nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2023‒02‒20
28 papers chosen by
Georg Man

  1. FDI and development redux: Is R&D a substitute for FDIs? By Dwumfour, Richard Adjei; Pan, Lei; Harris, Mark N.
  2. The Propensity to Remit: Macro and Micro Factors Driving Remittances to Central America and the Caribbean By Chiara Fratto; Hussein Bidawi; Paola Aliperti F. Domingues; Ms. Nicole Laframboise
  3. How Do Transaction Costs Influence Remittances By Mr. Kangni R Kpodar; Patrick A. Imam
  4. A Theory of Payments-Chain Crises By Saki Bigio
  5. Theory of supply chains: a working capital approach By Se-Jik Kim; Hyun Song Shin
  6. Scarring and Corporate Debt By Davide Furceri; Siddharth Kothari; Nour Tawk; Julia Estefania-Flores; Pablo Gonzalez-Dominguez
  7. Debt Maturity and Firm Productivity—The Role of Intangibles By Nakatani, Ryota
  8. Structural change, global R* and the missing-investment puzzle By Bailey, Andrew; Cesa-Bianchi, Ambrogio; Garofalo, Marco; Harrison, Richard; McLaren, Nick; Sajedi, Rana; Piton, Sophie
  9. The Trickling Up of Excess Savings By Adrien Auclert; Matthew Rognlie; Ludwig Straub
  10. Using machine learning to measure financial risk in China By Al-Haschimi, Alexander; Apostolou, Apostolos; Azqueta-Gavaldon, Andres; Ricci, Martino
  11. Recession Signals and Business Cycle Dynamics: Tying the Pieces Together By Michael T. Kiley
  12. A DSGE model for macroprudential policy in Morocco By Chafik, Omar; Mikou, Mohammed; Slaoui, Yassine; Motl, Tomas
  13. Macroprudential Regulation: A Risk Management Approach By Daniel Dimitrov; Sweder van Wijnbergen
  14. Bank Stress Testing, Human Capital Investment and Risk Management By Thomas Schneider; Philip Strahan; Jun Yang
  15. Stress relief? Funding structures and resilience to the Covid Shock By Forbes, Kristin; Friedrich, Christian; Reinhardt, Dennis
  16. The Sovereign-Bank Nexus in Emerging Markets in the Wake of the COVID-19 Pandemic By Mustafa Yenice; Yizhi Xu; Tara Iyer; Mr. Hamid R Tabarraei; Andrea Deghi; Mr. Salih Fendoglu
  17. Connected Lending of Last Resort By Kris James Mitchener; Eric Monnet
  18. Do Actions Speak Louder Than Words? Assessing the Effects of Inflation Targeting Track Records on Macroeconomic Performance By Mr. Zhongxia Zhang; Shiyi Wang
  19. Cycle financier, cycle réel et transmission de la politique monétaire au Maroc By Chafik, Omar; Achour, Aya
  20. Multiple Structural Breaks in Interactive Effects Panel Data and the Impact of Quantitative Easing on Bank Lending By Jan Ditzen; Yiannis Karavias; Joakim Westerlund
  21. Bitcoin Does Not Hedge Inflation By Mykola Pinchuk
  22. A Theory of Fear of Floating By Javier Bianchi; Louphou Coulibaly
  23. Real Exchange Rate and International Reserves in the Era of Financial Integration By Joshua Aizenman; Sy-Hoa Ho; Luu Duc Toan Huynh; Jamel Saadaoui; Gazi Salah Uddin
  24. The Development of Local Currency Bond Markets and Uncovered Interest Rate Parity By Park, Cyn-Young; Shin, Kwanho
  25. China in Tax Havens By Christopher Clayton; Antonio Coppola; Amanda Dos Santos; Matteo Maggiori; Jesse Schreger
  26. Why European Banks Adjust their Dividend Payouts? By Mariusz Jarmuzek; Marco Belloni; Maciej Grodzicki
  27. Pecuniary Externalities in Competitive Economies with Limited Pledgeability By V. Filipe Martins-Da-Rocha; Toan Phan; Yiannis Vailakis
  28. An appreciative theorizing approach to gazelle enterprises assisted by the Arica Business Center By Rodrigo Rodrigo Barra Novoa Barra Novoa

  1. By: Dwumfour, Richard Adjei; Pan, Lei; Harris, Mark N.
    Abstract: Using a sample of 130 countries over the period 2004-2019, we revisit the development impact of foreign direct investment (FDI), but this time examine the role of research and development (R&D) in this framework. We use bilateral investment treaties (BITs) as a novel instrument for FDI. We find that compared to FDI, expenditure on R&D has a more pronounced impact on development outcomes – through increasing growth and human development while reducing poverty and inequality. We also find that countries that spend more on R&D are less dependent on FDI for development. Thus, R&D and FDI are substitutes in the development process with the results showing varying FDI and R&D thresholds at which the substitution takes place. We however find the vanishing effect of FDI on development. It turns out that R&D complements FDI only when FDI reaches its threshold and begins to hurt development – at this stage there is sufficient R&D expenditure which possibly suggest sufficient adaptive capacity.
    Keywords: FDI; R&D; Economic growth; Poverty; Income inequality
    JEL: F43 O40
    Date: 2023–01–24
  2. By: Chiara Fratto; Hussein Bidawi; Paola Aliperti F. Domingues; Ms. Nicole Laframboise
    Abstract: In contrast to expectations, remittances to Central America and the Caribbean (CAC) surprised positively during 2020 and 2021. This study revisits the key macro indicators driving remittances, looks at the heterogeneous impacts of the global financial crisis (GFC) and COVID shocks, then uses micro data from the U.S. Current Population Census to examine individual features of immigrant households and how this might affect the “propensity to remit”. The paper finds that remittance flows are responsive to both sending and receiving country economic conditions and that labor market conditions are particularly important determinants of remittance flows, explaining the unexpected jump in remittance flows in 2020-2021 and providing stronger predictive power when combined with income variables. Analysis of the micro data reinforces these findings, reflecting the existence of a family resource sharing model at play.
    Keywords: Migrant remittances; covid-19 pandemic; global financial crisis; elasticities.; remittance flow; micro data; labor market condition; IMF working papers; remittances to Central America and the Caribbean; migrant remittance; Remittances; Migration; Income; Labor markets; Central America; Caribbean; Global
    Date: 2022–09–30
  3. By: Mr. Kangni R Kpodar; Patrick A. Imam
    Abstract: Using a new quarterly panel database on remittances (71 countries over the period 2011Q1- 2020Q4), this paper investigates the elasticity of remittances to transaction costs in a high frequency and dynamic setting. It adds to the literature by systematically exploring the heterogeneity in the cost-elasticity of remittances along several country characteristics. The findings suggest that cost reductions have a short-term positive impact on remittances, that dissipates beyond one quarter. According to our estimates, reducing transaction costs to the Sustainable Development Goal target of 3 percent could generate an additional US$32bn in remittances, higher that the direct cost savings from lower transaction costs, thus suggesting an absolute elasticity greater than one. Among remittance cost-mitigation factors, higher competition in the remittance market, a deeper financial sector, and adequate correspondent banking relationships are associated with a lower elasticity of remittance to transaction costs. Similarly, remittance cost-adaptation factors such as enhanced transparency in remittance costs, improved financial literary and higher ICT development coincide with remittances being less sensitive to transaction costs. Supplementing the panel analysis, the use of micro data from the USA-Mexico corridor confirm that migrants facing higher transaction costs tend to remit less, and that this effect is less pronounced for skilled migrants and those that have access to a bank account.
    Keywords: Remittances; Transaction Costs; Elasticity; Migration; elasticity of remittance; remittance market; remittances flow; remittance cost; cost-mitigation factor; Income; Exchange rates; Correspondent banking; Global
    Date: 2022–11–04
  4. By: Saki Bigio
    Abstract: This paper introduces an endogenous network of payments chains into a business cycle model. Agents order production in bilateral relations. Some payments are executed immediately. Other payments, chained payments, are delayed until other payments are executed. Because production starts only after orders are paid, chained payments induce production delays. In equilibrium, agents choose the amount of chained payments given interest rates and access to internal funds or credit lines. This choice determines the payments-chain network and aggregate total-factor productivity (TFP). The paper characterizes equilibrium dynamics and their innate inefficiencies. Agents internalize the direct costs of their payment delays, but do not internalize the costs induced onto others. This externality produces novel policy insights and rationalizes permanent reductions in TFP under excessive debt.
    JEL: E32 E42 G01
    Date: 2023–01
  5. By: Se-Jik Kim; Hyun Song Shin
    Abstract: This paper presents a "time-to-build" theory of supply chains which implies a key role for the financing of working capital as a determinant of supply chain length. We apply our theory to offshoring and trade, where firms strike a balance between the productivity gain due to offshoring against the greater financial cost due to longer supply chains. In equilibrium, the ratio of trade to GDP, inventories and productivity are procyclical and closely track financial conditions.
    Keywords: global value chains, offshoring, trade finance
    JEL: F23 F36 G15 G21 L23
    Date: 2023–01
  6. By: Davide Furceri; Siddharth Kothari; Nour Tawk; Julia Estefania-Flores; Pablo Gonzalez-Dominguez
    Abstract: This paper estimates the scarring effect of recessions on corporates’ investment and how it is amplified by the level of corporate debt. Our results suggest that the effect of firms’ debt in shaping the response of investment to recessions is statistically significant and economically sizeable, with high debt firms seeing a larger decline in investment than low debt firms. Back-of-the-envelope calculations suggest that firms’ debt accounts for at least 28 percent of the average medium-term decline of investment following a recession. This effect is especially larger for firms that are credit constrained—small and less profitable firms, as well as firms with high share of short-term debt—and that therefore may find it more difficult to rollover or raise new funds to invest in new projects. The results are robust to several checks, including to various sub-samples, alternative measures of recessions and explanatory variables, and a large set of controls.
    Keywords: Scarring; Corporate Debt; Recessions; Firms; Local Projection; scarring effect; debt dummy; debt firm; investment to recession; Economic recession; Capital spending; Global
    Date: 2022–10–28
  7. By: Nakatani, Ryota
    Abstract: Does the maturity of debt matter for productivity? Using data on Italian firms from 1997 to 2015, we study the relationship among debt maturity, productivity, and firm characteristics. We find that productivity is positively associated with short-term debt and negatively associated with long-term debt. This result supports the hypothesis that the less intense monitoring of firm performance and fewer liquidation fears stemming from the long maturity of debt causes a moral hazard, while short-term debt serves as a disciplinary device to improve firm performance in the short run. This effect is evident in small- and medium-sized enterprises and old firms. In contrast, large firms can utilize long-term financing to improve productivity through long-term investments. Firms improve productivity by purchasing intangible assets financed by short-term debt.
    Keywords: Debt maturity; Productivity; SMEs; Firm size; Firm age; Intangibles
    JEL: D22 D24 G32 O16 O34
    Date: 2023–01–28
  8. By: Bailey, Andrew (Bank of England); Cesa-Bianchi, Ambrogio (Bank of England); Garofalo, Marco (Bank of England); Harrison, Richard (Bank of England); McLaren, Nick (Bank of England); Sajedi, Rana (Bank of England); Piton, Sophie (Bank of England)
    Abstract: The world has undergone substantial structural change over recent decades, with profound implications for the long-run policy landscape. We focus on two key trends. First, the secular decline in risk-free interest rates, suggesting a fall in the long-run global equilibrium interest rate, Global R*. Using a structural model, we find that declining productivity growth and increasing longevity played the largest roles in explaining this fall. The second trend is the recorded weakness in investment, despite an increasing wedge between the return on capital and the risk-free rate. We use industry-level data for the United Kingdom to investigate the potential structural factors behind this ‘missing-investment puzzle’, and find a strong role for intangible capital.
    Keywords: Structural change; equilibrium interest rates; investment
    JEL: E22 E43 J11
    Date: 2023–01–23
  9. By: Adrien Auclert; Matthew Rognlie; Ludwig Straub
    Abstract: We provide a simple framework connecting the distribution of excess savings across households to the dynamics of aggregate demand. Deficit-financed fiscal transfers generate excess savings. The poorest households with the highest MPCs spend down their excess savings the fastest, increasing other households’ incomes and their excess savings. This leads to a long-lasting increase in aggregate demand until, ultimately, excess savings have “trickled up” to the richest savers with the lowest MPCs, raising wealth inequality.
    JEL: E21 E62
    Date: 2023–01
  10. By: Al-Haschimi, Alexander; Apostolou, Apostolos; Azqueta-Gavaldon, Andres; Ricci, Martino
    Abstract: We develop a measure of overall financial risk in China by applying machine learning techniques to textual data. A pre-defined set of relevant newspaper articles is first selected using a specific constellation of risk-related keywords. Then, we employ topical modelling based on an unsupervised machine learning algorithm to decompose financial risk into its thematic drivers. The resulting aggregated indicator can identify major episodes of overall heightened financial risks in China, which cannot be consistently captured using financial data. Finally, a structural VAR framework is employed to show that shocks to the financial risk measure have a significant impact on macroeconomic and financial variables in China and abroad. JEL Classification: C32, C65, E32, F44, G15
    Keywords: China, financial risk, LDA, machine learning, textual analysis, topic modelling
    Date: 2023–01
  11. By: Michael T. Kiley
    Abstract: Examining a parsimonious, yet comprehensive, set of recession signals yields three lessons. First, signals from financial markets, leading indicators of activity, and gauges of the macroeconomic environment are each useful at different horizons, with leading indicators and financial signals informative at short horizons and the state of the business cycle at medium horizons. Second, approaches emphasizing the yield curve overstate the recession signal from the term spread if other factors are not considered; given correlations among indicators, these differences are often small, but were large in 2022. Finally, simulations of a reduced-form vector autoregression of unemployment and financial conditions, which captures the time-series properties of the series well, suggest the patterns are consistent with a typical hump-shape characterization of business cycle dynamics; this synthesis tightens the connections of the recession prediction literature with the business-cycle literature.
    Keywords: Yield spread; Inflation; Unemployment; Recession forecast
    JEL: E37 E47 G12
    Date: 2023–01–20
  12. By: Chafik, Omar (Bank Al-Maghrib, Département de la Recherche); Mikou, Mohammed (Bank Al-Maghrib, Département de la Recherche); Slaoui, Yassine (Bank Al-Maghrib, Département de la Recherche); Motl, Tomas (Bank Al-Maghrib, Département de la Recherche)
    Abstract: This working paper presents a DSGE model for macroprudential analysis in Morocco. The model has been calibrated to match stylized facts of the Moroccan financial sector and can be used for macroprudential policy analysis, scenario building, or stress-testing. The model provides a top-down perspective on the financial sector stability, complementing the more traditional financial supervision tools currently in use at Bank Al-Maghrib. The paper describes the model structure and highlights its features that make it suitable for the analysis of macroprudential issues– strong role of nonlinearities, endogenous macro-financial feedback loops, and explicit description of the aggregate bank balance sheet. The paper presents three simulations to illustrate key transmission mechanisms: (i) Macroeconomic impact of an increase in equity capital; (ii) The role of capital flows sensitivity to capital buffers building requirement and (iii) The Impact of the COVID-19 crisis on the banking sector.
    Keywords: Macroprudential-policy; Macroeconomic-modeling; Morocco-Financial sector
    JEL: F47
    Date: 2022–12–24
  13. By: Daniel Dimitrov; Sweder van Wijnbergen
    Abstract: We address the problem of regulating the size of banks’ macroprudential capital buffers by using market-based estimates of systemic risk combined with a structural framework for credit risk assessment. We develop a set of novel modeling mech- anisms through which capital buffers can be allocated across systemic banks: (1) equalizing the expected impact between a systemic and a non-systemic institution; (2) minimizing the aggregate systemic risk; (3) balancing the social costs and ben- efits of higher capital requirements. We apply the model to the European banking sector and find sometimes substantial differences with the capital buffers currently assigned by national regulators. Since capital buffers are one of the main policy instruments for managing banks’ potential contributions to systemic distress, our findings have substantial implications for systemic risk in the EEA.
    Keywords: systemic risk; regulation; implied market measures; financial institutions; CDS rates
    JEL: G01 G20 G18 G38
    Date: 2023–02
  14. By: Thomas Schneider; Philip Strahan; Jun Yang
    Abstract: This paper studies banks’ investment in risk management practices following the Global Financial Crisis and the advent of stress testing. Banks that experienced greater losses during the Crisis exhibit stronger demand for risk management talents. Banks increase their demand for highly skilled stress test labor in anticipation of a test and following poor performance on a test. Following this higher demand, banks exhibit lower systematic risk and lower profitability. While stress testing has modernized banks’ internal risk management by spurring the acquisition of highly skilled risk management talent, recent changes to the tests could erode its efficacy.
    JEL: G20
    Date: 2023–01
  15. By: Forbes, Kristin (MIT-Sloan School of Management, NBER and CEPR); Friedrich, Christian (Bank of Canada); Reinhardt, Dennis (Bank of England)
    Abstract: This paper explores whether different funding structures – including the source, instrument, currency, and counterparty location of funding – affected the extent of financial stress experienced in different countries and sectors during the early stages of the Covid-19 pandemic. We measure financial stress using a new data set on changes in credit default swap spreads for sovereigns, banks, and corporates during the Covid Shock – the period of acute financial stress in early 2020. Then we use country-sector and country-sector-time panels to assess if these different forms of financial intermediation and internationalisation tended to mitigate – or amplify – the impact of this risk-off shock. We find that banks with a higher share of funding from non-bank financial institutions (NBFI) and that were more reliant on US dollar funding were significantly more vulnerable. In contrast, whether funding was obtained in loans (instead of debt markets) or cross-border (instead of domestically) did not significantly impact resilience. The results suggest that macroprudential regulations should broaden their current focus to take into account reliance on NBFI and dollar funding, with less priority for regulations focusing on residency (ie, capital controls). Moreover, policies directly targeting these structural vulnerabilities (ie, focused on NBFIs and USD swap lines) can have significant effects even after controlling for broader macroeconomic responses and appear more successful at mitigating stress related to these funding structures than easing more generalised banking regulations.
    Keywords: Covid-19; financial stress; funding structure; non-bank financial institutions; shadow banks; macroprudential policy; swap lines
    JEL: E44 E65 F31 F36 F42 G18 G23 G38
    Date: 2022–11–18
  16. By: Mustafa Yenice; Yizhi Xu; Tara Iyer; Mr. Hamid R Tabarraei; Andrea Deghi; Mr. Salih Fendoglu
    Abstract: The COVID-19 pandemic has brought the relationship between sovereigns and banks—the so-called sovereign-bank nexus—in emerging market economies to the fore as bank holdings of domestic sovereign debt have surged. This paper examines the empirical relevance of this nexus to assess how it could amplify macro-financial stability risks. The findings show that an increase in sovereign credit risk can adversely affect banks’ balance sheets and credit supply, especially in countries with less-well-capitalized banking systems. Sovereign distress can also impact banks indirectly through the nonfinancial corporate sector by constraining their funding and reducing their capital expenditure. Notably, the effects on banks and corporates are strongly nonlinear in the size of the sovereign distress.
    Keywords: Sovereign-bank nexus;emerging markets; financial stability; sovereign risk; COVID-19; banking sector; corporate investment; outcome variable; Annex I. data description; summary statistics; Emerging and frontier financial markets; Capital adequacy requirements; Commercial banks; Credit default swap; Global
    Date: 2022–11–11
  17. By: Kris James Mitchener; Eric Monnet
    Abstract: Because of secrecy, little is known about the political economy of central bank lending. Utilizing a novel, hand-collected historical daily dataset on loans to commercial banks, we analyze how personal connections matter for lending of last resort, highlighting the importance of governance for this core function of central banks. We show that, when faced with a banking panic in November 1930, the Banque de France (BdF) lent selectively rather than broadly, providing substantially more liquidity to connected banks – those whose board members were BdF shareholders. The BdF’s selective lending policy failed to internalize a negative externality – that lending would be insufficient to arrest the panic and that distress via contagion would spillover to connected banks. Connected lending of last resort fueled the worst banking crisis in French history, caused an unprecedented government bailout of the central bank, and resulted in loss of shareholder control over the central bank.
    Keywords: lender of last resort, fiscal backing, central-bank solvency, central-bank design, banking crises, central bank independence, Banque de France, Great Depression
    JEL: E44 E58 G01 G32 G33 G38 N14 N24
    Date: 2023
  18. By: Mr. Zhongxia Zhang; Shiyi Wang
    Abstract: Inflation Targeting (IT) has become a prevalent monetary policy framework in the past three decades, as more central banks adopted and maintained price stability as their primary monetary policy mandate. Using a dataset of 68 major advanced countries and emerging markets economies, this paper evaluates the effects of inflation targeting countries’ track records on their macroeconomic performance, measured by real GDP growth and CPI inflation. This paper constructs three novel inflation targeting track record measures and establishes new stylized facts on the heterogeneity of inflation targeting countries’ tendency in managing inflation with respect to their stated objectives. This paper finds evidence that most targeters conduct dynamic inflation targeting by frequently updating inflation target bands, and their band sizes are wide-ranging across IT countries. We empirically study the contemporaneous and future effects of inflation targeting track records on countries’ macroeconomic performance. Results from the dynamic panel and local projection regressions suggest that better IT track records do not lead to superior growth and inflation rates in the short term.
    Keywords: inflation targeting; track records; dynamic target points and ranges; economic growth and inflation.; novel inflation targeting track record measure; inflation target band; countries' track records; effects of inflation targeting track records; better IT; Inflation; Monetary policy frameworks; Nominal effective exchange rate; Commodity price fluctuations; Global
    Date: 2022–11–11
  19. By: Chafik, Omar (Bank Al-Maghrib, Département de la Recherche); Achour, Aya (Bank Al-Maghrib, Département de la Recherche)
    Abstract: Ce document de travail cherche à étudier l’impact du cycle financier sur le cycle réel et la transmission de la politique monétaire au Maroc. Notre analyse repose sur un modèle nouveau-keynésien permettant de tenir compte d’une manière endogène des interactions entre les cycles réel et financier. Par rapport à littérature sur la question, notre cadre analytique a l’avantage d’intégrer la politique monétaire et d’offrir une description plus détaillée de l’économie adaptée au régime de change en vigueur au Maroc. Les résultats de notre étude montrent que le cycle financier peut amplifier ou réduire l’ampleur des chocs économiques et, par conséquent, amener la politique monétaire à ajuster sa réaction pour stabiliser l’économie. L’analyse montre également que l’effet du cycle financier sur la transmission des chocs et la conduite de la politique monétaire peut avoir un caractère asymétrique.
    Keywords: Cycle-financier; cycle-réel; politique-monétaire; modèle-new-keynésien; estimation-bayésienne
    JEL: E50
    Date: 2022–12–24
  20. By: Jan Ditzen (Free University of Bozen-Bolzano, Italy); Yiannis Karavias (Department of Economics, University of Birmingham, UK); Joakim Westerlund (Department of Economics, Lund University, Sweden and Deakin University, Melbourne, Australia)
    Abstract: This paper develops a new toolbox for multiple structural break detection in panel data models with interactive effects. The toolbox includes tests for the presence of structural breaks, a break date estimator, and a break date confidence interval. The new toolbox is applied to a large panel of US banks for a period characterized by massive quantitative easing programs aimed at lessening the impact of the global financial crisis and the COVID–19 pandemic. The question we ask is: Have these programs been successful in spurring bank lending in the US economy? The short answer turns out to be: “No”.
    Keywords: Panel Data, Structural Breaks, Cross-Section Dependence, Bank Lending, Quantitative Easing.
    JEL: C13 C33 E52 E58 G21
    Date: 2023–02
  21. By: Mykola Pinchuk
    Abstract: This paper examines the response of major cryptocurrencies to macroeconomic news announcements (MNA). While other cryptocurrencies exhibit no reaction to major MNA, Bitcoin responds negatively to inflation surprise. Price of Bitcoin decreases by 24 bps in response to a 1 standard deviation inflationary surprise. This reaction is inconsistent with widely-held beliefs of practitioners that Bitcoin can hedge inflation. I do not find support for the hypothesis that the negative response of Bitcoin to inflation is due to its negative exposure to interest rates. Instead, I find support for the hypothesis that Bitcoin is strongly affected by the shift in consumption-savings decisions, driven by the rise in inflation. Consistent with this view, Bitcoin has negative exposure to a proxy for the consumption-savings ratio.
    Date: 2023–01
  22. By: Javier Bianchi; Louphou Coulibaly
    Abstract: Many central banks whose exchange rate regimes are classified as flexible are reluctant to let the exchange rate fluctuate. This phenomenon is known as “fear of floating”. We present a simple theory in which fear of floating emerges as an optimal policy outcome. The key feature of the model is an occasionally binding borrowing constraint linked to the exchange rate that introduces a feedback loop between aggregate demand and credit conditions. Contrary to the Mundellian paradigm, we show that a depreciation can be contractionary, and letting the exchange rate float can expose the economy to self-fulfilling crises.
    JEL: E44 E52 F33 F34 F36 F41 F45 G01
    Date: 2023–01
  23. By: Joshua Aizenman; Sy-Hoa Ho; Luu Duc Toan Huynh; Jamel Saadaoui; Gazi Salah Uddin
    Abstract: The global financial crisis has brought increased attention to the consequences of international reserves holdings. In an era of high financial integration, we investigate the relationship between the real exchange rate and international reserves using nonlinear regressions and panel threshold regressions over 110 countries from 2001 to 2020. We find the buffer effect of international reserves is more pronounced in Europe and Central Asia above a threshold of 17% of international reserves over GDP. Our study shows the level of financial-institution development plays an essential role in explaining the buffer effect of international reserves. Countries with a low development of their financial institutions may manage the international reserves as a shield to deal with the negative consequences of terms-of-trade shocks on the real exchange rate. We also find the buffer effect is stronger in countries with intermediate levels of financial openness.
    JEL: F30 F40 F44
    Date: 2023–01
  24. By: Park, Cyn-Young (Asian Development Bank); Shin, Kwanho (Department of Economics, Korea University)
    Abstract: This paper investigates whether the uncovered interest parity (UIP) will hold more firmly if the local currency bond markets (LCBMs) are more developed, and the presence of nonbank financial institutions (NBFIs) is expanded. Deviations in UIP decrease as LCBMs develop, while the patterns of the UIP premium in emerging markets increasingly resemble patterns in advanced economies. Capital flows respond more sensitively to the UIP premium for emerging markets when LCBMs are more developed. These suggest the development of LCBMs and NBFIs might induce more active cross-border carry trades and reduce UIP deviations. However, greater carry trade positions may increase a country’s exposure to market disruptions and exchange rate volatility. Empirical results show that gross portfolio debt inflows increase (decrease) when the exchange rate appreciates (depreciates). While LCBMs becoming more developed can mitigate the negative effect of the original sin redux hypothesis in advanced economies, this aggravates the impact of exchange rate depreciation in emerging markets.
    Keywords: uncovered interest parity; local currency bond markets; emerging economies; nonbank financial institutions; capital inflows
    JEL: E44 F34 F62 G12 G21 G23
    Date: 2023–02–09
  25. By: Christopher Clayton; Antonio Coppola; Amanda Dos Santos; Matteo Maggiori; Jesse Schreger
    Abstract: We document the rise of China in offshore capital markets. Chinese firms use global tax havens to access foreign capital both in equity and bond markets. In the last twenty years, China's presence went from raising a negligible amount of capital in these markets to accounting for more than half of equity issuance and around a fifth of global corporate bonds outstanding in tax havens. Using rich micro data, we show that a range of Chinese firms, including both tech giants and SOEs, use these offshore centers. We conclude by discussing the macroeconomic and financial stability implications of these patterns.
    JEL: F3 G10 G30 H87
    Date: 2023–01
  26. By: Mariusz Jarmuzek; Marco Belloni; Maciej Grodzicki
    Abstract: Using a panel data approach for two samples of listed and unlisted European banks, this paper provides evidence that, over a decade and a half preceding the pandemic, bank dividend payouts were adjusted in line with the motivations found in the literature. Banks change their dividend payouts because they would like to signal good profitability to shareholders to address information asymmetry, or use dividends to mitigate the agency costs, or could come under pressure from prudential supervisors and regulators to retain earnings. Banks are found not to discount expectations about future economic conditions or their own profitability when making payouts. Simulations show that, in the absence of supervisory sector-wide recommendations to suspend dividend payouts, banks would likely have reduced the payouts only slightly in the first year of the pandemic.
    Keywords: Bank dividend policy; banking regulation and supervision; panel data analysis.; bank dividend payout; bank profitability ratio; dividend payout; bank capital ratios; Capital adequacy requirements; Bank soundness; Global financial crisis of 2008-2009; Countercyclical capital buffers; Global
    Date: 2022–09–23
  27. By: V. Filipe Martins-Da-Rocha (LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique, EESP - Sao Paulo School of Economics - FGV - Fundacao Getulio Vargas [Rio de Janeiro]); Toan Phan (Federal Reserve Bank of Richmond); Yiannis Vailakis (Adam Smith Business School - University of Glasgow)
    Abstract: We analyze the efficiency properties of competitive economies with strategic default and limited pledgeability. We show that laissez-faire equilibria can be constrained suboptimal. Under certain conditions, imposing tighter borrowing constraints (relative to the laissez-faire regime) can make everybody in the economy better off. The inefficiency is due to the interaction between debt pricing and the default option, which generates a pecuniary externality. We also show that a Pigouvian subsidy on net financial positions may induce borrowers to internalize this externality and increase welfare.
    Keywords: Limited pledgeability, Debt constraints, Constrained inefficiency, Macroprudential interventions.
    Date: 2022–12–21
  28. By: Rodrigo Rodrigo Barra Novoa Barra Novoa (UCJC - Universidad Camilo José Cela)
    Abstract: The role played by gazelles in economic development processes is a topic of growing interest in the scientific and business community. Empirical evidence agrees that gazelles and fast-growing firms are innovative, transformative economic structures with capabilities to promote economic growth. This paper examines the role of a group of gazelle firms assisted in Arica that positively weigh the cost-benefit ratio of the Business Center program in Chile. This path poses an exercise in "appreciative theorizing" —as Richard Nelson (2018) calls it— and examines various factors of growth that cannot be explained by economic models in equilibrium.
    Keywords: Business centers economic growth gazelle firms innovation appreciative theorizing B21 Microeconomics D22 Firm behavior J18 Public policy O43 Institutions and growth R11 Regional economic activity Centros de negocios crecimiento económico firmas gacelas innovación teorización apreciativa, Business centers, economic growth, gazelle firms, innovation, appreciative theorizing B21 Microeconomics, D22 Firm behavior, J18 Public policy O43 Institutions and growth R11 Regional economic activity Centros de negocios, crecimiento económico, firmas gacelas, innovación, teorización apreciativa
    Date: 2022–10–11

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