nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2022‒12‒12
28 papers chosen by
Georg Man

  1. Banks, Credit Reallocation, and Creative Destruction By Christian Keuschnigg; Michael Kogler; Johannes Matt
  2. Desirable Banking Competition and Stability By Jonathan Benchimol; Caroline Bozou
  4. Working Paper 366 - Remittances and employment in family-owned firms: Evidence from Nigeria and Uganda By Ainembabazi John Herbert; Francis H. Kemeze
  5. Financial Intermediation and the Economys By Committee, Nobel Prize
  6. Financial Development and Monetary Policy Transmission By María Fernanda Meneses-González; Angélica María Lizarazo-Cuellar; Diego Fernando Cuesta-Mora; Daniel Osorio-Rodríguez
  8. Do Sovereign Credit Ratings Matter for Foreign Direct Investment: Evidence from Sub-Sahara African Countries By Arogundade, Sodiq; Biyase, Mduduzi; Eita, Joel Hinaunye
  9. Economic and Social Impacts of FDI in Central, East and Southeast Europe By Doris Hanzl-Weiss; Branimir Jovanović
  10. Deep Trade Agreements and FDI in Partial and General Equilibrium: A Structural Estimation Framework By Larch, Mario; Yotov, Yoto
  11. Explaining foreign direct investment patterns: A testable micro-macro gravity model for FDI By Kox, Henk L.M.
  12. Does the US Contagion Risk Effects Foreign Direct Investment Inflows in Emerging Economies? By Woraphon Yamaka; Paravee Maneejuk
  13. Estimating Dynamic Spillover Effects along Multiple Networks in a Linear Panel Model By Clemens Possnig; Andreea Rot\u{a}rescu; Kyungchul Song
  14. Formation of Optimal Interbank Lending Networks under Liquidity Shocks By Daniel E. Rigobon; Ronnie Sircar
  15. International Business Cycle Synchronization: A Synthetic Assessment By Lee, Hyun-Hoon; Park, Cyn-Young; Pyu, Ju Hyun
  16. Measuring Uncertainty and its e ects in a Small Open Economy By Miguel Cabello; Rafael Nivin
  17. Asset Pricing with “Buy Now, Pay Later” By Semyon Malamud; Neng Wang; Yuan Zhang
  18. Household Debt, Knowledge Capital Accumulation and Macrodynamic Performance By Laura Barbosa de Carvalho; Gilberto Tadeu Lima, Gustavo Pereira Serra
  19. Working Paper 365 - Public Investment Efficiency, Economic Growth and Debt Sustainability in Africa By George Kararach; Jacob Oduor; Edward Sennoga; Walter Odero; Peter Rasmussen; Lacina Balma
  20. The long and short of financing government spending By Bastien Bernon; Joep Konings; Glenn Magerman
  21. Borrowing Constraints in Emerging Markets By Santiago Camara; Maximo Sangiacomo
  22. Working Paper 367 - Debt Distress and Recovery Episodes in Africa: Good Policy or Good Luck? By Chuku Chuku; Alexandre Kopoin
  23. Working Paper 364 - ‘Catch Me if You Can’ On Drivers of Venture Capital Investment in Africa By Fadel Jaoui; Omolola Amoussou; Francis H. Kemeze
  24. The Effect of Firm-Level Investment on Inequality and Poverty around the World By Tosun, Mehmet S.; Watson, Ethan D.; Yildiz, Serhat
  25. Income inequality and the German export surplus By Ansgar Rannenberg; Thomas Theobald
  26. Credit Market Freedom and Corporate Decisions By Andrea Calef; Ifigenia Georgiou; Alfonsina Iona
  27. Corporate Investment Behavior and Level of Participation in the Global Value Chain: A Dynamic Panel Data Approach By Kuantan, Dhaha Praviandi; Siregar, Hermanto; Ratnawati, Anny; Juhro, Solikin M.
  28. A dissonant violin in the international orchestra? Discount rate policy in Italy (1894-1913) By Paolo Di Martino; Fabio C. Bagliano

  1. By: Christian Keuschnigg (University of St. Gallen – Department of Economics (FGN-HSG); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Michael Kogler (University of St. Gallen); Johannes Matt (London School of Economics & Political Science (LSE))
    Abstract: How do banks facilitate creative destruction and shape firm turnover? We develop a dynamic general equilibrium model of bank credit reallocation with endogenous firm entry and exit that allows for both theoretical and quantitative analysis. By restructuring loans to firms with poor prospects and high default risk, banks not only accelerate the exit of unproductive firms but also redirect existing credit to more productive entrants. This reduces banks’ dependence on household deposits that are often supplied inelastically, thereby relaxing the economy’s resource constraint. A more efficient loan restructuring process thus fosters firm creation and improves aggregate productivity. It also complements policies that stimulate firm entry (e.g., R&D subsidies) and renders them more effective by avoiding a crowding-out via a higher interest rate.
    Keywords: creative destruction, reallocation, bank credit, productivity
    JEL: E23 E44 G21 O4
    Date: 2022–11
  2. By: Jonathan Benchimol (Bank of Israel); Caroline Bozou (Centre d'Économie de la Sorbonne)
    Abstract: Every financial crisis raises questions about how the banking market structure affects the real economy. Although low bank concentration may lower markups and foster bank risk-taking, controlled banking concentration systems appear more resilient to financial shocks. We use a nonlinear dynamic stochastic general equilibrium model with financial frictions to compare the transmissions of shocks under different competition and concentration configurations. Oligopolistic competition and concentration amplify the effects of the shocks relative to monopolistic competition. The transmission mechanism works through the markups, which are amplified when banking concentration is increased. According to financial stability and social welfare objectives, the desirable banking market structure is determined. Depending on policymakers' preferences, the banking concentration of five to seven banks balances social welfare and bank stability objectives.
    Keywords: Banking Concentration, Imperfect Competition, Financial Stability, Welfare Analysis, DSGE Model
    JEL: D43 E43 E51 G21
    Date: 2022–10
  3. By: Mduduzi Biyase (College of Business and Economics, University of Johannesburg); Mathias Manguzvane (College of Business and Economics, University of Johannesburg); Thomas Udiman (Southwest Forestry University)
    Abstract: We take another look at the relationship between remittances and economic growth in South Africa, using recent data and a fairly lengthy time period of approximately 50 years for South Africa running from 1970 to 2019. We use the autoregressive distributed lag (ARDL) bounds testing approach to assess the cointegration among remittances, economic growth, including control variables in the presence of structural breaks. We find evidence to suggest that the structural change in economic growth occurred in 2008 during the global financial crisis, while the break point for remittances received emerged in 1997. After taking into consideration the presence of structural breaks, our study confirmed a cointegration relationship between remittances received and economic growth in South Africa. Specifically, the ARDL results present a negative and significant estimates of remittances on economic growth in the short and long-run, consistent with previous studies. All the specification tests confirm the statistical robustness of the ARDL bounds testing method.
    Keywords: ARDL; economic growth; remittances; WDI
    JEL: C32 F24
    Date: 2022
  4. By: Ainembabazi John Herbert (African Development Bank); Francis H. Kemeze (African Development Bank)
    Abstract: The link between remittance transfers and job creation in recipient communities offers a kind of private-sector led economic growth. This link has been largely ignored in migration research. Using nationally representative panel household data collected from Nigeria and Uganda, we investigate the relationship between job creation in familyowned firms and remittances. We measure remittances as a share of household income in order to capture income and substitution effects. We find that employment of family members into family-owned firms is high in households receiving small amounts of remittances relative to their household income. As the share of remittance transfers in household income increases, the likelihood of hiring family members decreases as it increases for hired workers. The threshold point appears to occur when remittance transfers contribute more than a half of household income. The implication of our findings is that remittance transfers induce an income effect by increasing reservation wage of family members which reduces their likelihood of working in family business, which in turn opens up employment opportunities for non-family individuals. Our findings point to a sign of hidden potential of remittances to spur job creation in migrants’ communities if policies to increase the size of remittance transfers are put in place.
    Keywords: Remittances, Family-owned firmes, employment, economic growth JEL classification: D13, F24, O12, J22
    Date: 2022–07–08
  5. By: Committee, Nobel Prize (Nobel Prize Committee)
    Abstract: The 2022 Sveriges Riksbank Prize in Economic Sciences in Honor of Alfred Nobel rewards foundational research on the role of banks in the economy, particularly during financial crises. Financial intermediaries such as traditional banks and other bank-like institutions facilitate loans between lenders and borrowers, and thereby play a key role for the allocation of capital. They enable households to get a mortgage to buy a home, farms to get a loan to buy a harvesting machine, and firms to get a loan to build a new factory.
    Keywords: Banking; financial crisis
    JEL: E53 G21 G28
    Date: 2022–10–10
  6. By: María Fernanda Meneses-González; Angélica María Lizarazo-Cuellar; Diego Fernando Cuesta-Mora; Daniel Osorio-Rodríguez
    Abstract: This paper estimates the effect of financial development on the transmission of monetary policy. To do so, the paper employs a panel data set containing financial development indicators, policy rates, lending rates, and deposit rates for 43 countries for the period 2000-2019 and applies the empirical strategy of BrandaoMarques et al. (2020): firstly, monetary policy shocks are estimated using a Taylor-rule specification that relates changes in the policy rate to inflation, the output gap and other observables that are likely to influence monetary policy decisions; secondly, the residuals of this estimation (policy shocks) are used in a specification that relates lending or deposit rates to, among others, policy shocks and the interaction between policy shocks and measures of financial development. The coefficient on this interaction term captures the effect of financial development on the relationship between policy shocks and lending or deposit rates. The main findings of the paper are twofold: on the one hand, financial development does strengthen the monetary policy transmission channel to deposit rates; that is, changes in the policy rate in economies with more financial development induce larger changes (in the same direction) in deposit rates than is the case in economies with less financial development. This result is particularly driven by the effect of the development of financial institutions on policy transmission – the effect of financial markets development turns out to be smaller in magnitude. On the other hand, financial development does not strengthen the transmission of monetary policy to lending rates. This is consistent with a credit channel which weakens in the face of financial development in a context where banks cannot easily substitute short-term funding sources. These results highlight the relevance of financial development for the functioning of monetary policy across countries, and possibly imply the necessity of a more active role of monetary authorities in fostering financial development. **** Este trabajo estima el efecto del desarrollo financiero en la transmisión de la política monetaria. Con este objetivo, el documento utiliza una base de datos que contiene indicadores de desarrollo financiero, tasas de política monetaria, tasas de interés de créditos y depósitos para 43 países para el período 2000-2019 y aplica una estrategia empírica propuesta por Brandao-Marques et al. (2020): en primer lugar, se estiman choques de política monetaria por país utilizando una aproximación a la regla de Taylor que relaciona los cambios en la tasa de política con la tasa de inflación, la brecha del producto y otras variables observables que probablemente influyan en las decisiones de política monetaria; en segundo lugar, los residuos de esta estimación (choques de política) se utilizan en una especificación de un modelo panel que relaciona las tasas activas o pasivas con, entre otros, choques de política y la interacción entre choques de política y medidas de desarrollo financiero. El coeficiente de este término de interacción capta el efecto del desarrollo financiero en la relación entre los choques de política monetaria y las tasas activas o pasivas. Los principales hallazgos del documento son dos: por un lado, el desarrollo financiero fortalece el canal de transmisión de la política monetaria a las tasas de los depósitos; es decir, cambios en la tasa de política en economías con mayor desarrollo financiero inducen cambios mayores (en la misma dirección) en las tasas de depósitos que en el caso de las economías con menor desarrollo financiero. Este resultado está particularmente impulsado por el efecto del desarrollo de las instituciones financieras en la transmisión, ya que el efecto del desarrollo de los mercados financieros resulta ser de menor magnitud. Por otro lado, los resultados obtenidos sugieren que el desarrollo financiero no fortalece la transmisión de la política monetaria a las tasas activas. Esto es consistente con un canal de crédito que se debilita ante el desarrollo financiero en un contexto donde los bancos no pueden sustituir fácilmente las fuentes de financiamiento de corto plazo. Estos resultados resaltan la relevancia del desarrollo financiero para el funcionamiento de la política monetaria y posiblemente implican la necesidad de un papel más activo de las autoridades monetarias en el fomento del desarrollo financiero.
    Keywords: Financial development, monetary policy transmission, monetary policy shocks, desarrollo financiero, transmisión de política monetaria, choques de política monetaria
    JEL: G10 G18 G20 G28 E44 E52 E58
    Date: 2022–11
  7. By: , Le Thanh Tung
    Abstract: Tis study investigates the mixed impact of fscal-monetary policies on economic growth in Vietnam, an emerging economy in the Asia-Pacifc region. Te Vector autoregressive method (VAR), a quantitative technique, is employed on a quarterly database collected in 2004–2018. Te cointegration test indicates a long-term cointegration relationship between these macroeconomic policies and the growth of gross output. Te variance decomposition and impulse response function conclude that the impacts of these policies on economic growth are quite weak and faint. However, our results indicate that monetary policy is more signifcant than fscal policy in supporting economic growth. Te results imply that these economic policies may give priority to other macroeconomic objectives instead of promoting economic growth in the studied period. Hence, policymakers need to have more solutions to improve the efciency of these policies in Vietnam in the future.
    Date: 2022–09–04
  8. By: Arogundade, Sodiq; Biyase, Mduduzi; Eita, Joel Hinaunye
    Abstract: This study examines the impact of sovereign credit ratings (SCR) on foreign direct investment (FDI) inflow of 20 SSA countries. In achieving this, the study uses the fixed effect model, fixed effect instrumental variable regression, and the bootstrap panel granger causality test proposed by Emirmahmutoglu and Kose (2011). There are three main important findings from this empirical study: (1) sovereign credit ratings have a significant and positive impact on FDI inflows in the region; this result is robust to sub-regional analysis, the instrumental regression model and an alternative measure of credit rating, (2) the impact of SCR on FDI increases after the global financial crises (GFC), and (3) there is a unidirectional causality running from SCR to FDI in SSA. In increasing foreign investors' appetite, this study recommends that SSA countries get rated, and the ones rated should put in place appropriate policies to get better ratings.
    Keywords: Foreign direct investment, Sovereign credit ratings, Global financial crises Bootstrap panel Granger causality test, and Sub-Sahara African Countries
    JEL: E00 F0 F30 G00 G01
    Date: 2022–11–18
  9. By: Doris Hanzl-Weiss (The Vienna Institute for International Economic Studies, wiiw); Branimir Jovanović (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: This study assesses the economic and social impacts of foreign direct investment (FDI) in 17 economies in Central, East and Southeast Europe (CESEE). More precisely, we investigate how different FDI inflows have affected various economic and social indicators, such as GDP growth, labour market outcomes, and poverty and inequality, for the period since the fall of communism until 2020. We pay particular attention to FDI that originates from the EU, as well as FDI from Germany and Austria, in order to evaluate whether their effects are different from the effects of FDI from other places of origin. We also examine whether there are differences in the impacts of different types of FDI – equity capital, reinvested earnings and intra-company debt, as well as of FDI that goes to different sectors of the economy – the primary, secondary and tertiary sectors. We find that FDI inflows have had, in general, a positive effect on economic growth in CESEE, and that this effect has been particularly strong for German and Austrian FDI. For total FDI, higher inflows of 1 percentage point (pp) of GDP are associated with 0.19 pp higher GDP growth. For FDI from Germany and Austria, this effect is five times higher – FDI inflows of 1 pp of GDP have led to 0.9 pp higher GDP growth. The positive GDP effects have come from the higher consumption and exports that the FDI has induced. FDI inflows have also reduced unemployment and increased wages, but have had no effects on labour productivity. Total FDI has had only limited effects on inequality and poverty, but FDI from Germany and Austria has been found to reduce both inequality and poverty, likely because they have benefitted mainly lower-income persons. There are differences in the effects of the different types of FDI, with reinvested earnings and equity capital having in general more beneficial effects than intra-company loans. Also, FDI in different sectors of the economy has had different effects, with inflows to the secondary and tertiary sectors having greater effects than inflows to the primary sector. The policy implications of these results are that CESEE economies should not give up on their efforts to attract more FDI, but also that their endeavours should be more targeted, focusing on investments that have greater economic and social impacts. Moreover, foreign investment should not be criticised for the perhaps unsatisfactory economic and social performances of the economies from this region. Instead, the reasons for this should be sought in domestic factors and in the modest growth of the European Union during the past two decades.
    Keywords: FDI, growth, unemployment, poverty, inequality, Eastern Europe
    JEL: F21 O40 J01 D63 I3
    Date: 2022–11
  10. By: Larch, Mario (University of Bayreuth); Yotov, Yoto (Drexel University)
    Abstract: We quantify the relationships between deep trade liberalization and foreign direct investment (FDI). To this end, we focus on the effects of Deep Trade Agreements (DTAs), and we rely on a structural framework that simultaneously enables us to (i) estimate the direct impact of DTAs on FDI, (ii) translate the partial DTA estimates into general equilibrium effects on FDI; and (iii) obtain partial DTA effects on trade and quantify the impact of DTAs on FDI through trade. We obtain sizable, positive, and statistically significant estimates of the effects of DTAs on both trade and FDI. A counterfactual analysis suggests that, in combination through direct and indirect channels, DTAs have contributed to a large but very asymmetric increase in inward vs. outward FDI.
    Keywords: Foreign Direct Investment (FDI); Trade Liberalization; Deep Trade Agreements
    JEL: F10 F43 O40
    Date: 2022–09–25
  11. By: Kox, Henk L.M.
    Abstract: This paper proposes a stand-alone model for explaining international foreign direct investment (FDI) patterns, including zero flows. The model provides a micro foundation for FDI decisions at firm level that supports a structural gravity model. The FDI supply push depends on the relative abundance of proprietary knowledge assets of firms, which in turn depends on knowledge creation by the public sector. The demand pull for inward FDI depends on market size and the relative knowledge gap of countries. Firms self-select into FDI if their productivity is high enough to overcome the fixed costs of an international headquarter and the setup costs of a foreign subsidiary. Both types of fixed costs increase in the level of bilateral FDI frictions (physical and policy-related). Aggregated at country level, the model explains the occurrence of zero FDI flows between countries. The model is generalised to a n-country model, which includes the effects third-country policies. The latter affect the relative FDI start-up costs of all other countries, depending on the size and distance of the third countries. The paper derives testable predictions from the model. The model implications have high potential policy relevance.
    Keywords: foreign direct investment, firm behaviour, decision model, structural gravity, zero FDI flows, policy implications
    JEL: D21 D23 F21 F23 L1 O34
    Date: 2022–11
  12. By: Woraphon Yamaka; Paravee Maneejuk
    Abstract: Contagion has been one of the most widely studied and challenging problems in recent economic research. This study aims to measure the lower-tail dependence of risk contagion between the US economy and emerging countries. Four time-varying copulas, namely Student-t, Clayton, rotated survival Gumbel, and rotated survival Joe are considered to quantify the tail dependence. Overall, the results show the contagion effects of the US economy on 18 emerging economies. The size of contagion effects gradually increases for all countries, except Thailand, the Philippines, Argentina, and Chile. Furthermore, the Granger causality test and regression analysis reveal a temporal and contemporaneous effects of contagion risk on FDI inflows in 8 out of the 18 countries.
    Keywords: Contagion Risk; Emerging Economies; Foreign Direct Investment; Copula; Tail Dependence
    JEL: B23 C01 F21
    Date: 2022–11
  13. By: Clemens Possnig; Andreea Rot\u{a}rescu; Kyungchul Song
    Abstract: Spillover of economic outcomes often arises over multiple networks, and distinguishing their separate roles is important in empirical research. For example, the direction of spillover between two groups (such as banks and industrial sectors linked in a bipartite graph) has important economic implications, and a researcher may want to learn which direction is supported in the data. For this, we need to have an empirical methodology that allows for both directions of spillover simultaneously. In this paper, we develop a dynamic linear panel model and asymptotic inference with large $n$ and small $T$, where both directions of spillover are accommodated through multiple networks. Using the methodology developed here, we perform an empirical study of spillovers between bank weakness and zombie-firm congestion in industrial sectors, using firm-bank matched data from Spain between 2005 and 2012. Overall, we find that there is positive spillover in both directions between banks and sectors.
    Date: 2022–11
  14. By: Daniel E. Rigobon; Ronnie Sircar
    Abstract: We formulate a model of the banking system in which banks control both their supply of liquidity, through cash holdings, and their exposures to risky interbank loans. The value of interbank loans jumps when banks suffer liquidity shortages, which can be caused by the arrival of large enough liquidity shocks. In two distinct settings, we compute the unique optimal allocations of capital. In the first, banks seek only to maximize their own utility -- in a decentralized manner. Second, a central planner aims to maximize the sum of all banks' utilities. Both of the resulting financial networks exhibit a `core-periphery' structure. However, the optimal allocations differ -- decentralized banks are more susceptible to liquidity shortages, while the planner ensures that banks with more debt hold greater liquidity. We characterize the behavior of the planner's optimal allocation as the size of the system grows. Surprisingly, the `price of anarchy' is of constant order. Finally, we derive capitalization requirements that cause the decentralized system to achieve the planner's level of risk. In doing so, we find that systemically important banks must face the greatest losses when they suffer liquidity crises -- ensuring that they are incentivized to avoid such crises.
    Date: 2022–11
  15. By: Lee, Hyun-Hoon (Kangwon National University); Park, Cyn-Young (Asian Development Bank); Pyu, Ju Hyun (Korea University)
    Abstract: We synthetically assess the three major transmission channels of international business cycles: bilateral trade, foreign direct investment (FDI), and portfolio investment flows between economies with multiple fixed effects. Using the data of 72 economies during 2010–2019, we find that real and financial integration generates heterogeneous impacts on business cycle comovement. Trade integration, particularly through intermediate input trade, drives business cycle synchronization. We also find greenfield FDI leads business cycle comovements. This may be due to deepening intra-industry trade and dense global value chains. Higher debt market integration is also associated with more synchronized business cycle comovement, implying that balance sheet effects and the related credit cycle can exert influence on business cycle comovements. However, equity integration leads to business cycle divergence, suggesting that cross-border equity holdings may help stabilize transmission of a foreign economy’s shocks.
    Keywords: business cycle synchronization; trade; FDI; portfolio investment
    JEL: F15 F21 F34 F44
    Date: 2022–08–31
  16. By: Miguel Cabello (Central Reserve Bank of Peru); Rafael Nivin (Central Reserve Bank of Peru)
    Abstract: In the aftermath of the 2008 Global Financial Crisis (GFC), scholars and policymakers turned their attention to the role of uncertainty in amplifying the e ects of economic or financial shocks on economic activity. A growing literature has focused on addressing this question. Most works find that uncertainty provides an additional transmission mechanism for recessionary shocks, which amplifies their negative e ects on the economy. Nonetheless, most of these studies focus on developed economies. It is important to study the e ects of uncertainty in the context of small open economies as, unlike developed countries, they are subject to uncertainty from both external and domestic sources. Along these lines, this paper seeks to assess the e ects of uncertainty on economic performance in a small open economy and establish the relative importance of external and domestic uncertainty.
    Keywords: Uncertainty; Stochastic volatility; Dynamic Factor models.
    JEL: E44 C11 C13 C32 C55
    Date: 2022–11–16
  17. By: Semyon Malamud (Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Neng Wang (Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER); Asian Bureau of Finance and Economic Research (ABFER)); Yuan Zhang (Shanghai University of Finance and Economics)
    Abstract: “Buy Now, Pay Later” (BNPL) and other forms of consumer credit create a wedge between consumption and payments. We introduce this wedge into a standard consumption-based asset pricing model (CCAPM). In equilibrium, the pricing kernel equals the marginal utility of consumption divided by the return on the annuity with BNPL duration. When this duration is stochastic and co-moves with market risk, the BNPLCCAPM pricing kernel can jointly price size- and book-to-market-sorted stock portfolios and maturity-sorted bond portfolios.
    Keywords: asset pricing, yield curve, buy-now-pay-later, consumer credit, financial frictions, credit frictions
    JEL: D11 D50 D51 D53 E21 E51 G12
    Date: 2022–11
  18. By: Laura Barbosa de Carvalho; Gilberto Tadeu Lima, Gustavo Pereira Serra
    Abstract: Motivated to some extent by the empirical significance of student loans in the U.S., this paper incorporates knowledge capital formation by working households financed through debt to a demand-led dynamic model of physical and knowledge capital utilization and output growth. Average labor productivity varies positively with the average knowledge capital across the labor force. A rise in labor productivity resulting from knowledge capital accumulation is fully passed on to the real wage, so that the wage share remains constant. In the unique long-run equilibrium, which is stable, an exogenous rise in the wage share raises the rates of physical capital utilization and output growth but has an ambiguous effect on the rate of employment (which also measures the rate of knowledge capital utilization). The long-run equilibrium also features the following interrelated results: the output growth rate is greater than the exogenous interest rate; the debt ratio (working households’ debt as a ratio of either the physical or the knowledge capital, or the output) is independent from the interest rate; and the allocation of a higher (lower) proportion of wage income to debt repayment (consumption) raises instead of lowers the debt ratio, which we dub the paradox of debt repayment.
    Keywords: Household debt; knowledge capital; capacity utilization; employment rate; output growth
    JEL: E12 E22 E24
    Date: 2022–11–29
  19. By: George Kararach (African Development Bank); Jacob Oduor (African Development Bank); Edward Sennoga (African Development Bank); Walter Odero (African Development Bank); Peter Rasmussen (African Development Bank); Lacina Balma (African Development Bank)
    Abstract: Investment is an important driver of economic growth with important implications for debt sustainability. Investment efficiency gaps adversely impact debt sustainability in Africa. The current heightened fiscal vulnerabilities can be attributed to external factors including volatile commodity prices particularly for commodity-exporting countries and health challenges like COVID-19 pandemic that weakened fiscal revenues and growth. In addition are domestic factors such as elevated government spending on the back of big-push investment expenditures to close infrastructure gap, increased security expenditures in response to conflict and social unrest in some countries. Using a dynamic stochastic general equilibrium (DSGE) framework, we estimate the role of debt in the provision of productive investments, driving economic growth and subsequent debt sustainability. To entrench fiscal sustainability, countries need to strengthen domestic resource mobilization and improve public investment management for greater efficiency. Measures to increase tax revenue collections, savings mobilization and efficiency of public spending are therefore critical. It is prudent for development partners to support debt reporting, data harmonisation, tax compliance, combating illicit financial flows and developing effective debt resolution frameworks.
    Keywords: Public investment, economic growth, debt sustainability, dynamic stochastic general equilibrium, Africa development1George Kararach is a Lead Economist, African Development Bank ( Visiting Professor, Wits School of Governance, university of Witwatersrand, South Africa; Jacob Oduor is a Chief Country Economist, African Development Bank (; Edward Sennoga is a Lead Economist, African Development Bank (; Walter Oderois a Principal Country Economist, African Development Bank(; Peter Rasmussen is a Principal Country Economist, African Development Bank (; Lacina Balma is a Senior Research Economist, African Development Bank ( views expressed here are those of the authors and do not represent the official policy of the Africa DevelopmentBankand the University of the Witwatersrand, Johannesburg, South Africa JEL classification: E6, H63, H4, O11
    Date: 2022–07–08
  20. By: Bastien Bernon (: DECARES (ULB)); Joep Konings (Nazarbayev University GSB; KU Leuven and CEPR); Glenn Magerman (ECARES (ULB) and CEPR)
    Abstract: This paper shows that debt-financed fiscal multipliers vary depending on the maturity of debt issued to finance spending. Utilizing state-dependent SVAR models and local projections for post-war US data, we show that a fiscal expansion financed with short term debt increases output more than one financed with long term debt. The reason for this result is that only the former may lead to a significant increase in private consumption. We then construct an incomplete markets model in which households invest in long and short assets. Short assets have a lower return (in equilibrium) since they provide liquidity services, households can use them to cover sudden spending shocks. An increase in the supply of these assets through a short term debt financed government spending shock makes it easier for constrained households to meet their spending needs and therefore crowds in private consumption. We first prove this analytically in a simplified model and then show it in a calibrated standard New Keynesian model. We finally study the optimal policy under a Ramsey planner. The optimizing government faces a trade-off between the hedging value of long term debt, as its price decreases in response to adverse shocks, and the larger multiplier when it issues short term debt. We find that the latter effect dominates and that the optimal policy for the government is to finance spending predominantly with short term debt.
    Keywords: Spending multiplier; Fiscal Policy; Debt Maturity, Incomplete Markets, SVAR, Local Projections.
    JEL: D52 E31 E43 E62
    Date: 2022–10
  21. By: Santiago Camara; Maximo Sangiacomo
    Abstract: Borrowing constraints are a key component of modern international macroeconomic models. The analysis of Emerging Markets (EM) economies generally assumes collateral borrowing constraints, i.e., firms access to debt is constrained by the value of their collateralized assets. Using credit registry data from Argentina for the period 1998-2020 we show that less than 15% of firms debt is based on the value of collateralized assets, with the remaining 85% based on firms cash flows. Exploiting central bank regulations over banks capital requirements and credit policies we argue that the most prevalent borrowing constraints is defined in terms of the ratio of their interest payments to a measure of their present and past cash flows, akin to the interest coverage borrowing constraint studied by the corporate finance literature. Lastly, we argue that EMs exhibit a greater share of interest sensitive borrowing constraints than the US and other Advanced Economies. From a structural point of view, we show that in an otherwise standard small open economy DSGE model, an interest coverage borrowing constraints leads to significantly stronger amplification of foreign interest rate shocks compared to the standard collateral constraint. This greater amplification provides a solution to the Spillover Puzzle of US monetary policy rates by which EMs experience greater negative effects than Advanced Economies after a US interest rate hike. In terms of policy implications, this greater amplification leads to managed exchange rate policy being more costly in the presence of an interest coverage constraint, given their greater interest rate sensitivity, compared to the standard collateral borrowing constraint.
    Date: 2022–11
  22. By: Chuku Chuku (International Monetary Fund); Alexandre Kopoin (African Development Bank)
    Abstract: Greater access to international capital markets has meant that many African countries now owe a significant share of their debt to private bondholders, traded in secondary debt markets around the world. Assessing sovereign debt challenges for the continent will have to take on different forms, expanding beyond the traditional definitions of debt distress to broader market-oriented measures that identify crises through movements in sovereign bond spreads. In this paper, we use duration models to identify recent debt dis-tress and recovery episodes in Africa from a market-oriented approach, pinning down the entry points, the duration, and exit points of recent debt crises in Africa’s frontier market economies. Using the identified debt distress episodes, we examine the role of the external global environment, the domestic policy environment, and the presence of an international financial institution (IFI)-supported programme in explaining the duration of debt distress and the process of recovery. Our results indicate that favourable external conditions combined with sound domestic policy and the presence of an IFI-supported pro-gram contribute to shorter episodes of bond market crisis. Specifically, higher commodity prices, lower global interest rates, stronger political institutions, more robust reserves, and lower levels of short-term debt shorten the duration of debt crises in Africa. Thus, both good policies and good luck have played complementary roles in facilitating recovery from debt distress in Africa.
    Keywords: Bond market, debt distress, duration models, recovery rates JEL classification: C41, E44, F34, G15
    Date: 2022–11–07
  23. By: Fadel Jaoui (African Development Bank); Omolola Amoussou (African Development Bank); Francis H. Kemeze (African Development Bank)
    Abstract: This paper investigates the determinants of venture capital investments across 25 African countries over the period 2014-2019. In particular, it considers the significance of innovation and digitalization in Africa’s venture capital activity. The results show that digital infrastructure, high-technology exports, internet coverage, market size, minority investor protection, and government effectiveness are the main drivers of venture capital deals in Africa over the period examined. More generally, these findings highlight that digital infrastructure and connectivity, innovation and institutional frameworks all play an important role in shaping a favorable environment to attract venture capital funding.
    Keywords: Venture capital, Digitalization, Innovation, Africa JEL classification: G18, G24, O33
    Date: 2022–07–08
  24. By: Tosun, Mehmet S. (University of Nevada, Reno); Watson, Ethan D. (North Carolina State University); Yildiz, Serhat (University of Nevada, Reno)
    Abstract: This paper investigates the effect of firm-level investment on the levels of income inequality and poverty. Using a sample of firms from 87 countries for the period from 1979 to 2018, we document that firm-level investment is negatively associated with various measures of income inequality. This negative association is robust to alternative firm-level capital investment proxies, empirical model specifications, and a variety of country-level controls. Further evidence shows that firm-level investment is also negatively related to several measures of poverty. Overall, our results indicate that firm-level capital expenditures provide benefit to the poor and, thus, decreases income inequality. Our findings indicate that firm-level capital investment can be a valuable tool for countries that are aiming to achieve the United Nations' Sustainable Development Goals of reducing inequality and poverty. Our results may also be beneficial to policy makers as they consider a variety of regulatory and taxation measures that may constrain or help firm's ability to invest.
    Keywords: income inequality, corporate capital expenditure, poverty, Sustainable Development Goals (SDGs)
    JEL: D31 E22 I32 O15 O16
    Date: 2022–10
  25. By: Ansgar Rannenberg (: Economics and Research Department, National Bank of Belgium); Thomas Theobald
    Abstract: We investigate the contribution of the increase in German (DE) income inequality to the German export surplus increase and the decline of the natural rate of interest in the Euro Area in an open economy model with rich and non-rich households. Rich households have Capitalist Spirit type Preferences (CSP) over their wealth and thus save out of an increase in their permanent income. Simulating the increase in DE income inequality over the 1992-2016 period generates a decline of the EA natural rate of interest rate of about 1 p.p. and an increase of the DE net-export-to-GDP ratio of about 3 p.p.
    Date: 2022–10
  26. By: Andrea Calef (School of Economics, University of East Anglia); Ifigenia Georgiou (School of Business, University of Nicosia); Alfonsina Iona (School of Economics and Finance, Queen Mary University of London)
    Abstract: Despite the extensive empirical evidence of a positive impact of economic freedom on economic growth, the influence of economic freedom and its components on a firm’s level of cash, leverage and investment remains an unexplored issue in microeconomics and corporate finance research. In this study, we contribute towards filling this gap by examining whether Credit Market Freedom - an important component of the Economic Freedom Index – influences corporate decisions. In particular, we study whether and to what extent Credit Market Freedom affects a firm’s target level of investment, cash holdings, and leverage. We observe the behavior of a large and heterogeneous sample of North American non-financial firms over the period 2000-2019. Our empirical results suggest that higher Credit Market Freedom is associated with a healthier corporate capital structure, higher financial flexibility, and a friendlier investment environment.
    Keywords: Economic Freedom, Corporate Decisions, Capital Structure
    JEL: G10 G18 G30 G31
    Date: 2022–11
  27. By: Kuantan, Dhaha Praviandi; Siregar, Hermanto; Ratnawati, Anny; Juhro, Solikin M.
    Abstract: This study was conducted to comprehensively identify factors that potentially influence corporate investment behavior, including micro, macro, and sectoral variables. Furthermore, investment behavior was studied across nations based on their participation in the global value chain (GVC), which was evaluated based on commodities, limited manufacturing, advanced manufacturing, and innovative activities. The study uses the dynamic panel data analysis and Generalized Method of Moment (GMM) estimation for a sample of 800 corporations, with data spanning over 2000−2019. The study result shows that in all types of countries, the coefficient lag indicator of capital expenditure statistically has a significant effect on capital expenditure. Sales growth, exchange rate, and GDP have a significant positive effect on corporate investment growth, while DER has a negative effect. In commodity countries, corporate investment is influenced by sales growth, exchange rate, and FCI. The variables that influence corporate investment in manufacturing countries are the FCI, exchange rate, sales growth, GDP, and DER. In innovative countries, variables that significantly affect capital expenditure are DER, GDP, and TobinQ. In each type of country, the interaction terms between exchange rate and commodity price are positive and statistically significant.
    Keywords: Global Value Chain, Corporate Investment, Capital Expenditure
    JEL: F1 F2 F3 G0 G3
    Date: 2021–12–31
  28. By: Paolo Di Martino; Fabio C. Bagliano
    Abstract: Based on a new series and applying econometric techniques, this paper investigates the discount rate policy implemented by the main Italian bank of issue of the time, the Banca d’Italia. We focus on two interrelated aspects of the problem. Firstly, anchoring our analysis to the Bank’s annual reports, we enquiry into the general determinants of its discount rate variations. Secondly, we study the reaction of the Italian rate to exogenous changes in leading international official rates. We show that discount rate variations responded to short-term fluctuations of official rates in the UK and France but, simultaneously, to deviations from long-term equilibrium relations involving two pairs of variables. On the one hand, a relationship between the Italian discount rate and the French open market rate; on the other hand, a link between the Bank’s reserve ratio and its exposure to the national credit market. We also show that reactions to variations in foreign official rates were of a very limited magnitude. This “sterilisation†policy came with little repercussions in terms of exchange rate fluctuations or loss of international reserves, somehow in contrast with the results of the recent literature.
    Keywords: Bank of Italy, discount rate policy, international gold standard, sterilization
    Date: 2022

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