nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2022‒10‒24
23 papers chosen by
Georg Man

  1. Female Entrepreneurship, Financial Frictions and Capital Misallocation in the US By Marta Morazzoni; Andrea Sy
  2. The impact of risk cycles on business cycles: a historical view By Jón Daníelsson; Marcela Valenzuela; Ilknur Zer
  3. Impact of Uncertainty Shocks on Income and Wealth Inequality By Sangyup Choi; Jeeyeon Phi
  4. The effect of structural risks on financial downturns By Hodula, Martin; Pfeifer, Lukáš; Janků, Jan
  5. Whither Liquidity Shocks? By Giorgio Massari; Patrizio Tirelli
  6. Macroeconomic and Asset Pricing Effects of Supply Chain Disasters By Vladimir Smirnyagin; Aleh Tsyvinski
  7. Systemic bank runs without aggregate risk: how a misallocation of liquidity may trigger a solvency crisis By Lukas Altermatt; Hugo van Buggenum; Lukas Voellmy
  8. External Wealth of Nations and Systemic Risk By Alin Marius Andries; Alexandra-Maria Chiper; Steven Ongena; Nicu Sprincean
  9. Economic Growth and Inflation Tradeoffs within Global Stagflation: Evidence in Vietnam Economy By Ly Dai Hung
  10. Central bank digital currency and cryptocurrency in emerging markets By Le, Anh H.
  11. Central Bank Digital Currency: Financial Inclusion vs. Disintermediation By Jeremie Banet; Lucie Lebeau
  12. Goldilocks: American precious metals and the Rise of the West By Yao Chen; Nuno Palma; Felix Ward
  13. A Model of the Gold Standard By Jesús Fernández-Villaverde; Daniel Sanches
  14. Sovereign Risk, Financial Fragility and Debt Maturity By Dallal Bendjellal
  15. Managing Public Portfolios By Leo R. Aparisi de Lannoy; Anmol Bhandari; David Evans; Mikhail Golosov; Thomas J. Sargent
  16. Listing State-Owned Enterprises in Emerging and Developing Economies By World Bank
  17. Can donors prevent aid misallocations? Evidence from Chinese and World Bank aid By Pierre André; Paul Maarek; Fatoumata Tapo
  18. Are West Virginia Banks Unique? By Eduardo Minuci; Scott Schuh
  19. Better the devil you know: Home and sectoral biases in bank lending By Aurore Burietz; Loredana Ureche-Rangau
  20. Financing gaps of companies during the Covid-19 pandemic By Demary, Markus; Hagenberg, Anna-Maria; Zdzralek, Jonas
  21. Q-Monetary Transmission By Priit Jeenas; Ricardo Lagos
  22. The Transmission of US Monetary Policy Shocks: The Role of Investment & Financial Heterogeneity By Santiago Camara; Sebastian Ramirez Venegas
  23. Global Monetary and Financial Spillovers: Evidence from a New Measure of Bundesbank Policy Shocks By James Cloyne; Patrick Hürtgen; Alan M. Taylor

  1. By: Marta Morazzoni; Andrea Sy
    Abstract: We document and quantify the effect of a gender gap in credit access on both entrepreneurship and input misallocation in the US. We show that female-owned firms are more likely to be rejected when applying for a loan and have a higher average product of capital, a sign of gender-driven capital misallocation across firms. Calibrating a heterogeneous agents model of entrepreneurship to the US economy, we establish that such gap in credit access explains the bulk of the gender differences in capital allocation across firms, and more than a third of their disparities in entrepreneurial rates. In a counterfactual exercise, we illustrate that eliminating this credit imbalance leads to a 4% increase in output, and that fiscal policies affect differently female and male entrepreneurial margins in the presence of gender gaps in financial access.
    Keywords: entrepreneurship, misallocation, aggregate productivity, gender differences, Financial constraints
    JEL: O11 E44 D11
    Date: 2021–10
  2. By: Jón Daníelsson; Marcela Valenzuela; Ilknur Zer
    Abstract: We investigate the effects of financial risk cycles on business cycles, using a panel spanning 73 countries since 1900. Agents use a Bayesian learning model to form their beliefs on risk. We construct a proxy of these beliefs and show that perceived low risk encourages risk-taking, augmenting growth at the cost of accumulating financial vulnerabilities, and therefore, a reversal in growth follows. The reversal is particularly pronounced when the low-risk environment persists and credit growth is excessive. Global-risk cycles have a stronger effect on growth than local-risk cycles via their impact on capital flows, investment, and debt-issuer quality.
    Keywords: Stock market volatility; Uncertainty; Monetary policy independence; Financial instability; Risk-taking; Global financial cycles
    JEL: F30 F44 G15 G18 N10 N20
    Date: 2022–09–09
  3. By: Sangyup Choi (Yonsei Univ); Jeeyeon Phi (Yonsei Univ)
    Abstract: We study the distributional consequences of uncertainty shocks in the U.S. economy at a business cycle frequency. We document that the effects of uncertainty shocks are highly heterogeneous across income and wealth distribution and also vary depending on the sources of uncertainty. First, uncertainty shocks tend to have a more adverse effect on income at the top and bottom of the distribution spectrum resulting in narrower income inequality between the rich and the middle class but wider inequality between the middle class and the poor. Second, once the redistribution policy is considered, uncertainty shocks do reduce income inequality. Third, the distributional consequences for wealth differ from those for income, as uncertainty shocks are relatively beneficial to both the middle class and the poor. Fourth, the COVID-19 pandemic has brought different implications on wealth inequality between Wall Street and Main Street uncertainty; whereas the former reduces wealth inequality through its particularly adverse effect on risky asset prices, the latter uncertainty increases it by damaging the labor market.
    Keywords: Uncertainty shocks; Income inequality; Wealth inequality; Redistribution policy; COVID-19
    JEL: E31 E32 E62 F31 F41
    Date: 2022–08
  4. By: Hodula, Martin; Pfeifer, Lukáš; Janků, Jan
    Abstract: We investigate the extent to which various structural risks exacerbate the materialization of cyclical risk. We use a large database covering all sorts of cyclical and structural features of the financial sector and the real economy for a panel of 30 countries over the period 2006Q1–2019Q4. We show that elevated levels of structural risks may have an important role in explaining the severity of cyclical and credit risk materialization during financial cycle contractions. Among these risks, private and public sector indebtedness, banking sector resilience and concentration of real estate exposures stand out. Moreover, we show that the elevated levels of some of the structural risks identified may be related to long-standing accommodative economic policy. Our evidence implies a stronger role for macroprudential policy, especially in countries with higher levels of structural risks. JEL Classification: E32, G15, G21, G28
    Keywords: cyclical risk, event study, financial cycle, panel regression, structural risks, systemic risk
    Date: 2022–09
  5. By: Giorgio Massari; Patrizio Tirelli
    Abstract: We show that popular models of (flight-to-) liquidity shocks have strongly counterfactual implications for asset returns and the composition of firms' liabilities, including the return spread between bank deposits and T-bills and the share of bank loans on corporate debt. Further, the implied estimate of the natural interest rate entails that the interest rate gap rose during recessions and fell thereafter. By including the relevant financial variables as observables in our empirical model, we can show that liquidity shocks played a negligible role and became virtually irrelevant after 2010. We also find that the slowdown in productivity growth, not liquidity shocks, caused the post-2010 fall in the natural rate.
    Keywords: natural rate of interest, DSGE models, liquidity shocks, flight-to-quality, financial frictions.
    JEL: C11 C32 C54 E43 E44
    Date: 2022–08
  6. By: Vladimir Smirnyagin; Aleh Tsyvinski
    Abstract: We build a general equilibrium production-based asset pricing model with heterogeneous firms that jointly accounts for firm-level and aggregate facts emphasized by the recent macroeconomic literature, and for important asset pricing moments. Using administrative firm-level data, we establish empirical properties of large negative idiosyncratic shocks and their evolution. We then demonstrate that these shocks play an important role for delivering both macroeconomic and asset pricing predictions. Finally, we combine our model with data on the universe of U.S. seaborne import since 2007, and establish the importance of supply chain disasters for the cross-section of asset prices.
    JEL: E0 F40 G0
    Date: 2022–09
  7. By: Lukas Altermatt; Hugo van Buggenum; Lukas Voellmy
    Abstract: We develop a general equilibrium model of self-fulfilling bank runs in a setting without aggregate risk. The key novelty is the way in which the banking system's assets and liabilities are connected. Banks issue loans to entrepreneurs who sell goods to households, which in turn pay for the goods by redeeming bank deposits. The return on bank assets is thus contingent on households being able to withdraw their deposits. In a run, not all households that wish to consume manage to withdraw, since part of banks' cash reserves end up in the hands of households without consumption needs. This lowers revenues of entrepreneurs, which causes some of them to default on their loans and thereby rationalises the run in the first place. Interventions that restrict redemptions in a run - such as deposit freezes - can be self-defeating due to their negative effect on demand in goods markets. We show how runs may be prevented with combinations of deposit freezes and redemption penalties as well as with the provision of emergency liquidity by central banks.
    Keywords: Fragility, deposit freezes, emergency liquidity
    JEL: E4 E5 G2
    Date: 2022
  8. By: Alin Marius Andries (Alexandru Ioan Cuza University of Iasi; Romanian Academy - Institute for Economic Forecasting); Alexandra-Maria Chiper (Alexandru Ioan Cuza University of Iasi); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Nicu Sprincean (Alexandru Ioan Cuza University of Iasi)
    Abstract: External imbalances played a pivotal role in the run-up to the global financial crisis, being an important underlying cause of the ensuing turmoil. While current account (flow) imbalances have narrowed in the aftermath of the crisis, net international investment position (stock) imbalances still persist. In this paper, we explore the implications of countries’ net foreign positions on systemic risk. Using a sample composed of 450 banks located in 46 advanced, developing and emerging countries over the period 2000-2020, we document that banks can reduce their systemic risk exposure when the countries where they are incorporated maintain creditor positions vis-à-vis the rest of the world. However, only the equity components of the net international investment positions are responsible for this outcome, whereas debt flows do not contribute significantly. In addition, we find that the heterogeneity across countries is substantial and that only banks located in advanced markets that maintain their creditor positions have the potential to improve their resilience to system-wide shocks. Our findings are relevant for policy makers who seek to improve banks’ resilience to adverse shocks and to maintain financial stability.
    Keywords: External Wealth of Nations, External Imbalances, Net International Investment Position, Systemic Risk, Financial Stability
    JEL: F32 G21 G32
    Date: 2022–09
  9. By: Ly Dai Hung (Vietnam Institute of Economics, Hanoi, Vietnam)
    Abstract: The paper analyzes the interaction of economic growth and inflation rate on accounting for both capital sources and global shocks. The analysis method is a time varying coefficients Bayesian vector autoregression (TVC-BSVAR) model applied in a quarterly data sample of Vietnam economy over Q3/2008-Q4/2020. The trade-off between growth and inflation exists for an increase of credit supply but mitigates for an increase of public investment or more foreign capital inflows. For a global stagflation, Vietnam economic growth reduces but its inflation rate stabilizes. An appropriated policy can be the combination of higher credit supply growth with more public investment. If the world economic growth reduces by 1% per quarter and world oil price raises by 1 USD per quarter for 4 consecutive quarters, the domestic economic growth reduces by 4% after one year. Then, the domestic credit supply growth needs to be raised by 7.6% or the public investment increases by 12%.
    Keywords: Global Stagflation,Vector Autoregression,Vietnam Economy
    Date: 2022–09–09
  10. By: Le, Anh H.
    Abstract: Blockchain technology has opened up the possibility of digital currency, smart contracts and much more applications including the launch of central bank digital currencies (CBDC). However, literature about the effect of CBDC with the presence of cryptocurrency for an emerging market economy seems to be left behind. In this paper, we introduce a New Keynesian - Dynamic Stochastic General Equilibrium (NK-DSGE) model to examine the implications of CBDC and cryptocurrency in an open economy for emerging markets. In our model, cryptocurrency is implemented as a form of deposit in banks where bankers can also receive deposits from abroad. Lastly, CBDC is introduced as a payment and saving instrument. We find that cryptocurrency has a crucial role in banking sectors and a significant effect on the dynamic of foreign debt which is deeply important for emerging markets. We also conduct optimal monetary policy under different scenarios. Hence, we uncover that a flexible rate in CBDC can affect the responses of the monetary rate and can reinforce the conventional monetary policy to achieve the central bank's targets.
    Keywords: Central bank digital currency, Cryptocurrency, Open-economy, Financial frictions, Optimal monetary policy
    JEL: E50 F30 F31 G15 G18 G23
    Date: 2022–09–20
  11. By: Jeremie Banet; Lucie Lebeau
    Abstract: An overlapping-generations model with income heterogeneity is developed to analyze the impact of introducing a Central Bank Digital Currency (CBDC) on financial inclusion, and its potential adverse effect on bank funding. We highlight the role of two design parameters: the fixed cost of CBDC usage and the interest rate it pays, and derive principles for maximum inclusion and for mitigating the inclusion-intermediation trade-off. Agents’ choice of money instrument is endogenously driven by income heterogeneity. Pre-CBDC, wealthier agents adopt deposits, while poorer agents adopt cash and remain unbanked. CBDCs with low fixed costs (and low interest rates) are adopted by cash holders and directly increase inclusion. CBDCs with high fixed costs (and high interest rates) are adopted by deposit holders and increase inclusion by raising deposit rates. The former allows for more favorable inclusion-intermediation trade-offs. We calibrate the model to match the U.S. income distribution and aggregate share of unbanked households. A CBDC 50% cheaper (30% more expensive) than bank deposits decreases financial exclusion by 93% (71%) without impacting intermediation. In comparison, making the deposit market perfectly competitive would only decrease exclusion by 45%.
    Keywords: central bank digital currency; financial inclusion; payments; monetary policy
    JEL: E42 E51 E58 G21
    Date: 2022–09–24
  12. By: Yao Chen (Erasmus University Rotterdam); Nuno Palma (University of Manchester); Felix Ward (Erasmus University Rotterdam)
    Abstract: We estimate the contribution of the American precious metal windfall to West Europe’s growth performance in the early modern period. The exogenous nature of American money arrivals allows for identification of monetary effects. We find that more than half of West Europe’s growth can be attributed to American precious metals, whose arrival promoted trade intensification and capital formation. Our findings place West Europe’s second-stage receivers in a particularly fortunate goldilocks zone that enjoyed monetary injections, while being insulated against the transport-loss induced financial crises that caused persistent damage to first-stage receiver Spain.
    Keywords: Money non-neutrality, Great Divergence, Little Divergence, Smithian growth, market integration
    JEL: E51 F40 N10
    Date: 2022–09–16
  13. By: Jesús Fernández-Villaverde; Daniel Sanches
    Abstract: The gold standard emerged as the international monetary system by the end of the 19th century. We formally study its properties in a micro-founded model and find that the scarcity of the world gold stock not only results in a suboptimal output of goods that are purchased with money but also subjects the domestic economy of a country to external shocks. The creation of inside money in the form of private credit instruments adds to the money supply, usually resulting in a Pareto improvement, but opens the door to the international transmission of banking crises. These properties of the gold standard can explain the limited adherence by peripheral countries because of the potential risks to their economies. We argue that the gold standard can be sustainable at the core but not at the periphery.
    JEL: E42 E58 G21
    Date: 2022–09
  14. By: Dallal Bendjellal (Aix Marseille Univ, CNRS, AMSE, Marseille, France.)
    Abstract: This paper studies the transmission of a sovereign debt crisis in which a shift in default risk generates a recession and gives rise to a doom loop between sovereign distress and bank fragility with important amplification effects. The model is used to investigate the macroeconomic and welfare effects of altering debt maturity during the crisis. Short-term maturities alleviate the bankers' losses on long-term bonds and moderate the recession at the cost of higher levels of debt in the future. In contrast, long-term maturities are more effective to reduce the households' welfare losses as they lower default risk and distortionary taxes.
    Keywords: debt crisis, sovereign default risk, financial fragility, maturity dynamics
    JEL: E44 E62 H12
    Date: 2022–09
  15. By: Leo R. Aparisi de Lannoy; Anmol Bhandari; David Evans; Mikhail Golosov; Thomas J. Sargent
    Abstract: We develop a unified framework for optimally managing public portfolios for a class of macro-finance models that include widely-used specifications for households' risk and liquidity preferences, market structures for financial assets, and trading frictions. An optimal portfolio hedges fluctuations in interest rates, primary surpluses, liquidities and inequalities. It recognizes liquidity benefits that government debts provide and internalizes equilibrium effects of public policies on financial asset prices. We express an optimal portfolio in terms of statistics that are functions only of macro and financial market data. An application to the U.S. shows that hedging interest rate risk plays a dominant role in shaping an optimal maturity structure of government debt.
    JEL: E63 H63
    Date: 2022–09
  16. By: World Bank
    Keywords: Private Sector Development - Emerging Markets Public Sector Development - State Owned Enterprise Reform Finance and Financial Sector Development - Capital Markets and Capital Flows
    Date: 2021–06
  17. By: Pierre André; Paul Maarek; Fatoumata Tapo (Université de Cergy-Pontoise, THEMA)
    Abstract: We estimate to what extent international aid projects are subject to favoritism. We compare two different sources: Chinese aid and World Bank aid, using differences in differences and RDD estimates based on the dates of presidential turnovers. Consistently with the literature, we find Chinese aid massively targets the region of birth of new presidents, concentrating in its large urban centers but not necessarily in the district of birth of the president. However, we also find some evidence of a less visible and less intense form of favoritism for World Bank aid: it targets areas co-ethnic with a new president without following main regional administrative borders. Finally, this pattern of World Bank aid disappears with democratization, which contrasts with Chinese aid also following the place of birth of presidents in democracies.
    Keywords: clientelism, Pork Barel politics, ethnic favoritism, aid, Africa.
    JEL: H41 H52 O10 O12
    Date: 2022
  18. By: Eduardo Minuci (North Carolina A&T State University); Scott Schuh (West Virginia University, Department of Economics)
    Abstract: Many factors contribute to weak economic growth in Appalachia, but little research has examined the role of banking heterogeneity and efficiency across states. This paper documents how West Virginia (WV) banks'  financial behavior differs from other U.S. banks and shows these differences cannot be explained fully by the composition of banks in the state. Despite experiencing faster banking consolidation, West Virginia still has more and smaller banks that are less efficient and profitable. WV banks' customers and managers heavily favor liabilities (time deposits) and assets (real estate loans) with longer maturity and lower risk and returns. Although shares of time deposits and real estate loans are positively correlated across states in part due to lower interest risk, other factors are needed to fully explain banks'  financial behavior across states and the connections to the real economy. Heterogeneity in the risk aversion of banks' customers and managers is one possible explanation.
    Keywords: Unique banks, West Virginia, Appalachia, state heterogeneity, financial statements, time deposits, real estate loans, mixed-effects model, market structure
    JEL: G21 R11 D22
    Date: 2022–09
  19. By: Aurore Burietz (LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique); Loredana Ureche-Rangau (CRIISEA - Centre de Recherche sur les Institutions, l'Industrie et les Systèmes Économiques d'Amiens - UR UPJV 3908 - UPJV - Université de Picardie Jules Verne)
    Abstract: This paper empirically investigates banks' lending and the extent to which they are influenced by specific preferences in terms of geographical location and industry. We study whether banks develop a field of expertise and focus on it, or whether they prefer to grant loans quite evenly among countries and industries. We manually built an original database of syndicated loans for banks in the four major banking systems in the eurozone, to estimate the determinants of loans' amounts between 2005 and 2013. Our findings highlight a domestic bias and a sectoral bias with banks lending larger amounts to their domestic borrowers and to industries they are more familiar with.
    Keywords: Credit supply,Biases,Syndicated loan market
    Date: 2020–12
  20. By: Demary, Markus; Hagenberg, Anna-Maria; Zdzralek, Jonas
    Abstract: For firms' business and investment decisions their access to finance is a critical determinant. In times when access to finance becomes tight, corporations face either higher capital costs or they have to postpone their investment decisions when credit lines are not prolongated. Since business investment is a prerequisite to spur economic growth, access to finance is a critical variable in business cycle stabilization. Therefore, central banks take a close look at the financing conditions of companies, and they have to loosen monetary policy when access to finance becomes tighter. In contrast to the US, where firms rely to a great degree on capital market financing, euro area firms are dominantly funded by banks. For our empirical analysis we use data from the Survey of Access to Finance of Small and Medium-sized Enterprises (SAFE) from the ECB. SAFE is a semi-annual survey and it covers the relevant data on financing conditions from the viewpoint of euro area firms with a focus on SMEs. The first wave started in the first half of 2009. Regression analyses with only three macroeconomic variables (yield on sovereign bonds, GDP growth and unemployment rate) on the percentage of vulnerable firms yield the result of a strong positive correlation with long-term interest rates. This effect is reduced when adding access to finance or the change in the external financing gap to the equation, which are also positively correlated to the vulnerability of SMEs. At the same time, the vulnerability of companies is negatively correlated with GDP growth indicating that in times of economic crisis, the vulnerability is higher than in times of economic boom. However, the coefficient loses its significance, when the change in the financing gap and access to finance were added to the regression. Since these two variables are also dependent on the business cycle, they better explain the vulnerability than GDP.
    JEL: E32 E44 E58
    Date: 2022
  21. By: Priit Jeenas; Ricardo Lagos
    Abstract: We study the effects of monetary-policy-induced changes in Tobin's q on corporate investment and capital structure. We develop a theory of the mechanism, provide empirical evidence, evaluate the ability of the quantitative theory to match the evidence, and quantify the relevance for monetary transmission to aggregate investment.
    Keywords: monetary transmission, stock prices, Tobin's q, investment, capital structure
    JEL: D83 E22 E44 E52 G12 G31 G32
    Date: 2022–05
  22. By: Santiago Camara; Sebastian Ramirez Venegas
    Abstract: This paper studies the transmission of US monetary policy shocks into Emerging Markets emphasizing the role of investment and financial heterogeneity. First, we use a panel SVAR model to show that a US interest tightening leads to a persistent recession in Emerging Markets driven by a sharp reduction in aggregate investment. Second, we study the role of firms' financial heterogeneity in the transmission of US interest rate shocks by exploiting detailed balance sheet dataset from Chile. We find that more indebted firms experience greater drops in investment in response to a US tightening shock than less indebted firms. This result is at odds with recent evidence from US firms, even when using the same identification strategy and econometric methods. Third, we rationalize this finding using a stylized model of heterogeneous firms subject to a tightening leverage constraint. Finally, we present evidence in support of this hypothesis as well as robustness checks to our main results. Overall, our results suggests that the transmission channel of US monetary policy shocks within and outside the US differ, a result novel to the literature.
    Date: 2022–09
  23. By: James Cloyne; Patrick Hürtgen; Alan M. Taylor
    Abstract: Identifying exogenous variation in monetary policy is crucial for investigating central bank policy transmission. Using newly-collected archival real-time data utilized by the Central Bank Council of the German Bundesbank, we identify unexpected changes in German monetary policy from 580 policy meetings between 1974 and 1998. German monetary policy shocks produce conventional effects on the German domestic economy: activity, prices, and credit decline significantly following a monetary contraction. But given Germany’s central role in the European Monetary System (EMS), we can also shed light on debates about the international transmission of monetary policy and the relative importance of the U.S. Federal Reserve for the global cycle during these years. We find that Bundesbank policy spillovers were much stronger in major EMS economies with Deutschmark pegs than in non-EMS economies with floating exchange rates. Furthermore, compared to monetary spillovers from the U.S., German spillovers were comparable or even larger in magnitude for both pegs and floats.
    JEL: E32 E52 F42 F44
    Date: 2022–09

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