nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2022‒11‒21
23 papers chosen by
Georg Man

  1. FDI AND ECONOMIC GROWTH IN SADC REGION By Gibogwe, Vincent; Nigo, Ayine; Kufuor, Karen
  2. BUSINESS AND FINANCIAL CYCLE IN INDONESIA: AN INTEGRATED APPROACH By Cicilia Anggadewi Harun; Wishnu Mahraddika; Jati Waluyo; Pakasa Bary; Rieska Indah Astuti; Fauzan Rachman; Rizky Primayudha; Dwi Oktaviyanti; Euis Aqmaliyah
  3. Uncertainty, Skewness, and the Business Cycle Through the MIDAS Lens By Efrem Castelnuovo; Lorenzo Mori
  4. Predicting a Recession with Ensemble Forecasting: The Fisher Knight Recession Indicator By Podshivalov, Georgii Gordon
  5. Consumption Insurance and Credit Shocks By Wöhrmüller, Stefan
  6. Endogenous Innovation Scale and Patent Policy in a Monetary Schumpeterian Growth Model By Yu, Po-yang; Lai, Ching-Chong
  7. Asset Bubbles and Inflation as Competing Monetary Phenomena By Guillaume Plantin
  8. Real interest rates and population growth across generations By Lucas Fuhrer; Nils Herger
  9. Interest Rate Repression : A New Database By Calice,Pietro; Diaz Kalan,Federico Alfonso; Masetti,Oliver
  10. Capital Controls and the Global Financial Cycle By Matschke, Johannes; Lovchikova, Marina
  11. Understanding and Measuring Financial Inclusion in the Philippines By Corpus, John Paul; Debuque-Gonzales, Margarita
  12. The Dynamics of Pareto Distributed Wealth in a Small Open Economy By Birkner, Matthias; Scheuer, Niklas; Wälde, Klaus
  13. Wealth-Income Ratios in Free Market Capitalism: Switzerland, 1900-2020 By Enea Baselgia; Isabel Z. Martínez
  14. Those Who Were Better Off: Capital and Top Incomes in Fascist Italy By Giacomo Gabbuti
  15. Income and Wealth Inequality in Hong Kong, 1981-2020: The Rise of Pluto-Communism? By Thomas Piketty; Li Yang
  16. How well do DSGE models with real estate and collateral constraints fit the data? By Alban Moura; Olivier Pierrard
  17. House Price Bubble Detection in Ukraine By Alona Shmygel; Martin Hoesli
  18. Empirical Evidence on Firm Growth and Jobs in Developing Countries By Buba, Johanne; Franco Gonzalez, Alvaro; Rizvi, Anam
  19. Basel III and SME bank finance in Germany By Marek, Philipp; Stein, Ingrid
  20. Dawn of the (half) dead: the twisted world of zombie identification By Mingarelli, Luca; Ravanetti, Beatrice; Shakir, Tamarah; Wendelborn, Jonas
  21. EXPLORING THE IMPACT OF LOAN RESTRUCTURING IN INDONESIAN BANKING By Wahyoe Soedarmono; Iman Gunadi; Fiskara Indawan; Carla Sheila Wulandari
  22. Optimal Intermediary Contracts By Nabi Arjmandi; Chao Gu; Joseph H. Haslag
  23. Climate uncertainty, financial frictions and constrained efficient carbon taxation By Felix K\"ubler

  1. By: Gibogwe, Vincent; Nigo, Ayine; Kufuor, Karen
    Abstract: The Southern African Development Community (SADC) has continued to experience an unprecedented increase in foreign direct investment (FDI) inflows for the past three decades. Evidence on their quantitative impact on the economy is still quite mixed. We use panel data methods on data from the (SADC) for the 1980–2020 period where our results show that FDI has a positive and statistically significant effect on economic growth; thus agreeing with some work that has been done on the community and in Sub-Saharan Africa. Our study calls for the development of human capital, promotion of market liberlisation, the improvement of financial sector and the need for policy measures that prioritise productive investment that is supportive of local private as well as foreign sector; the latter does provide positive spillovers to other sectors.
    Keywords: Foreign Direct Investment, Liberalisation, investment, economic growth
    JEL: O55
    Date: 2022–09–01
  2. By: Cicilia Anggadewi Harun (Bank Indonesia); Wishnu Mahraddika (Bank Indonesia); Jati Waluyo (Bank Indonesia); Pakasa Bary (Bank Indonesia); Rieska Indah Astuti (Bank Indonesia); Fauzan Rachman (Bank Indonesia); Rizky Primayudha (Bank Indonesia); Dwi Oktaviyanti (Bank Indoensia); Euis Aqmaliyah
    Abstract: This study discusses business cycle and financial cycle in Indonesia. In the first stage, the multivariate Kalman Filter estimation is carried out on the output gap and credit gap specifications which are derived by considering the IS curve, dominant currency pricing, financial frictions, and credit shocks. In the second stage, the financial cycle is constructed via common cycles and principal components by combining various financial indicators, including indicators of total credit obtained based on the results in the previous stage, asset prices, risk taking, banking indicators, corporate leverage, external exposure, and risk appetite. Based on several evaluation metrics, the resulting business and financial cycle are consistent to the dynamics of economic and financial conditions in Indonesia, which were triggered either by domestic or external events. The business cycle and financial cycle have been shown to have similar characteristics, although financial cycle has a longer average duration.
    Keywords: Business cycle, financial cycle, output gap, multivariate filtering, Kalman filter, principal component analysis, risk taking, dominant currency pricing, capital flows, commodity prices
    JEL: E32 C32 C38 E50 F30 F40
    Date: 2021
  3. By: Efrem Castelnuovo (University of Padova); Lorenzo Mori (University of Padova)
    Abstract: We employ a mixed-frequency quantile regression approach to model the time-varying conditional distribution of the US real GDP growth rate. We show that monthly information on the US financial cycle improves the predictive power of an otherwise quarterly-only model. We combine selected quantiles of the estimated conditional distribution to produce measures of uncertainty and skewness. Embedding these measures in a VAR framework, we show that unexpected changes in uncertainty are associated with an increase in (left) skewness and a downturn in real activity. Empirical findings related to VAR impulse responses and forecast error variance decomposition are shown to depend on the inclusion/omission of monthly-level information on financial conditions when estimating real GDP growth’s conditional density. Effects are significantly downplayed if we consider a quarterly-only quantile regression model. A counterfactual simulation conducted by shutting down the endogenous response of skewness to uncertainty shocks shows that skewness substantially amplifies the recessionary effects of uncertainty.
    Keywords: Uncertainty, skewness, quantile regressions, vector autoregressions, MIDAS
    Date: 2022–10
  4. By: Podshivalov, Georgii Gordon
    Abstract: Using an ensemble forecasting technique, we created the rule-based indicator (FKRI, the Fisher Knight Recession Indicator) that accurately predicted all five economic recessions in the United States during the last 45 years. The indicator gave neither type I nor type II errors (no false alarms and no misses) and predicted recessions in no later than four months. Based on the yield curve inversion principle, FKRI is strictly empirical and can be easily replicated with publicly available market data. We expect the indicator to accurately predict future recessions as well.
    Keywords: Recession, GDP, Treasury yield, Yield curve, Yield curve inversion, Forecasting, Indicator, Predictor, Ensemble, Fisher Knight Recession Indicator, FKRI
    JEL: E32 E37 E43 E44 E47 G12 G17
    Date: 2022–10–16
  5. By: Wöhrmüller, Stefan
    JEL: D12 D31 D52 E21 E44
    Date: 2022
  6. By: Yu, Po-yang; Lai, Ching-Chong
    Abstract: This paper develops a monetary R&D-driven endogenous growth model featuring endogenous innovation scales and the price-marginal cost markup. To endogenize the step size of quality improvement, we propose a trade-off mechanism between the risk of innovation failure and the benefit of innovation success in R&D firms. Several findings emerge from the analysis. First, a rise in the nominal interest rate decreases economic growth; however, its relationship with social welfare is ambiguous. Second, either strengthening patent protection or raising the professional knowledge of R&D firms leads to an ambiguous effect on economic growth. Third, the Friedman rule of a zero nominal interest rate fails to be optimal in view of the social welfare maximum. Finally, our numerical analysis indicates that the extent of patent protection and the level of an R&D firm’s professional knowledge play a crucial role in determining the optimal interest rate.
    Keywords: Intellectual property rights; Economic growth; Endogenous innovation scales; Endogenous markups; Inflation
    JEL: E41 L11 O30 O40
    Date: 2022–10–17
  7. By: Guillaume Plantin (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Abstract. In a model with multiple price-setting equilibria with varying price rigidity a` la Ball and Romer (1991), a central bank using a Taylor rule may inadvertly create asset bubbles instead of reaching its inflation target regardless of the value of the natural rate. These monetary bubbles differ from natural ones in three important ways: i) They do not push up the interest rate no matter their size and thus earn low returns themselves; ii) They burst when inflation picks up; iii) They always crowd out investment by draining resources from the most financially constrained agents.
    Date: 2021–10–23
  8. By: Lucas Fuhrer (Swiss National Bank); Nils Herger (Study Center Gerzensee)
    Abstract: This paper empirically examines the effect of population growth on real interest rates. Although this effect is well founded in macroeconomic theory, the corresponding empirical results have been rather tenuous. Demographic interest rate theories are typically based on long-term relationships across generations. Accordingly, key population trends appear often only across decades, if not centuries, worth of data. To capture these trends, we distinguish between population growth resulting from a birth surplus and net migration. Within a panel covering 12 countries and the years since 1820, we find robust evidence that the birth surplus significantly affects the real interest rate.
    Date: 2022–06
  9. By: Calice,Pietro; Diaz Kalan,Federico Alfonso; Masetti,Oliver
    Abstract: Financial repression resurfaced in the wake of the global financial crisis and might become acommon feature in the post Covid-19 world. To advance knowledge and inform policy advice, this paper presents anew database on interest rate controls, a popular form of financial repression, based on a survey of 108 countries,representing 88 percent of global gross domestic product. The data cover such aspects of interest rate controls astypes of controls, legal basis, intended objectives, methodologies, and enforcement rules. In an attempt toprovide a meaningful characterization of the data, the paper also provides a preliminarily estimate of the degree ofbindingness of the interest rate control regime in a country and presents simple correlations with other financialrepression policies.
    Keywords: Banks & Banking Reform,Financial Sector Policy,Macroeconomic Management,Financial Structures
    Date: 2020–10–27
  10. By: Matschke, Johannes; Lovchikova, Marina
    JEL: F36 F38 F41
    Date: 2022
  11. By: Corpus, John Paul; Debuque-Gonzales, Margarita
    Abstract: Financial inclusion can help curb poverty, reduce inequality, and potentially enhance productivity and long-term growth. However, empirical research on financial inclusion remains limited, particularly at the country level. To fill this gap, this paper conducts an empirical exploration of financial inclusion in the Philippines. Its specific objectives are to: (1) benchmark financial inclusion in the Philippines versus other countries in developing Asia; (2) capture stylized facts about financial inclusion in the country based on analysis of demand-side data; and (3) construct a subnational financial inclusion index that can be used, moving forward, to estimate the links of financial inclusion with economic growth, development, and financial stability. The Philippines leads comparator countries in terms of the enabling environment, has mixed performance in financial outreach, and lags in financial account ownership and usage. Less than 15 percent of adults in the country save money using a formal account, while less than a tenth use formal credit, among the lowest proportions in the region. In terms of stylized facts, we find that greater education, higher income, being female, being employed, and being older (up to a certain point) make financial inclusion, particularly formal account ownership and credit use, more likely. Fintech in the form of mobile money appears promising with seemingly the most equitable access among the different forms of financial inclusion, although account ownership remains scant and limited to more urbanized areas. Individuals with less education and those coming from lower-income households are more likely to be "involuntarily" excluded from the formal financial sector. To construct a subnational financial inclusion index, this paper makes use of supply-side data on outreach and usage of financial services in Philippine regions, with weights derived via principal component analysis. The computed regional index is positively associated with GDP per capita, literacy, and electricity access, and negatively associated with poverty incidence, in line with the demand-side analysis and reasonable expectations about the relationship between financial inclusion and development indicators. Comments to this paper are welcome within 60 days from the date of posting. Email
    Keywords: Financial inclusion; financial inclusion index
    Date: 2021
  12. By: Birkner, Matthias; Scheuer, Niklas; Wälde, Klaus
    JEL: C61 D31 E21
    Date: 2022
  13. By: Enea Baselgia; Isabel Z. Martínez
    Abstract: We estimate the ratio of private wealth to national income, βpt, for Switzerland from 1900 to 2020. Our results indicate that over the 20th century, βpt did not follow a U-shaped pattern as in most European countries. Instead, its was exceptionally stable at around 500%. We argue that this consistently high βpt was the result of geopolitical factors combined with Switzerland’s capital friendly policy-making. Since the turn of the century, however, βpt has been on a rapid rise to reach 793% in 2020. This considerable increase is mainly driven by large capital gains, especially in housing wealth.
    Keywords: wealth-income ratio, distribution, economic growth, housing prices
    JEL: N34 D31 D33 E01
    Date: 2022
  14. By: Giacomo Gabbuti
    Abstract: In the centennial of the March on Rome, this paper contributes to the political economy of Italian Fascism by addressing in quantitative terms the fortunes of Italian economic elites during the interwar period. Macro-economic indicators indicate capital accumulation and high profits, in a period characterised by international economic turmoil, alongside increasing concentration. New fiscal evidence is adopted to show the increasing relative position of the rich, including new series of top income shares. A discussion of taxation at the top and its evasion makes it possible to place these developments within the regressive economic policies of the Fascist regime.
    Keywords: Fascist Italy; income inequality; interwar Europe; top incomes; capital.
    Date: 2022–10–17
  15. By: Thomas Piketty (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, WIL - World Inequality Lab); Li Yang (DIW Berlin - Deutsches Institut für Wirtschaftsforschung)
    Abstract: In this paper, we aim to better understand the evolution and institutional roots of Hong Kong's growing economic inequality and political cleavages. The main findings of this paper are twofold. First, by combining multiple sources of data (household surveys, fiscal data, wealth rankings, national accounts) and innovative methodologies, we conduct a comprehensive analysis of the evolution of wage inequality, the capital share, as well as the concentration of top wealth in Hong Kong. Our evidence suggests a very large rise in income and wealth inequality in Hong Kong over the last four decades. Second, based on the latest opinion poll data, we provide evidence suggesting that business elites, who carry disproportionate weight in Hong Kong's Legislative Council, are more likely to vote for pro-establishment camp to ensure that policies are passed that protect their political and economic interests. We argue that the unique alliance of government and business elites in a partial democratic political system is the institutional root of Hong Kong's rising inequality and political cleavages.
    Date: 2022–07
  16. By: Alban Moura; Olivier Pierrard
    Abstract: Not so well. We reach this conclusion by evaluating the empirical performance of a benchmark DSGE model with real estate and collateral constraints. We estimate the model from U.S. data using Bayesian methods and assess its fit along various dimensions. We find that the model is strongly rejected when tested against unrestricted Bayesian VARs and cannot replicate the persistence of real estate prices and various comovements between aggregate demand, real estate prices, and debt. Performance does not improve with alternative definitions of real estate prices, estimation samples, or detrending approaches. Our results raise doubts about the ability of current DSGE models with real estate and collateral constraints to deliver credible policy insights and identify the dimensions in need of improvement.
    Keywords: real estate; housing; DSGE models; collateral constraints; model evaluation
    JEL: C52 E32 E44
    Date: 2022–10
  17. By: Alona Shmygel (National Bank of Ukraine); Martin Hoesli (University of Geneva - Geneva School of Economics and Management (GSEM); Swiss Finance Institute; University of Aberdeen - Business School)
    Abstract: The purpose of this paper is to build a framework for the assessment of the fundamental value of house prices in the largest Ukrainian cities, as well as to identify the thresholds, the breach of which would signal a bubble. House price bubbles are detected using two approaches: ratios and regression analysis. Two variants of each method are considered. We calculate the price-to-rent and price-to-income ratios that can identify a possible over- or undervaluation of house prices. Then, we perform regression analyses by considering individual multi-factor models for each city and by using a pooled OLS model with panel data. The only pronounced and prolonged period of a house price bubble is the one that coincides with the Global Financial Crisis. The bubble signals produced by these methods are, on average, simultaneous and are in accordance with economic sense.
    Keywords: house price bubbles, fundamental house prices, mortgage lending, systemic risk, regression analysis, Ukraine.
    JEL: R31 R38
    Date: 2022–10
  18. By: Buba, Johanne; Franco Gonzalez, Alvaro; Rizvi, Anam
    Abstract: Economic growth does not contribute enough to job creation. As shown in Merotto, weber and Aterido (2018), a bit more than half of growth episodes contributed to reducing unemployment. A significant part of this relationship between growth and jobs is centered around firms. Firms are more likely to hire when growing. For that reason, any discussion on how to get more jobs needs to respond to questions about firm performance. This review discusses the barriers to firm growth and performance, namely limited access to finance, frictions on the labor market, lack of know-how, limited access to technology and the role of markets. It synthesizes the main lessons on firm growth from firm-level experiments that address these constraints and when possible, focuses on the impacts of these interventions on jobs. The objective is to provide evidence that can guide practitioners who seek to promote jobs in the context of private sector development programming. Empirical Evidence on Firm Growth and Jobs in Developing Countries
    Keywords: access to finance; access to financial service; empirical evidence; firm growth; data collection effort; Internally Displaced Person; labor market performance; privileges and immunity; business environment; private investor; employment impact; representative sample; firm-level survey; external financing; macroeconomic environment; paper issue; accurate assessment; retail firms; gender participation; annual sale; best practice; capacity utilization; several countries; target setting; sole responsibility; original work; commercial purpose; research need; copyright owner; policy option; market study; Market Studies; job growth; survey respondent; management experience
    Date: 2020–12–18
  19. By: Marek, Philipp; Stein, Ingrid
    Abstract: This paper examines how Basel III capital reforms affected bank lending in Ger- many. We focus on the increase of minimum risk-based capital requirements and the introduction of the leverage ratio. The announcement of stricter risk-based capital regulation significantly affected low capitalized banks. The impact depends on a bank's credit risk model, i.e. whether a bank applies the standardized approach (SA) or an internal ratings-based approach (IRBA) to determine risk weights. Low capitalized SA banks significantly cut lending whereas IRBA banks did not ad- just lending volumes. By contrast, low capitalized IRBA banks significantly in- creased collateralization while low capitalized SA banks adjusted collateralization only marginally. Moreover, the impact on SMEs and large companies also differs. In terms of lending, SMEs were affected more strongly, whilst in terms of collateralization the impact on large companies was bigger. The announcement of the leverage ratio had, however, a rather limited impact. We find some evidence that low capitalized banks reduced lending. Furthermore, low capitalized banks somewhat tightened collateral requirements, especially for large companies.
    Keywords: Basel III,bank lending,nancial regulation,small and medium-sizedenterprises (SMEs)
    JEL: D22 E58 G21
    Date: 2022
  20. By: Mingarelli, Luca; Ravanetti, Beatrice; Shakir, Tamarah; Wendelborn, Jonas
    Abstract: Since the term was first coined in studies on the 1990s Japanese crisis, the concept of zombification has been investigated and revived repeatedly when concerns arise about credit misallocation and stagnating productivity growth in an economy. The starting point for these studies nearly always involves trying to identify the so-called ‘zombie’ firms. This has led in the past years to a proliferation of different definitions and identification methodologies. We survey the most prominent definitions, discussing advantages and limitations of each. We also undertake a comparison of methodologies on a common dataset for euro area firms from 2004-2019, with the exercise revealing limited overlap and low comparability in the firms identified by several prominent studies. In response, we introduce a formalisation of zombie-classifications which helps to make order in the growing number of variations and identification methodologies. Moreover, this formalisation also helps extending the concept of binary identification to that of fuzzy zombie-identification. In particular, we introduce a general procedure to turn arbitrary binary classifications into fuzzy ones showing it successfully increases consistency between zombie definitions. JEL Classification: L25, D22, D24, C55, O40
    Keywords: vulnerable firms, zombie firms
    Date: 2022–10
  21. By: Wahyoe Soedarmono; Iman Gunadi (Bank Indonesia); Fiskara Indawan (Bank Indonesia); Carla Sheila Wulandari
    Abstract: This paper investigates the impact of loan restructuring on risk and performance in Indonesian banking. We find that higher restructured loans increase non-performing loans. Concomittantly, higher restructured loans are associated with higher capital ratio and lower insolvency risk. In this regard, higher capital ratio is sufficient to offset an increase in credit risk, which in turn enhances bank solvency. A deeper analysis suggests that such findings are driven by banks with lower capitalization and private-owned banks. For banks with higher capitalization and government-owned banks, higher restructured loans may deteriorate bank solvency. Moreover, the role of loan restructuring in strengthening financial stability is more pronounced during economic downturns in general. Although loan restructuring matters for financial stability regardless of the degree of economic growth, the effectiveness of loan restructuring policy is conditional.
    Keywords: Bank loan restructuring, risk, capital ratio, performance, Indonesia
    JEL: G21 G28
    Date: 2021
  22. By: Nabi Arjmandi (Department of Economics, University of Missouri-Columbia); Chao Gu (Department of Economics, University of Missouri-Columbia); Joseph H. Haslag (Department of Economics, University of Missouri-Columbia)
    Abstract: Financial intermediaries simultaneously engage in two separate relationships: they accept deposits and they make loans. Yet, researchers have focused either on deposit contracts or loan contracts. In this paper, we develop a theory in which deposit contracts and loan contracts are determined in equilibrium. Borrowers have limited commitment and the banks have access to a direct, safe long-term investment. We then study how changes in the borrower’s creditworthiness affects deposit and loan contracts. We study this relationship across different trading protocols. With deteriorating credit conditions, we find that loan rates can decline (declining spreads) and loan quantities can increase. This is the opposite direction used when constructing things like credit indicators. This relationship is not robust to changes in market structures. Lastly, we show how an aggregate fundamental shock can induce bank runs. However, the bank run is less likely in the worst credit-condition category.
    Keywords: deposit contracts, loan contracts, credit conditions, financial indicators
    JEL: D53 E44 G21
    Date: 2022–11
  23. By: Felix K\"ubler
    Abstract: In this paper, I consider a simple heterogeneous agents model of a production economy with uncertain climate change and examine constrained efficient carbon taxation. If there are frictionless, complete financial markets, the simple model predicts a unique Pareto-optimal level of carbon taxes and abatement. In the presence of financial frictions, however, the optimal level of abatement cannot be defined without taking a stand on how abatement costs are distributed among individuals. I propose a simple linear cost-sharing scheme that has several desirable normative properties. I use calibrated examples of economies with incomplete financial markets and/or limited market participation to demonstrate that different schemes to share abatement costs can have large effects on optimal abatement levels and that the presence of financial frictions can increase optimal abatement by a factor of three relative to the case of frictionless financial market.
    Date: 2022–10

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