; Thomas Lubik
  7. Ideas, idea processing, and TFP growth in the US: 1899 to 2019 By James, Kevin R.; Kotak, Akshay; Tsomocos, Dimitrios P.
  8. Startup Support of Regional Financial Institutions and Regional Startup (Japanese) By YAMORI Nobuyoshi; NAGATA Kunikazu; KONDO Kazumine; OKUDA Masayuki
  9. Inflation Targeting and Developing countries’ Performance: Evidence from Firm-Level Data By Bao-We-Wal BAMBE; Jean Louis COMBES; Kabinet KABA; Alexandru MINEA
  10. Augmented credit-to-GDP gap as a more reliable indicator for macroprudential policy decision-making By Tihana Škrinjarić
  11. Macrofinancial Stress Testing on Australian Banks By Nicholas Garvin; Samuel Kurian; Mike Major; David Norman
  12. SRISK: una medida de riesgo sistémico para la banca colombiana 2005-2021 By Camilo Eduardo Sánchez-Quinto
  13. A Meta-Analysis on the Debt-Growth Relationship By D'Andrea, Sara
  14. The Systemic Impact of Debt Default in a Multilayered Global Network Model By Mr. Nathan Porter; Mr. Camilo E Tovar Mora; Mr. Juan P Trevino; Johannes Eugster; Theofanis Papamichalis
  16. Aggregating distributional treatment effects: a Bayesian hierarchical analysis of the microcredit literature By Meager, Rachael
  17. Banking on Snow: Bank Capital, Risk, and Employment By Baumgartner, Simon; Stomper, Alex; Schober, Thomas; Winter-Ebmer, Rudolf
  18. Cryptocurrency bubbles, the wealth effect, and non-fungible token prices: Evidence from metaverse LAND By Kanis Saengchote
  19. Decentralized finance research and developments around the World By Ozili, Peterson K
  20. Grasping De(centralized) Fi(nance) through the Lens of Economic Theory By Jonathan Chiu; Thorsten V. Koeppl; Charles M. Kahn
  21. A sustainability transition on the move? Evidence based on the disconnect from market fundamentals By Alessi, Lucia; Hirschbuhl, Dominik; Rossi, Alessandro

  1. By: João Jerónimo (University of Minho); José Assis de Azevedo (University of Minho); Pedro Neves (Departamento de Gestão e Economia and CEFAGE-UBI, University of Beira Interior); Maria João Thompson (University of Minho and NIPE)
    Abstract: Wishing to contribute theoretically to the understanding of the interactions between financial constraints and economic growth, we introduce financial dynamics in the R&D-based growth literature, by developing a generalization of Romer’s (1990) growth model, in which the original framework arises as a special case. We find that the overall effects of informational asymmetries on growth are negative, whilst asymptotically tending to null as our introduced financial parameter tends to zero.
    Keywords: Financial constraints; Economic growth
    JEL: C E
    Date: 2021
  2. By: Dirk Krueger (University of Pennsylvania CEPR and NBER); Harald Uhlig (University of Chicago CEPR and NBER)
    Abstract: This paper characterizes the stationary equilibrium of a continuous-time neoclassical production economy with capital accumulation in which households can insure against idiosyncratic income risk through long-term insurance contracts. Insurance companies operating in perfectly competitive markets can commit to future contractual obligations, whereas households cannot. For the case in which household labor productivity takes two values, one of which is zero, and where households have logutility we provide a complete analytical characterization of the optimal consumption insurance contract, the stationary consumption distribution and the equilibrium aggregate capital stock and interest rate. Under parameter restrictions, there is a unique stationary equilibrium with partial consumption insurance and a stationary consumption distribution that takes a truncated Pareto form. The unique equilibrium interest rate (capital stock) is strictly decreasing (increasing) in income risk. The paper provides an analytically tractable alternative to the standard incomplete markets general equilibrium model developed in Aiyagari (1994) by retaining its physical structure, but substituting the assumed incomplete asset markets structure with one in which limits to consumption insurance emerge endogenously, as in Krueger and Uhlig (2006).
    Keywords: Idiosyncratic Risk, Limited Commitment, Stationary Equilibrium
    JEL: E21 D11 D91 G22
    Date: 2022–09–09
  3. By: Stéphane Auray (CREST-ENSAI, Bruz, France); Aurélien Eyquem (University of Lausanne, Switzerland); Bertrand Garbinti (CREST-ENSAE-Institut Polytechnique Paris, France); Jonathan Goupille-Lebret (Univ Lyon, CNRS Ecully and ENS de Lyon, France)
    Abstract: How to explain rising income and wealth inequality? We build an original heterogeneousagent model with three key features: (i) an explicit link between firm’s market power and top income shares, (ii) a granular representation of the tax and transfer system, and (iii) three assets with endogenous portfolio decisions. Using France as an illustration, we look at how changes in markups, taxes, factor productivity, and asset prices affect inequality dynamics over the 1984-2018 period. Rising markups account for the bulk of rising income inequality. Wealth inequality dynamics result mostly from changes in saving rate inequality but only in response to the exogenous changes in taxation and markups. Our results point to the critical importance of endogenous saving decisions in response to exogenous shocks as a key driver of wealth inequality.
    Keywords: Heterogeneous Agents, Taxes, Market Power, Income Inequality, Wealth Inequality.
    JEL: D4 E2 H2 O4 O52
    Date: 2022–09–19
  4. By: Bakari, Sayef
    Abstract: We examine the effect of the exports on the relationship between domestic investment and economic growth. Data for 28 Developed Countries over the period 1998–2021 are used for panel data analysis. The effect of domestic investment on economic growth proves to be affected positively by exports and the effect of exports on the economic growth is positively strengthened by an increase in domestic investment.
    Keywords: Domestic Investment, Exports, Economic Growth, Developed Countries.
    JEL: F14 O16 O47
    Date: 2022–07–18
  5. By: Bakari, Sayef
    Abstract: The aim of this paper is to investigate the relationship among domestic investment, exports and economic growth in the case of Greece. To attempt our goal, we used annual data over the period 1970 – 2020 and Vector Error Correction Model. Empirical results indicate that in the long run there is no causality relationship between exports, domestic investment, and economic growth. In the short run, we found that only exports cause domestic investment. These results proved as evidence that domestic investment and exports are not seen as a source of economic growth in the case of Greece which also explain the catastrophe situation of economic activity in Greece
    Keywords: Domestic Investment, Exports, Economic Growth, VECM, Greece.
    JEL: C13 E22 F14 O47 O52
    Date: 2022
  6. By: Christoph Görtz (Department of Economics, University of Birmingham); Christopher Gunn (Department of Economics, Carleton University); Thomas Lubik (Federal Reserve Bank of Richmond)
    Abstract: This paper analyzes the nature of technology shocks and documents important changes in their propagation over time. We employ a vector-autoregression and identify a shock that explains the maximum variation in total factor productivity (TFP) at a long finite horizon. This agnostic identification suggests that the dominant shock driving TFP is not necessarily a surprise shock, but exhibits features consistent with a shock that is anticipated or diffuses over time: GDP and consumption rise prior to any significant increase in TFP. We further find that shock transmission has changed over time. In a sample that ends in the mid 1980s, the shock triggers a decline in hours-worked and inventories, and a rise in credit spreads. In a post-Great Inflation sample the response of these variables is reversed and the shock generates an outright expansion in hours, inventories, GDP and consumption that is accompanied by a decline in credit spreads. We find that the importance of technology shocks as a major drive of aggregate fluctuations has increased over time — they play a dominant role in the second subsample, but much less so in the first. Classification-JEL, E2, E3
    Keywords: technology shocks, total factor productivity, business cycles, shock transmission.
    Date: 2022–06–12
  7. By: James, Kevin R.; Kotak, Akshay; Tsomocos, Dimitrios P.
    Abstract: Innovativity – an economy's ability to produce the innovations that drive total factor productivity (TFP) growth – requires both ideas and the ability to process those ideas into new products and/or techniques. We model innovativity as a function of endogenous idea processing capability subject to an exogenous idea supply constraint and derive an empirical measure of innovativity that is independent of the TFP data itself. Using exogenous shocks and theoretical restrictions, we establish that: i) innovativity predicts the evolution of average TFP growth; ii) idea processing capability is the binding constraint on innovativity; and iii) average TFP growth declined after 1970 due to a constraints on idea processing capability, not idea supply.
    Keywords: Innovation; Financial Market Effectiveness; Endogenous Growth; Total Factor Productivity
    JEL: F3 G3
    Date: 2022–07–13
  8. By: YAMORI Nobuyoshi; NAGATA Kunikazu; KONDO Kazumine; OKUDA Masayuki
    Abstract: This paper examines whether the startup support provided by regional financial institutions contribute to startups in the region and which initiatives of regional financial institutions are effective in supporting startups, using the questionnaire information from two surveys. The analysis based on the 2020 startup firm questionnaire indicates that in the prefectures where firms have high opinions of regional financial institutions' support, more startup firms are founded, and the startup rate increases. Banks that are more highly motivated to support startups also have higher firms’ ratings for their capacity for lending without collateral or guarantees and evaluating business potential. The analysis comparing the 2020 startup firm questionnaire with the 2017 RIETI branch manager questionnaire shows that in prefectures where banks rely too heavily on collateral and guarantees, the assessments of banks’ loans and non-financing capacity decrease. Banks that are highly motivated to support startups make lending decisions based more on the management’s qualifications and motivations, and the evolution of business potential is vital in supporting startups.
    Date: 2022–09
  9. By: Bao-We-Wal BAMBE; Jean Louis COMBES; Kabinet KABA; Alexandru MINEA
    Keywords: , Inflation targeting , Manufacturing firm performance , Entropy balancing, Monetary policy credibility
    Date: 2022
  10. By: Tihana Škrinjarić (Hrvatska narodna banka, Hrvatska)
    Abstract: This paper aims to evaluate the possibilities of augmenting the credit-to-GDP gap series with out-of-sample forecasts to obtain a more stable indicator of excessive credit growth. The credit-to-GDP gap is a standardized and harmonized indicator of the Basel III regulatory framework used to calibrate the Countercyclical Capital Buffer (CCyB). Thus, a good indicator should be valid, stable, and represent future financial cycle movements. This research focuses on reducing the end-point bias problem of the Hodrick-Prescott (HP) filter approach to estimating this indicator. This is appropriate for those authorities whose analysis shows that the HP approach best predicts the financial crisis. Several popular models of out-of-sample forecasting are tested on Croatian data to extend the filtered original series, and the results are compared based on multiple criteria. These include the stability of the indicator, not just the usual model forecasting capabilities. The autoregressive approach, alongside the random walk model, was the best-performing one. The results of this study can be used in real-time decision-making, as they are relatively simple to estimate and communicate. Such augmented gaps reduce the bias in the series after the financial cycle turns. Moreover, the paper suggests possible corrections to the credit-to-GDP gap so that the resulting indicators are less volatile over time with stable signals for the policy decision-maker.
    Keywords: credit-to-GDP gap, out of sample forecasts, augmented credit gap, countercyclical capital buffer, estimation uncertainty.
    JEL: E32 G01 G21 C22
    Date: 2022–09–13
  11. By: Nicholas Garvin (Reserve Bank of Australia); Samuel Kurian (Reserve Bank of Australia); Mike Major (Reserve Bank of Australia); David Norman (Reserve Bank of Australia)
    Abstract: Macrofinancial stress testing is a tool to help policymakers better understand the key systemic vulnerabilities in a financial system. The Reserve Bank of Australia's (RBA) macrofinancial bank stress testing model is an example of this, enabling the RBA to analyse potential financial risks to Australia's banking sector, such as those arising during the COVID-19 pandemic. The model projects how economic shocks may influence a bank's profitability, dividends, loan growth and capital position, primarily using decision rules and accounting identities that are uniformly applied to profit and balance sheet data for the nine largest banks operating in Australia. It is designed with a focus on understanding systemic vulnerabilities and a philosophy of prioritising transparency over complexity. The key advantages of this model are its ability to quickly produce estimates of the capital loss in response to various macroeconomic scenarios, model various forms of contagion across banks, and allow the modeller to undertake 'reverse' stress tests. The paper sets out the key features of this model, how it was used during the past two years and the areas in which further work is required.
    Keywords: banks; stress testing; Australia
    JEL: E02 F01 G21
    Date: 2022–09
  12. By: Camilo Eduardo Sánchez-Quinto
    Abstract: Una de las lecciones que dejó la crisis financiera de 2008 fue la importancia de monitorear el riesgo sistémico en la búsqueda de la estabilidad de los sistemas financieros. Al respecto se han desarrollado líneas de investigación que, tomando la mayor cantidad de información, tienen el objetivo de brindar métricas fiables y oportunas de este riesgo. Entre ellas se encuentra el SRISK (Brownlees & Engle, 2016), una medida que combina el comportamiento del mercado, la relación de solvencia, el nivel de apalancamiento y los resultados contables de las entidades financieras para hallar el riesgo sistémico bajo un escenario de crisis financiera. Este documento replica la metodología SRISKajustada para el sistema bancario colombiano a través de modelos GJR-GARCH-DCC. Los resultados indican que, si bien el riesgo sistémico en la banca ha sido históricamente bajo, este alcanzó su máximo histórico en 2020, mostrando el impacto de la crisis sanitaria del Covid-19. Adicionalmente, se encuentra que el SRISK se correlaciona con variables de la actividad productiva y financiera, además tener capacidad predictiva en sentido de Granger. **** ABSTRACT: One of the lessons we learned from the 2008 financial crisis was the importance of monitoring the systemic risk in the stability of financial systems. In this regard, lines of research have been developed with the aim to provide reliable and timely metrics on this risk, taking as much information as possible. Among these, SRISK(Brownlees & Engle, 2016) stands out, a measure that combines market behavior, capital ratio, leverage and balance sheet of financial institutions to find the systemic risk exposure under a sustained crisis scenario. This paper replicates the SRISKmethodology adjusted for the Colombian banking system using GJR-GARCH-DCC models. The results show that, although systemic risk of banks has been historically low, it reached its maximum in 2020, adding empirical evidence on the impact of Covid-19 crisis. Furthermore, it is found that SRISKcorrelates with leading indicators of economic and financial sectors, in addition to having predictive power in the sense of Granger causality.
    Keywords: Riesgo sistémico, sistema bancario, causalidad de Granger, modelos Garch multivariados, Colombia, Systemic risk, banking system, Granger causality, multivariate Garch models, Colombia
    JEL: C22 C53 E44 G01 G21
    Date: 2022–09
  13. By: D'Andrea, Sara
    Abstract: We perform a meta-analysis on the relationship between public (government and external) debt and economic growth, coding 422 observations from 32 studies estimating cross-sectional or panel regressions. The average estimated effect size turns out to be negative (around -0.2). Heterogeneity is substantial and influenced mainly by within-studies variability. The moderators that allow to slightly mitigate it and that influence the estimate of the effect size concern the publication status, the journal ranking, the variables used as proxies, the level of wealth and development of the countries considered, the sample size, the region, and the estimation method. Publication bias arises, both as regards the direction of the estimated effect size, and the statistical significance of the results presented.
    Keywords: Meta-Analysis, Economic Growth, Public Debt, External Debt, Systematic Review
    JEL: C1 H63 O4
    Date: 2022–09–01
  14. By: Mr. Nathan Porter; Mr. Camilo E Tovar Mora; Mr. Juan P Trevino; Johannes Eugster; Theofanis Papamichalis
    Abstract: The world has become more interconnected over the past few decades. Against this backdrop, economic and financial contagion following adverse shocks can have a severe impact on the global economy. How systemic can the effects of contagion be? What specific transmission channels are involved? What is their relative importance? We address these questions using a multilayered global network model of contagion that simulates the impact of sovereign debt default on the global economy. We also develop a measure of global systemic risk and use bank stress testing techniques to quantify the systemic impact of the shock and the extent of contagion on the global economy. Our model shows that economic and financial contagion are highly non-linear, and many bystander economies can experience significant negative effects as the initial default is spread through the network. This suggests that many economies might be systemically more important than what conventional measures of size or openness might suggest.
    Keywords: Network; Contagion; Crises; Stress-test
    Date: 2022–09–02
  15. By: Koffi, Siméon
    Abstract: The shadow economy exists in all countries (developed and developing). This sector, which in many countries escapes any measure, causes distortions in the formal economy. It is to reduce its effect on the economy that this study was initiated to identify its determinants and its size. For the econometric analysis the MIMIC approach was preferred. The results of the study show that of the four causal variables identified (labor force, growth rate of the economy, financial development, and tax burden) only two have significant effects on the size of the informal sector: financial development and tax burden. The latter two variables have positive multiplier effects on the informal economy: 1% increase in one of these determinants could increase the size of the informal economy by almost 2%. Over the study period, 2000-2020, the size of the informal economy (% of GDP) in Côte d'Ivoire is in the range [41; 47].
    Keywords: Shadow economy, MIMIC, causal variables
    JEL: A10 C1 D0
    Date: 2022–08–06
  16. By: Meager, Rachael
    Abstract: Expanding credit access in developing contexts could help some households while harming others. Microcredit studies show different effects at different quantiles of household profit, including some negative effects; yet these findings also differ across studies. I develop new Bayesian hierarchical models to aggregate the evidence on these distributional effects for mixture-type outcomes such as household profit. Applying them to microcredit, I find a precise zero effect from the fifth to seventy-fifth quantiles, and uncertain yet large effects on the upper tails, particularly for households with business experience. These quantile estimates are more reliable than averages because the data are fat tailed.
    JEL: G21 L25 O16 P34
    Date: 2022–06–01
  17. By: Baumgartner, Simon (Humboldt University Berlin); Stomper, Alex (Humboldt University Berlin); Schober, Thomas (Auckland University of Technology); Winter-Ebmer, Rudolf (University of Linz)
    Abstract: How does small-firm employment respond to exogenous labor productivity risk? We find that this depends on the capitalization of firms' local banks. The evidence comes from firms offering (quasi-) fixed employment to workers whose productivity depends on the weather. Weather risk reduces this employment, and the effect is stronger in regions where the regional banks have less equity capital. Bank capitalization also proxies for the extent to which the regional banks' borrowers can obtain liquidity when the regions are hit by weather shocks. We argue that, as liquidity providers, well-capitalized banks support economic adaptation to climate change.
    Keywords: quasi-fixed employment, labor productivity risk, bank liquidity
    JEL: J23 J41 E44
    Date: 2022–08
  18. By: Kanis Saengchote
    Abstract: The rapid rise of cryptocurrency prices led to concerns (e.g. the Financial Stability Board) that this wealth accumulation could detrimentally spill over into other parts of the economy, but evidence is limited. We exploit the tendency for metaverses to issue their own cryptocurrencies along with non-fungible tokens (NFTs) representing virtual real estate ownership (LAND) to provide evidence of the wealth effect. Cryptocurrency prices and their corresponding real estate prices are highly correlated (more than 0.96), and cryptocurrency prices Granger cause LAND prices. This metaverse bubble reminisces the 1920s American real estate bubble that preceded the 1929 stock market crash.
    Date: 2022–09
  19. By: Ozili, Peterson K
    Abstract: Decentralized finance is financial services offered on a public blockchain over the internet. This paper reviews the decentralized finance (DeFi) research and development around the world. The findings of the literature review are that decentralized finance offers many benefits such as broadening financial inclusion; encouraging permission-less innovation; eliminating the need for intermediaries; ensuring the immutability of transactions; censorship resistance and making cross-border transactions cheaper. The associated risks include execution risk in smart contracts, legal liability risk, data theft risk, interconnectedness risk, external data risk, and greater propensity for illicit activity using DeFi applications. The review of existing DeFi research show that there are few studies on DeFi, and a large number of DeFi research studies are non-empirical studies. Most studies hold a positive view about DeFi. They emphasize the benefits of DeFi in great depth but the challenges of DeFi were not analysed in great depth, and there are no critical studies on DeFi. Observations on DeFi developments from around the world show that there is growing interest in decentralized finance in Europe, U.S., Asia and Oceania. There are concerns that regulating decentralized finance can impede growth in decentralized finance markets in Asia. There are also concerns that banning crypto assets can hinder the growth of decentralized finance in African countries where regulators do not fully permit blockchain-enabled cryptocurrencies. Several policy issues associated with DeFi are discussed. Areas for further research are provided to advance the literature on decentralized finance.
    Keywords: decentralized finance, DeFi, blockchain, ethereum, cryptocurrency, distributed ledger technology, protocol, token, total valued locked, smart contract, digital currency, literature review.
    JEL: G21 G24 G28 O31 O38
    Date: 2022
  20. By: Jonathan Chiu (Bank of Canada); Thorsten V. Koeppl; Charles M. Kahn
    Abstract: In this viewpoint article, we provide an analysis of the value proposition of De(centralized) Fi(nance) and its limitations using a simple stylized model of collateralized lending. DeFi uses a decentralized ledger to run smart contracts that automatically enforce the terms of a lending contract and safeguard the collateral. DeFi can lower the costs associated with intermediated lending and improve nancial inclusion. Limitations are the volatility of crypto collateral and stablecoins used for settlement, the possible incompleteness of smart contracts and the lack of a reliable oracle. A proper infrastructure reducing such limiations could improve the value of DeFi.
    Keywords: Decentralized Finance, Cryptocurrency, Stablecoins, Collateralized Lending
    JEL: G2
    Date: 2022–08
  21. By: Alessi, Lucia (European Commission); Hirschbuhl, Dominik (European Commission); Rossi, Alessandro (European Commission)
    Abstract: In a context where European stock prices have been trending upwards, one of the main concerns is that stocks perceived as more sustainable from an environmental, social and governance (ESG) perspective could be particularly exposed to exuberance. To shed some light on the magnitude of the deviation of stock prices from fundamentals we apply a Markov-switching augmented version of the present-value model. Using monthly data on the European stock market from 2005 to 2022, our model suggests that at the beginning of 2022 the non-fundamental component was about one fourth of the total price. When looking at particular market segments, the model shows that green and ESG stocks behave broadly in line with the market. However, in recent years ESG stocks have shown a significant, though small, disconnect from the market. These finding suggest that investor preferences are shifting towards sustainability, while not posing immediate risks to market stability.
    Keywords: Bayesian inference, European stock market, green transition, Markov-switching, present-value model
    JEL: C11 C32 G12
    Date: 2022–07

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