nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2023‒01‒16
thirty-two papers chosen by
Georg Man

  1. The global financial cycle and macroeconomic tail risks By Beutel, Johannes; Emter, Lorenz; Metiu, Norbert; Prieto, Esteban; Schüler, Yves
  2. Rates Normalization Amid Elevated Global Financial Vulnerabilities By Fabio M Natalucci
  3. Macroeconomic uncertainty and bank lending By Vegard H. Larsen; Ragnar E. Juelsrud
  4. Bank credit risk and macro-prudential policies: role of counter-cyclical capital buffer By Benbouzid, Nadia; Kumar, Abhishek; Mallick, Sushanta K.; Sousa, Ricardo M.; Stojanovic, Aleksandar
  5. Macro-financial stability frameworks: experience and challenges By Claudio Borio; Ilhyock Shim; Hyun Song Shin
  6. Firm Entry and Exit during Recessions By Ayres, JoaÞo; Raveendranathan, Gajendran
  7. Financial integration and international risk spillovers By Dongwon Lee
  8. International Liquidity Shock and Bank Resilience: Evidence from Matched Bank-Firm Data By Youngju Kim; Hyunjoon Lim; Youngjin Yun
  9. Commodity Exports, Financial Frictions and International Spillovers By Romain Houssa; Jolan Mohimont; Christopher Otrok
  10. Foreign Currency Working Capital Constraints for Imported Inputs and Compositional Effects in Intermediate Goods By Sámano Daniel
  11. Financialization, Growth, and the Resource Curse: Evidence from the MENA Region Erdal By Erdal Özmen; Fatma Tasdemir
  12. Developing Countries’ Policy Responses to Large Private Capital Inflows: Control or Liberalize? By Shereen Attia; Ahmed Ragab
  13. Public savings in Africa: Do sovereign wealth funds serve development? By Tony Addison; Amir Lebdioui
  14. Determinants of domestic savings in Tanzania: Empirical evidence By Maureen Were; Cornel Joseph
  15. Late Banking Transitions : Comparing Uzbekistan to Earlier Reformers By Babasyan, Davit; Gu, Yunfan; Melecky, Martin
  16. Is a State Bank a Useful Economic Development Tool in the United States? By Robert S. Chirinko
  17. On the Determinants and Outcomes of IMF Loans: A Political Economy Approach By Jala Youssef; Chahir Zaki
  18. The Nexus between Construction Investment and Economic Development: Evidence from MENA Countries By Hasan Murat Ertugrul; Burak Pirgaip
  19. Financial Constraints and Corporate Investment in China By Kun Mo; Michel Soudan
  20. State Ownership and Corporate Leverage Around the World By Ralph de Haas; Sergei Guriev; Alexander Stepanov
  21. The Threshold Impact of Remittances on Financial Development: New Evidence from Egypt By Mesbah Fathy Sharaf; Abdelhalem Mahmoud Shahen
  22. Interest Rate Uncertainty and Macroeconomics in Turkey By Pelin Öge Güney
  23. A Simple Theory-Based Estimate of the Real Natural Rate of Interest in Open Economies By Alex Ilek; Guy Segal
  24. Gazing at r*: A Hysteresis Perspective By Paul Beaudry; Katsiaryna Kartashova; Césaire A Meh
  25. The Economics of Low Interest Rates By Atif Mian
  26. Sovereign Default and Liquidity: The Case for a World Safe Asset By François Le Grand; Xavier Ragot
  27. Inequality-Constrained Monetary Policy in a Financialized Economy By Fierro, Luca Eduardo; Giri, Federico; Russo, Alberto
  28. Essays on Fiscal Sustainability in Algeria By Abderrahim Chibi; Sidi Mohamed Chekouri; Mohamed Benbouziane; Hadjer Boulila
  29. Unfunded mandates and the economic impact of decentralisation. When finance does not follow function By Rodríguez-Pose, Andrés; Vidal-Bover, Miquel
  30. Evidence on aid (in)effectiveness in highly fragile states: A synthesis of three systematic reviews of aid to Afghanistan, Mali, and South Sudan, 2008-21 By Christoph Zürcher
  31. Embedded finance: assessing the benefits, use case, challenges and interest over time By Ozili, Peterson K
  32. The scalpel and the ledger: Finance, medicine and the making of a professional life in Ireland, India and Britain, 1888-1921 By Cassidy, Daniel; Fitzpatrick, Kieran

  1. By: Beutel, Johannes; Emter, Lorenz; Metiu, Norbert; Prieto, Esteban; Schüler, Yves
    Abstract: We study the link between the global financial cycle and macroeconomic tail risks using quantile vector autoregressions. Contractionary shocks to financial conditions and monetary policy in the United States cause elevated downside risks to growth around the world. By tightening financial conditions globally, these shocks affect the left tail of the conditional output growth distribution more strongly than the center of the distribution. This effect is particularly pronounced for countries with less flexible exchange rate arrangements, higher foreign currency exposures, and higher levels of private sector leverage, suggesting that exchange rate policies and macroprudential policies can mitigate downside risks to growth.
    Keywords: Financial shocks,Monetary policy,Global financial cycle,Growth-at-Risk,International spillovers,Quantile VAR
    JEL: C32 E23 E32 E44 F44
    Date: 2022
  2. By: Fabio M Natalucci
    Keywords: vulnerabilities; growth-at-risk; financial stability; financial conditions; asset prices; capital flows-at-risk; macroprudential tools
    Date: 2022–06
  3. By: Vegard H. Larsen; Ragnar E. Juelsrud
    Abstract: We investigate the impact of macro-related uncertainty on bank lending in Norway. We show that an increase in general macroeconomic uncertainty reduces bank lending. Importantly, however, we show that this effect is largely driven by monetary policy uncertainty, suggesting that uncertainty about the monetary policy stance is key for understanding why macro-related uncertainty impacts bank lending.
    Keywords: Macroeconomic uncertainty, Textual analysis, Bank lending
    Date: 2022–11
  4. By: Benbouzid, Nadia; Kumar, Abhishek; Mallick, Sushanta K.; Sousa, Ricardo M.; Stojanovic, Aleksandar
    Abstract: This paper investigates the impact of macro-prudential policy (proxied by the counter-cyclical capital buffer (CCyB)) on bank credit risk during uncertain times, as banking sector stability is crucial in promoting financial intermediation. Using a unique daily data set consisting of 4939 credit default swaps (CDS) of 70 banks from 25 countries over the period 2010–2019, we find that CCyB tightening decreases bank-level CDS spreads, while CCyB loosening increases CDS spreads. This heterogeneous effect of CCyB arises due to its asymmetric effect on the capital ratio (i.e., the equity-to-total assets ratio) of banks. Tightening CCyB significantly increases capital, whereas loosening CCyB does not impact capital. Thus, the risks that emanate from the banking sector during periods of heightened uncertainty and financial distress can be significantly dampened when CCyB regulation is enabled. Consequently, macro-prudential policies for banks to hold higher levels of capital during good times are justified to contain financial market risks during downturns.
    Keywords: Bank CDS; Macro-prudential policy; Bank-level characteristics; Macroeconomic environment; Uncertainty
    JEL: G15
    Date: 2022–12–01
  5. By: Claudio Borio; Ilhyock Shim; Hyun Song Shin
    Abstract: Since the 2008–9 Great Financial Crisis, major advanced economies (AEs) have used monetary and macroprudential policies to achieve macroeconomic and financial stability. Emerging market economies (EMEs) have, in addition, combined interest rate tools with FX intervention, macroprudential policy and, sometimes, capital flow management measures (CFMs) to address the challenges from capital flow and exchange rate volatility. This paper provides an overview of the use of monetary, macroprudential and exchange rate policies, sometimes alongside CFMs, both in AEs and EMEs. It also assesses the extent to which the use of these policies constitutes a holistic macro-financial stability framework (MFSF). We reach three conclusions. First, combining tools has succeeded in improving policy trade-offs, notably by mitigating the risks to domestic stability arising from external influences. Second, a holistic MFSF is still a work in progress. Finally, more efforts need to be made to better understand the channels of international spillovers and spillbacks.
    Keywords: capital flow, exchange rate policy, macro-financial stability framework, macroprudential measure, monetary policy
    JEL: E44 E52 F38 G28
    Date: 2022–12
  6. By: Ayres, JoaÞo; Raveendranathan, Gajendran
    Abstract: We analyze shocks to productivity, collateral constraint (credit shock), firm operation, and labor disutility in a model of firm dynamics with entry and exit. Shocks to firm operation and labor disutility capture COVID-19 lockdowns. Compared to the productivity shock, the credit and the lockdown shocks generate larger changes in firm entry and exit. The credit shock accounts for lower entry, higher exit, and concentration of exit among young firms during the Great Recession. The lockdown shocks predict a large fall in entry and rise in exit followed by a sharp rebound. In both recessions, changes in entry and exit account for 10-20 percent of the fall in output and hours. Finally, we discuss how the modeling of potential entrants matters for the quantitative results.
    Keywords: firm dynamics;general equilibrium model;COVID-19;recession;lockdown;COVID-19;COVID-19;COVID-19;COVID-19;Creditshock
    JEL: E24 E32 D22 D21
    Date: 2021–06
  7. By: Dongwon Lee (Department of Economics, University of California Riverside)
    Date: 2023–01
  8. By: Youngju Kim (Bank of Korea); Hyunjoon Lim (Bank of Korea); Youngjin Yun (Inha University)
    Abstract: Banks are the first line of defense against the propagation of adverse external shocks. This study examines the role of banks in the transmission of international liquidity shock using matched bank-firm data for Korea over the 2006-2015 period. We measure individual banks’ sensitivity to international shocks by analyzing their foreign exchange (FX) borrowing rates. The bank from which a firm borrows matters in times of FX liquidity shocks. We find that sensitive banks reduce FX credit supply to firms and that FX loan-reliant, highly productive firms subsequently reduce their investment. Foreign banks are affected less by the shocks, but they reduce credit supply more than domestic banks. Our findings emphasize the importance of bank resilience vis-Ã -vis external and domestic stability.
    Keywords: international liquidity shock, FX loan, credit register, real effect
    JEL: E22 F34 G15
    Date: 2022–12
  9. By: Romain Houssa; Jolan Mohimont; Christopher Otrok
    Abstract: This paper offers a solution to the international co-movement puzzle found in open-economy macroeconomic models. We develop a small open-economy (SOE) dynamic stochastic general equilibrium (DSGE) model describing three endogenous channels that capture spillovers from the world to a commodity exporter: a world commodity price channel, a domestic commodity supply channel and a financial channel. We estimate our model with Bayesian methods on two commodity-exporting SOEs, namely Canada and South Africa. In addition to explaining international business cycle synchronization, the new model attributes an important fraction of business cycle fluctuations to foreign shocks in the SOEs.
    Keywords: international spillovers; commodities; financial frictions; small open economy; DSGE; Bayesian; monetary policy
    JEL: E3 E43 E52 C51 C33
    Date: 2022–12–17
  10. By: Sámano Daniel
    Abstract: I develop an asymmetric two-country incomplete markets model in which economies trade final consumption goods and inputs. The purchases of imported inputs from the firms of one of the economies (the emerging) to the firms of the other economy (the advanced) are subject to a foreign currency working capital constraint. Domestic firms are assumed to finance their working capital by borrowing from the domestic household in local currency. Through numerical simulations, I show that in this environment domestic productivity shocks have compositional effects through the cost of the working capital. In particular, after a domestic positive productivity shock terms of trade rise and the working capital cost exhibits a sudden increase followed by a prolonged temporary decrease. This leads to inputs recomposition in the domestic economy in response to working capital cost adjustments.
    Keywords: Working capital;Foreign currency;Imported inputs
    JEL: C68 F15 F41
    Date: 2022–12
  11. By: Erdal Özmen (Middle East Technical University); Fatma Tasdemir (Sinop University)
    Abstract: This study investigates whether the impacts of natural resource endowments (NREs) on growth are invariant on an endogenously estimated threshold level for international financial integration (IFI) in 13 Middle East and North Africa (MENA) economies over the 1970-2019 period. Our dynamic panel threshold estimation results suggest that NREs encourage growth up to a certain threshold level of IFI, beyond which the impact of NREs decreases for the sample of Gulf Cooperation Council (GCC) countries. This impact even becomes negative for the non-GCC economies. We also decompose IFI as resident-driven asset flows (capital outflows) and non-resident-driven liability flows (capital inflows) to investigate whether the direction of financial integration matters. We find that asset flows matter for the sample of GCC countries. There is a positive association between NREs and growth; however, this relationship diminishes with more capital outflows. Liability flows provide a data-driven estimated threshold for the non-GCC countries. NREs have a growth-enhancing effect in economies with fewer capital inflows but tend to dampen growth in economies with more capital inflows.
    Date: 2022–08–20
  12. By: Shereen Attia (Senior Researcher and Consultant); Ahmed Ragab (Cairo University)
    Abstract: Although the influx of large private capital inflows provides developing countries with substantial macroeconomic benefits, the integration process carries some difficult macroeconomic challenges. This paper examines the implications of large private capital inflows episodes on the macroeconomic fundamentals of highly integrated developing countries under the two policy regimes. We begin by classifying developing countries according to their degree of capital account openness. Then, we exploit large capital inflow episodes to measure their short-run effects on key domestic macroeconomic fundamentals for a sub-sample of highly integrated countries that adopted the two policy regimes using a VAR framework. The results indicate that countries experiencing more volatile macroeconomic fluctuations, including a sharp reversal of inflows, tend to have higher current account deficits and experience stronger increases in both aggregate demand and the real value of the currency during the period of large capital inflows. In this respect, countries with a liberalized capital account usually witness an expansion of economic activity. However, such an effect is not likely to last indefinitely, and the boom phase may tend to reverse itself as the economy reaches its potential. Meanwhile, countries that adopt tightening capital controls on capital inflows experience more moderate GDP growth following the surge in inflows. Nonetheless, capital controls don’t completely insulate countries against external disturbances, as the real exchange rate is more vulnerable to shocks.
    Date: 2022–09–20
  13. By: Tony Addison; Amir Lebdioui
    Abstract: Do sovereign wealth funds (SWFs) contribute to Africa's development? This paper assesses the objectives of SWFs (fiscal stabilization, productive investment, intergenerational saving) and discusses alternatives. We argue that fiscal stabilization funds are often necessary, but entail considerable opportunity costs.
    Keywords: Saving, Sovereign wealth funds, Fiscal policy, Development finance, Africa
    Date: 2022
  14. By: Maureen Were; Cornel Joseph
    Abstract: This paper examines trends and determinants of gross domestic savings in Tanzania using data for the period 1990-2020. The autoregressive distributed lag approach is employed to empirically analyse the short-run and long-run relationships. There has been a fairly stable increase in the domestic savings as a ratio of gross domestic product, though with considerable fluctuations over time.
    Keywords: Domestic savings, Saving, Tanzania, Saving and investment
    Date: 2022
  15. By: Babasyan, Davit; Gu, Yunfan; Melecky, Martin
    Abstract: Uzbekistan is one of the late transition economies. This paper compares the earlyexperience and challenges that Uzbekistan confronts in transitioning its banking system to market principlesagainst the earlier experience with banking transitions from Poland, Russia, and Vietnam, and other relevant evidencefrom the literature. To that effect, the paper uses new data on Uzbekistan’s banking sector, the data on past transitioneconomies, and qualitative and quantitative evidence from the literature. Uzbekistan’s latest experience with bankingtransition generates important lessons for countries that have yet to transition. Namely, how much can a newtransitioning country reasonably expect to accomplish within the medium term Which banking reforms are the most essentialand how should they best be sequenced How can expectations about efficient capital reallocation be managed, access tofinance made more equitable, and transition risks of financial instability be mitigated What are thecomplementary reforms in the real sector, especially of state-owned enterprises and the competition framework, thatneed to happen in tandem for the new banking market to function properly
    Date: 2022–03–23
  16. By: Robert S. Chirinko
    Abstract: The possibility of creating a state bank has received much recent attention in the United States. In 2021, six states introduced legislation to create a state bank; in 2019, similar legislation was enacted in California for municipal banks. This paper develops a framework to evaluate state banking, reviews prior experiences with state banking and related alternatives to traditional private banking and identifies five questions determining the advisability of creating a state bank. The overall goal is to shed some light on whether a state bank can be a useful tool to further state economic development and the welfare of state residents.
    Keywords: state bank, public bank, credit allocation, economic development
    JEL: G21 G28 H70
    Date: 2022
  17. By: Jala Youssef (University of Paris 1 Panthéon-Sorbonne); Chahir Zaki (Cairo University and Lead Economist, Economic Research Forum (ERF))
    Abstract: The main objective in this paper is to empirically analyze the economic and political determinants of IMF lending in low- and middle-income countries. Compared to the existing literature, our main contribution is twofold. First, using the IMF Monitoring of Fund Agreements (MONA) database, we merge domestic political and institutional factors with international political economy factors to analyze IMF lending determinants. Second, we use the predicted values of determinants of IMF lending as instruments to explain the consequences of this lending on economic outcomes. Our main findings show that economic and political proximity to the IMF major shareholders matter for the likelihood of obtaining an IMF non-concessional loan. Furthermore, most of the loans seem to exert either an insignificant or a negative effect on the trend component of GDP, confirming that such loans can stabilize the economies in the short term without improving the long run steady growth. Yet, democratic regimes compared to autocratic ones improve the effects of these loans on economic growth and other outcomes (such as the current account and inflation). By contrast, key physical and human capital variables do not seem to be significantly affected by such loans.
    Date: 2021–10–20
  18. By: Hasan Murat Ertugrul (Economic Research Forum); Burak Pirgaip (Hacettepe University)
    Abstract: We aim at scrutinizing the relationship between construction investments and economic development for 10 greatest economies in the Middle East and North Africa (MENA) region, namely, Saudi Arabia, Turkey, Iran, United Arab Emirates, Egypt, Iraq, Qatar, Algeria, Kuwait, and Morocco, between 1970 and 2018. By employing second generation panel data modelling tools, we find that there is an inverted U-shaped pattern implying that the share of construction investments started to decline at some point in time as the economic growth reached a certain threshold. We argue that MENA countries should reconsider their construction-induced growth policies and incorporate alternative options supported by innovative and environmental-friendly technologies to attach much more importance to the role of construction in future economic development plans.
    Date: 2021–08–20
  19. By: Kun Mo; Michel Soudan
    Abstract: Distortions in capital markets can create financial constraints that deter firms from pursuing optimal investment plans. This paper explores how much these constraints affect investment by ownership type in China, using a panel data model estimated with observations on listed firms for the period 2005–2017. We find that privately owned enterprises (POEs) in China face greater financial constraints than state-owned enterprises (SOEs), as POE investment plans depend more on the availability of internally generated cash. Correspondingly, we find evidence that Chinese lenders appear less concerned about the credit risk of SOEs, and that an expansion in credit correlates with a disproportionally larger increase in investment for SOEs.
    Keywords: Financial markets; Firm dynamics
    JEL: E22 G1 G3
    Date: 2022–12
  20. By: Ralph de Haas (CEPR - Center for Economic Policy Research - CEPR); Sergei Guriev (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research - CEPR); Alexander Stepanov
    Abstract: Does state ownership hinder or help rms access credit? We use data on almost 4 million rms in 89 countries to study the relationship between state ownership and corporate leverage. Controlling for country-sector-year xed eects and conventional rm-level determinants of leverage, we show that state ownership is robustly and negatively related to corporate leverage. This relationship holds across most of the rm-size distributionwith the important exception of the largest companiesand is stronger in countries with weak political and legal institutions. A panel data analysis of privatized rms and a comparison of privatized with matched control rms yield similar qualitative and quantitative eects of state ownership on leverage.
    Keywords: State ownership privatization corporate debt state banks, State ownership, privatization, corporate debt, state banks
    Date: 2022–05–10
  21. By: Mesbah Fathy Sharaf (Department of Economics, Faculty of Arts, University of Alberta, Canada); Abdelhalem Mahmoud Shahen
    Abstract: This study examines the nonlinear impact of remittances on financial development (FD) in Egypt over the period 1980-2019 while controlling for other key determinants of FD. The paper utilizes a recently developed comprehensive index of FD and uses an Autoregressive Distributed lag (ARDL) bounds testing approach to cointegration and a vector error-correction model to estimate the short- and long-run parameters of equilibrium dynamics. We find support for the complementarity hypothesis in the short run in which remittances have a statistically significant positive impact on FD. However, the results show that remittances have an inverted U-shaped impact on FD in the long run. In particular, remittances complement (substitute) FD below (above) a remittance-toGDP ratio of 7.28 percent. This implies that in the long run remittances to Egypt hinder FD when received in large quantities. We also found that financial openness has a statistically significant positive impact on FD in the long run, while inflation impedes FD. Policies aimed at increasing the flows of remittances to Egypt should mitigate its potential adverse impact on financial development
    Date: 2022–04–20
  22. By: Pelin Öge Güney (Hacettepe University)
    Abstract: Monetary policy plays a central role in stabilizing macroeconomic fluctuations. In addition to monetary policy, uncertainty in monetary policy associated with uncertainty in interest rates is an important determinant of economic decisions. In this paper, we analyze the effect of interest rate uncertainties for different maturities on industrial production, inflation, unemployment, and exchange rate for Turkey using the VAR model. Since the dominant position of the US economy in global financial markets implies uncertainty about how the monetary policy of the US (MPU) may impact foreign economies, we also discuss the impact of MPU uncertainty on the variables of interest. Although the effect varies across the different maturities of the yield, our findings suggest that interest rate uncertainty reduces the growth of industrial production, increases unemployment, and depreciates the exchange rate. Additionally, inflation increases in response to interest rate uncertainty shocks. Finally, while a shock in MPU uncertainty tends to significantly increase unemployment, it decreases the growth of production.
    Date: 2022–08–20
  23. By: Alex Ilek (Bank of Israel); Guy Segal (Bank of Israel)
    Abstract: We propose a simple methodology to estimate the short-term natural rate of interest (NRI) in small open economies. Following Clarida et al. (2002), the NRI depends on the expected growth of (1) domestic potential output and (2) output abroad. We use observable expectations within an estimated central bank's policy rules in Israel, Sweden, and Canada to derive NRI estimates. Our estimates possess strong common dynamics: they fall during crises and rise during booms. Our estimates also imply that monetary policy has been accommodative since the global financial crisis.
    Date: 2022–01
  24. By: Paul Beaudry; Katsiaryna Kartashova; Césaire A Meh
    Abstract: Despite current high inflation and a monetary tightening cycle, the market's evaluation of long-term real interest rates remains very low in most advanced countries. This is consistent with the view that neither monetary policy nor inflation shocks — which are both nominal phenomena — are likely to effect long-run real interest rates. This paper presents both theory and evidence that put into question this simple dichotomy between real and nominal phenomena due to asset accumulation behavior that favours the emergence of more than one steady state value of real interest rates (r*) and thereby creates hysteresis. Our main building block is household saving decisions that incorporate both inter-temporal substitution and retirement forces. When households trade off these two saving motives, we show how this can give rise to C-shaped asset demands and the possibility of more than one steady state equilibrium real interest rate. Since many macroeconomic models predict that long-run asset demands are increasing in interest rates, as opposed to C-shaped, we provide evidence from household balance sheets that runs counter to the former and favours the latter. A central contribution of the paper is to show that when r* is not unique due to C-shaped asset demands, monetary policy can greatly influence long-run real interest rate outcomes. In particular, we show that an aggressive inflation targeting regime can make a high-real-rate outcome fragile to small negative inflation shocks and favour the convergence to a low (possibly negative) real-rate environment. However, we also show that either a large positive inflation shock or a large increase in public debt can bring back an equilibrium with high real rates, which could surprise the market in the current environment.
    Keywords: real interest rates; wealth-to-income ratio; saving rates; inter-temporal substitution; retirement motives; C-shaped long-run asset demand; inflation; general equilibrium
    Date: 2022–06
  25. By: Atif Mian
    Keywords: low interest rates; indebted demand; inequality; r-star; savings glut; wealth tax
    Date: 2022–06
  26. By: François Le Grand (EM - emlyon business school, ETH Zürich - Eidgenössische Technische Hochschule - Swiss Federal Institute of Technology [Zürich]); Xavier Ragot (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CNRS - Centre National de la Recherche Scientifique, OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)
    Abstract: This paper presents a positive and normative study of a world financial market when sovereign countries can default on their debt. We construct a tractable model that enables us to study sovereign default in general equilibrium. The amount of safe assets is thus endogenous and determined by international risk-sharing. We characterize the equilibrium structure and we show that the market equilibrium can generate multiple equilibria. In addition, the market equilibrium is not constrained-efficient because countries do not fully internalize the value of their debt being used as liquidity. We prove that a world fund issuing a safe asset increases aggregate welfare. The fund's relationship with the IMF's Special Drawing Rights is discussed.
    Keywords: Sovereign Default,Safe Asset,International Liquidity
    Date: 2021–07
  27. By: Fierro, Luca Eduardo; Giri, Federico; Russo, Alberto
    Abstract: We study how income inequality affects monetary policy through the inequality-household debt channel. We design a minimal macro Agent-Based model that replicates several stylized facts, including two novel ones: falling aggregate saving rate and decreasing bankruptcies during the household's debt boom phase. When inequality meets financial liberalization, a leaning against-the-wind strategy can preserve financial stability at the cost of high unemployment, whereas an accommodative strategy can dampen the fall of aggregate demand at the cost of larger leverage. We conclude that inequality may constrain the central bank, even when it is not explicitly targeted.
    Keywords: Inequality; Financial Fragility; Monetary Policy; Agent-Based Model
    JEL: E21 E25 E31 E52 G01
    Date: 2022–12–01
  28. By: Abderrahim Chibi (Maghnia University Center); Sidi Mohamed Chekouri (Maghnia University Center); Mohamed Benbouziane (Maghnia University Center); Hadjer Boulila (Maghnia University Center)
    Abstract: The topic of fiscal policy sustainability has received much attention during the last two decades, as budget deficits in developed and emerging countries have deteriorated. It is no coincidence that the sustainability of public debt became a specific research agenda in macroeconomics and public economics at around the same time. However, the literature lacks a clear consensus about the definition of public finance. In fact, many research papers introduce their own criteria for sustainability, with many similar (but not identical) elements. In this context, the concept of a debt ceiling, limit, or threshold complements debt sustainability analysis (DSA) exercises and gives a better sense of fiscal sustainability. It could be used as a starting point for determining the level at which it would be desirable to stabilize debt. Regardless of how the debt limit is derived, the debt anchor should not be set at this limit; instead, it should be utilized as a mechanism for self-insurance that provides a buffer against adverse macroeconomic and fiscal shocks (Eyraud et al., 2018). Those buffers should reflect the distribution of risks around the predicted debt trajectory (Fournier and Fall, 2015; Debrun et al., 2019). Accordingly, this study focuses on two main aspects of fiscal sustainability in Algeria. In the first essay, we use Ostry et al.’s (2010) “fiscal space and public debt limits” approach to analyze fiscal sustainability. We use Fully Modified Least Squares and threshold models to estimate the fiscal reaction function for Algeria between 1990-2020. Despite the efforts made to rearrange spending and income priorities, the descriptive and econometric results provide clear evidence of the fiscal fatigue state (loss of control of the debt growth) and the decrease in the fiscal space available in Algeria. The results also show the existence of a threshold level in the debt ratio (debt ceiling or fiscal cliff), approximately equal to 61.1 percent, above which Algerian fiscal policymakers are concerned with corrective actions to avoid insolvency. The second essay aims to analyze the relationship between public debt and economic growth and investigate whether a unique debt turning point (threshold) exists for Algeria. For this purpose, we use an innovative methodology: a regression kink with an unknown threshold (Hansen, 2017). The empirical results show a debt-to-GDP threshold of 31.9 percent for 1970- 2020. Our estimated threshold suggests that, in Algeria, debt-to-GDP ratios below 32 percent would boost economic growth by 0.13 percent, while any debt ratios above that threshold would harm economic growth by 0.06 percent.
    Date: 2022–02–20
  29. By: Rodríguez-Pose, Andrés; Vidal-Bover, Miquel
    Abstract: Decentralisation has frequently been sold as a means to increase well-being and development. Yet, questions remain as to whether decentralisation improves economic performance. This is possibly because decentralisation processes have often led to “unfunded mandates”, that is a mismatch between the powers transferred to subnational tiers of government and the resources allocated to them. In this paper we analyse how unfunded mandates shape regional economic growth across 518 regions in 30 OECD countries over the period 1997-2018. There is a negative, statistically significant, and robust impact of unfunded mandates on economic growth. This effect is higher in more politically and less fiscally decentralised regions and in regions with a higher level of wealth. Unfunded mandates thus represent a serious drag on the potential positive economic effect of political decentralisation. Hence, for those benefits to materialise, better not more decentralisation —ensuring that finance follows function— should be pursued.
    Keywords: political decentralisation; fiscal decentralisation; unfunded mandates; economic growth; regions; OECD; Sage deal
    JEL: H70 H77 O47
    Date: 2022–11–27
  30. By: Christoph Zürcher
    Abstract: This working paper provides a summary of three systematic reviews on the effectiveness of aid in Afghanistan, Mali, and South Sudan between 2008 and 2021. These three countries, like all other highly fragile countries, suffer from bad governance, lack of capacity, and violence. The systematic reviews provide robust evidence that aid interventions in precisely those fields are not effective. Aid cannot improve governance, build capacity for central governments, or stabilize the situation. The international aid community can no longer ignore this evidence.
    Keywords: Foreign aid, Aid effectiveness, Systematic review, Afghanistan, Mali, South Sudan
    Date: 2022
  31. By: Ozili, Peterson K
    Abstract: There is little academic interest in embedded finance despite the fact that embedded finance is part of the on-going digital finance revolution. This paper presents an overview of embedded finance. It identifies the applications, use case examples, benefits and challenges of embedded finance. The paper also analyzes global interest in embedded finance and compares it with interest in related finance concepts such as open finance, open banking, decentralized finance, financial innovation, FinTech and digital finance. Granger causality test and two-stage least square regression were used to assess interest over time in embedded finance. The empirical result show that interest in embedded finance increased significantly during the COVID-19 pandemic. The United States, the United Kingdom and India witnessed the highest interest in embedded finance compared to other countries. There is bi-directional Granger causality between interest in information about embedded finance and interest in information about financial innovation. There is uni-directional Granger causality between interest in information about embedded finance and interest in information about digital finance and open finance. The findings also reveal that interest in decentralized finance and open finance are significant determinants of interest in embedded finance. On the other hand, interest in embedded finance is a significant determinant of interest in digital finance, decentralized finance, FinTech and open banking. Also, interest in embedded finance is significantly correlated with interest in digital finance, decentralized finance, open banking and FinTech.
    Keywords: Embedded finance, open finance, open banking, decentralized finance, financial innovation, FinTech, digital finance, BaaS, API.
    JEL: G21 O31
    Date: 2022
  32. By: Cassidy, Daniel; Fitzpatrick, Kieran
    Abstract: By the time of his death in September 1921, Peter Johnstone Freyer was an extremely wealthy man. After an education at Queen's College Galway, his medical career had been defined by colonial service in India, and the establishment of a successful surgery and consultancy on London's Harley Street. In public, these hallmarks of his career led to him being described by his contemporaries as amongst medicine's most prominent figures, and as a 'great surgeon' by newspapers the length of and breadth of the United Kingdom on the occasion of his death. However, his private papers show that his medical practice was only responsible for a small part of his material success; two-thirds of his wealth was derived from his skill, exercised in private, as an investor in financial markets. By establishing his history as an investor, and comparing it to his public profile in medicine, this paper traces the social and cultural histories of professional identity in late-Victorian and Edwardian London. Over the course of its arc, it demonstrates how medicine's public significance in this period was part of a broader, middle-class, professional culture concerned with the accrual of 'virtual' wealth, the construction of advantageous social networks, and the tapping of capital in multiple forms. In sum, Freyer's career reflects the symbolic meaning of publicly wielding a scalpel, whilst privately managing a portfolio of financial ledgers.
    Keywords: Financial markets, investment, risk
    JEL: G41 N2 N3
    Date: 2022

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