nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2023‒03‒13
23 papers chosen by
Georg Man

  1. Financial development and economic growth in Botswana: new evidence from disaggregated data By Musakwa, Mercy T; Odhiambo, Nicholas M
  2. Does foreign direct investment influence poverty in Zimbabwe? A multivariate approach By Musakwa, Mercy T
  3. Online Appendix to "Credit Markets, Relationship Lending, and the Dynamics of Firm Entry" By Qingqing Cao; Paolo Giordani; Raoul Minetti; Pierluigi Murro
  4. A novel framework to evaluate changes in access to and costs of trade finance By Auboin, Marc; Bekkers, Eddy; De Quarti, Dario
  5. Regulatory Collateral Requirements and Delinquency Rate in a Two-Agent New Keynesian Model By Aicha Kharazi; Francesco Ravazzolo
  6. Financial openness, financial fragility and policies for economic stability: a comparative analysis across regions of the developing world By Pérez Caldentey, Esteban
  7. Effect of caps on interest rates in Peru By Walter Cuba; Eduardo Diaz
  8. Dynamic Tax Evasion and Growth with Heterogeneous Agents By Francesco Menoncin; Andrea Modena
  9. Stablecoins and the Financing of the Real Economy By Jean Barthélémy; Paul Gardin; Benoit Nguyen
  10. Cryptocurrency competition: An empirical test of Hayek's vision of private monies By Mayer, Fabian; Bofinger, Peter
  11. On the Fragility of DeFi Lending By Jonathan Chiu; Emre Ozdenoren; Kathy Yuan; Shengxing Zhang
  12. Non-standard preferences in asset pricing and household finance By Goossens, Jorgo
  13. The Canadian Neutral Rate of Interest through the Lens of an Overlapping-Generations Model By Martin Kuncl; Dmitry Matveev
  14. Negative rates, monetary policy transmission and cross-border lending via international financial centres By Andreeva, Desislava; Coman, Andra; Everett, Mary; Froemel, Maren; Ho, Kelvin; Lloyd, Simon; Meunier, Baptiste; Pedrono, Justine; Reinhardt, Dennis; Wong, Andrew; Wong, Eric; Żochowski, Dawid
  15. How Much Can the Fed’s Tightening Contract Global Economic Activity? By Julian di Giovanni; Neel Lahiri
  16. Macroeconomic Effects of Monetary Policy in Japan: An Analysis Using Interest Rate Futures Surprises By Hiroyuki Kubota; Mototsugu Shintani
  17. Inflation, Output, and Welfare in the Laboratory By Janet Hua Jiang; Daniela Puzzello; Cathy Zhang
  18. Who funds zombie firms: Banks or non-banks? By Tuuli, Saara
  19. What Policy Combinations Worked? The Effect of Policy Packages on Bank Lending during COVID-19 By Mr. Maria Soledad Martinez Peria; Ms. Prachi Mishra; Mr. Divya Kirti; Jan Strasky
  20. The consequence of societal secrecy for financial constraints By Olayinka Oyekola; Samuel Odewunmi
  21. Funding and financing infrastructure: the joint-use of public and private finance By Marianne Fay; David Martimort; Stéphane Straub
  22. Another Boiling Frog: the impact of climate-related events on financial outcomes in Brazil By Juliano Assunção; Flávia Chein; Giovanni Leo Frisari; Sérgio Mikio Koyama
  23. Climate tech 2.0: social efficiency versus private returns By Giulio Cornelli; Jon Frost; Leonardo Gambacorta; Ouarda Merrouche

  1. By: Musakwa, Mercy T; Odhiambo, Nicholas M
    Abstract: In this study, the causal relationship between financial development and economic growth in Botswana is re-examined using disaggregated data from 1980 to 2020 on financial development. The importance of financial development and economic growth in achieving Sustainable Development Goals (SDGs) cannot be overemphasised. Between economic growth and financial development, the ability to influence the right variable allows policy makers in Botswana to achieve the desired economic growth levels that make achieving SDGs possible. Financial development is measured at an aggregate level by the Financial Development Index (FDI) and at a disaggregate level by the Financial Institution Index (FII) and Financial Market Index (FMI) from the International Monetary Fund (IMF) financial development index database. Using the Autoregressive Distributed Lag (ARDL) approach to cointegration and ECM-based causality, the study found no distinct causal flow between economic growth and financial development. The study did find an indirect causal flow from economic growth to financial development through the gross fixed capital formation link, thereby confirming the financial demand hypothesis. This finding points to the importance for Botswana to continue with the Vision 2036 and the National Development Plans that focus, among other goals, on economic growth, to realise an increase in gross fixed capital formation and financial development.
    Keywords: Imports; South Africa; intermediate goods; consumer goods, capital goods, economic growth, autoregressive distributed lag (ARDL), causality
    Date: 2022–12
  2. By: Musakwa, Mercy T
    Abstract: This study examined the causal relationship between poverty and foreign direct investment inflows in Zimbabwe using data from 1990 to 2020. The study was motivated by the need to determine which factor influence the other between FDI and poverty. This would contribute to identifying possible solution to the challenge of low foreign direct investment and high poverty levels in Zimbabwe, despite the government open-door policy for foreign investors. The human development index and household consumption expenditure were used as poverty proxies. Using the autoregressive distributed lag to cointegration test and ECM-based causality test, the study found a unidirectional causal flow from poverty to foreign direct investment in both the short and long run, regardless of the poverty proxy used. The study confirms the importance of preconditions to foreign direct investment inflows. It is recommended that policy makers in Zimbabwe complement the open-door policy for foreign investors with policies that address preconditions such as poverty, infrastructure, education and health, to stimulate high levels of foreign direct investment.
    Keywords: foreign direct investment; poverty; human development index; household consumption expenditure; Zimbabwe
    Date: 2022–12
  3. By: Qingqing Cao (Michigan State University); Paolo Giordani (LUISS University); Raoul Minetti (Michigan State University); Pierluigi Murro (LUISS University)
    Abstract: Online appendix for the Review of Economic Dynamics article
    Date: 2023
  4. By: Auboin, Marc; Bekkers, Eddy; De Quarti, Dario
    Abstract: In this paper we integrate the costs of trade finance in a computable general equilibrium (CGE) model to evaluate the trade and output effects of counterfactual policy experiments on costs of and access to trade finance. The costs of financing international trade consist of two components: the financial costs and the costs associated with the risk of goods not being delivered, considering risk aversion of traders. These costs are determined for four ways to finance international trade (cash-in-advance, trade loans, letters of credit, and exports financed with internal working capital). Trade finance costs are a weighted average of the costs under the four different ways of financing. The framework is applied to trade of four ECOWAS countries employing data collected on financial costs, costs of risk and trade finance instrument shares through a comprehensive bank survey in these countries complemented with data from the literature. Counterfactual experiments on increases in the availability of letters of credit and trade loans and the costs of these instruments show that raising the shares and costs to African averages would increase trade of the four ECOWAS countries by about 11%. The framework is generic and can be applied to other countries.
    Keywords: Trade credit, international trade, financial institutions, general equilibrium simulations
    JEL: F10 F14 F39 G21
    Date: 2023
  5. By: Aicha Kharazi (Free University of Bozen-Bolzano, Italy); Francesco Ravazzolo (BI Norwegian Business School, Norway; Free University of Bozen-Bolzano, Italy; Rimini Centre for Economic Analysis)
    Abstract: In light of the high levels of systemic risks and the elevated probability of a crisis occurring, understanding the effectiveness of macro-prudential policies is becoming increasingly crucial. We incorporate a collateral-based macro-prudential policy into a two-agent New Keynesian model, this policy adjusts counter-cyclically to the state of the borrowing sector. We show that regulators accommodate high delinquency rates by allowing for tighter collateral requirements. An active macro-prudential policy amplifies the impact of a monetary policy shock on output and labor supply, and this policy emerges as a potential tool to prevent the risk of delinquency in the short run.
    Keywords: macro prudential policies, credit supply, collateral constraint, monetary policy
    JEL: E32 E44 G21
    Date: 2023–02
  6. By: Pérez Caldentey, Esteban
    Abstract: This book presents a comparative analysis of the policy responses of developing countries in Africa, Asia and Latin America and the Caribbean to the challenges that greater external financial openness and price and exchange-rate flexibility pose to economic stability. Greater external openness has significantly narrowed developing economies’ policy space, while at the same time increasing the potential for financial fragility and instability. These challenges, which have come to the fore since the global financial crisis of 2008–2009, are also manifest in the profound impact of the COVID-19 pandemic and will shape the post-pandemic recovery. The book examines how different countries have used capital controls and macroprudential tools and highlights key lessons learned.
    Date: 2023–01–12
  7. By: Walter Cuba (Central Reserve Bank of Peru); Eduardo Diaz (Central Reserve Bank of Peru)
    Abstract: We review the initial effects of the imposition of caps on interest rates in Peru's financial system. We developed a methodology that allows us to quantify the potential exclusion of clients. We found that financial institutions excluded close to 243 thousand clients from the financial system. Regarding consumer loans, the exclusion ratio was higher among debtors outside the capital city, under the age of 25. Additionally, the effect was smaller for married debtors. In the case of small and micro-business loans, the effect was higher for natural persons, the commerce sector, and firms in the capital city. In summary, the effects induced by caps on interest rates are concentrated among people with lower incomes and those with vulnerable firms. Additionally, these debtors typically had the highest interest rates and were the main clients of non-banking financial institutions.
    Keywords: Cap on interest rate; credit market; exclusion
    JEL: G21 G23 G28 K20
    Date: 2023–02–24
  8. By: Francesco Menoncin; Andrea Modena
    Abstract: We develop a tractable model of a production economy in which public capital improves aggregate productivity and the taxpayers have heterogeneous evasion opportunities. We show that, by issuing bonds, compliant taxpayers supply the evaders with an instrument to hedge against auditing risks, thereby expanding their evasion capacity. Moreover, we demonstrate that a higher share of tax evaders reduces the economy’s total factor productivity but has a hump-shaped relationship with the growth rate of aggregate capital.
    Keywords: Dynamic tax evasion; general equilibrium; growth; heterogeneous agents
    JEL: E20 G11 H26
    Date: 2023–02
  9. By: Jean Barthélémy; Paul Gardin; Benoit Nguyen
    Abstract: Stablecoins are crypto-assets that aim to maintain a stable value relative to a fiat currency. This paper documents one implication of their massive growth since 2020 for the financing of the real economy. The largest stablecoins manage their peg with the US dollar by holding short-term safe assets. We identify changes in the stablecoin demand for US dollardenominated commercial papers (CP) by exploiting cross-sectional and time-varying heterogeneity in the main tablecoins’ reserve assets policy. We show that CP issuers catered to the additional demand from stablecoins by issuing more, illustrating the implications of stablecoins for financial stability and the financing of the real economy.
    Keywords: : Crypto-Assets, Stablecoins, Financial Markets, Safe Assets
    JEL: G14 G23 G29
    Date: 2023
  10. By: Mayer, Fabian; Bofinger, Peter
    Abstract: We investigate monopolistic tendencies and the intensity of currency competition on the crypto market in the light of Hayek's "Denationalization of money". Interestingly, Hayek never considered differentiation and specialization by innovative private currencies could lead lasting currency competition instead of network effects. We argue that competition between private currencies could run on different functions of money, especially the function as a store of value and that as a means of exchange, which partly explains the differences in the set-up of private currencies that Hayek demanded and that of cryptocurrencies. Drawing on a large sample of 101 cryptocurrencies and a time frame from 2016 to 2022, we empirically examine the evolution and degree of competition on the crypto market, also taking changes in general crypto market structure into account. We find that competition is strong for unpegged cryptocurrencies that mostly compete as a speculative store of value. Competition is also strong for stablecoins when competing as a stable store of value. Competition is much less pronounced for the function as a means of exchange and network effects and monopolistic tendencies are more likely to be present on this sub-market.
    Keywords: Hayek, Cryptocurrencies, Functions of Money, Currency Competition, NetworkEffects, Monopol
    JEL: B25 D40 E42 E50 E51 L11
    Date: 2023
  11. By: Jonathan Chiu; Emre Ozdenoren; Kathy Yuan; Shengxing Zhang
    Abstract: We develop a dynamic model of decentralized finance (DeFi) lending that incorporates two/these key features: 1) borrowing and lending are decentralized, anonymous, overcollateralized and backed by the market value of crypto assets where contract terms are pre-specified and rigid; and 2) information friction exists between borrowers and lenders. We identify a price-liquidity feedback: the market outcome in any given period depends on agents’ expectations about lending activities in future periods, with higher price expectations leading to more lending and higher prices in that period. Given the rigidity inherent to smart contracts, this feedback leads to multiple self-fulfilling equilibria where DeFi lending and asset prices move with market sentiment. We show that flexible updates of smart contracts can restore equilibrium uniqueness. This finding highlights the difficulty of achieving stability and efficiency in a decentralized environment without a liquidity backstop.
    Keywords: Digital currencies and fintech; Financial stability
    JEL: G10 G01
    Date: 2023–02
  12. By: Goossens, Jorgo (Tilburg University, School of Economics and Management)
    Date: 2023
  13. By: Martin Kuncl; Dmitry Matveev
    Abstract: The neutral rate of interest is an important concept and communication tool for central banks. We develop a small open economy model with overlapping generations to study the determinants of the neutral real rate of interest in a small open economy. The model captures domestic factors such as population aging, declining productivity, rising government debt and inequality. Foreign factors are captured by changes in the global neutral real rate. We use the model to evaluate secular dynamics of the neutral rate in Canada from 1980 to 2018. We find that changes in both foreign and domestic factors resulted in a protracted decline in the neutral rate.
    Keywords: Economic models; Interest rates; Monetary policy
    JEL: E21 E22 E43 E50 E52 E58 F41
    Date: 2023–02
  14. By: Andreeva, Desislava; Coman, Andra; Everett, Mary; Froemel, Maren; Ho, Kelvin; Lloyd, Simon; Meunier, Baptiste; Pedrono, Justine; Reinhardt, Dennis; Wong, Andrew; Wong, Eric; Żochowski, Dawid
    Abstract: We study the effects of negative interest rate policies (NIRP) on the transmission of monetary policy through cross-border lending. Using bank-level data from international financial centres – the United Kingdom, Hong Kong and Ireland – we examine how NIRP in the economies where banks have their headquarters influences cross-border lending from financial-centre affiliates. We find that NIRP impairs the bank-lending channel for cross-border lending to non-bank sectors, especially for those banks that have only a weak deposit base in IFCs – and are thus relatively more exposed to NIRP in their headquarters. Using euro-area data, including bank-level data from France, we find that NIRP does not influence overall cross-border lending from banks’ headquarters’ economies, but NIRP does impair lending to financial sectors based in IFCs. This impairment is stronger for banks with a large deposit base in headquarter economies exposed to NIRP. JEL Classification: E52, F34, F36, F42, G21
    Keywords: bank lending, cross-border lending, International financial centres, monetary policy, negative interest rates, risk-taking
    Date: 2023–02
  15. By: Julian di Giovanni; Neel Lahiri
    Abstract: What types of foreign firms are most affected when the Federal Reserve raises its policy rate? Recent empirical research used cross-country firm level data and information on input-output linkages and finds that the impact on sales and investment spending is largest in sectors with exposure to trade in intermediate goods. The research also finds that financial factors drive differences, with U.S. monetary policy spillovers having a much smaller impact on firms that are less financially constrained.
    Keywords: U.S. monetary policy spillovers; Foreign firms; international production linkages; financial constraints
    JEL: E52 F0
    Date: 2023–02–13
  16. By: Hiroyuki Kubota (University of California, Los Angeles); Mototsugu Shintani (The University of Tokyo)
    Abstract: We estimate the effects of monetary policy on the aggregate economy in Japan during the last three decades when the effective lower bound (ELB) on interest rates was occasionally binding. Using monetary policy surprises from the interest rate futures market as the external instrument to identify monetary policy shocks in the VAR model, we show that monetary policy has been effective in Japan for the entire sample period but its effect was more persistent in the ELB regime. Using a New Keynesian model with forward guidance, we further show that our empirical finding is consistent with theoretical predictions.
    Date: 2023–02
  17. By: Janet Hua Jiang; Daniela Puzzello; Cathy Zhang
    Abstract: We develop an experimental framework to investigate the quantity theory of money and the real effects of inflation in an economy where money serves as a medium of exchange. We test the classical view that inflation reduces output and welfare by taxing monetary exchange. Inflation is engineered by constant money growth. We conduct three treatments, where the newly issued money is used to finance government spending, lump-sum transfers, and proportional transfers, respectively. Experimental results largely support theoretical predictions. Higher money growth leads to higher inflation. Output and welfare are significantly lower with government spending, and output is significantly lower with lump-sum transfers, while there are no significant real effects with proportional transfers. A deviation from theory is that the detrimental effect of money growth in our framework depends on the implementation scheme and is stronger with government spending than with lump-sum transfers.
    Keywords: Inflation and prices; Inflation: costs and benefits; Monetary policy
    JEL: C92 D83 E40
    Date: 2023–02
  18. By: Tuuli, Saara
    Abstract: Analyses of zombie firms have emphasised the role of bank financing as the reason for zombie survival. This conclusion was made despite no comparative analysis of the sources of external finance for zombie firms. This paper provides the first analysis of that sort using Finnish data. Surprisingly, the results show quite clearly that there is no connection between zombie survival and bank financing; this result is robust to various measurement and specification issues. Instead, a role is found for owners (i.e. equity funders) in keeping zombies alive in the (often correct) anticipation of the firm recovering.
    Keywords: zombie firms, banks, credit constraints, firm-level data, panel data
    JEL: D25 E51 G2 G3
    Date: 2023
  19. By: Mr. Maria Soledad Martinez Peria; Ms. Prachi Mishra; Mr. Divya Kirti; Jan Strasky
    Abstract: This paper analyzes the impact of fiscal, monetary, and prudential policies during the COVID-19 pandemic on bank lending across a broad sample of countries. We combine a comprehensive announcementlevel dataset of policy actions with bank and firm-level information to analyze the effectiveness of different types of policies. We document that different types of policies were introduced together and hence accounting for policy combinations, or packages, is crucial. Lending grew faster at banks in countries that announced packages combining fiscal, monetary, and prudential measures relative to those that relied on some, but not all, policy dimensions. Within packages including all three types of policy measures, banks in countries with more and larger measures saw faster loan growth. The impact was larger among more constrained banks with low equity levels. Large packages combining fiscal, monetary and prudential policies also increased liquidity for bank dependent firms, but did not disproportionately benefit unviable firms.
    Keywords: COVID-19; policy packages; policy effectiveness; bank lending
    Date: 2023–02–03
  20. By: Olayinka Oyekola (Department of Economics, University of Exeter); Samuel Odewunmi (Department of Economics, University of Exeter)
    Abstract: Does the level of societal secrecy aggravate or alleviate access to finance? We explore this question for over 50, 000 firms in around 40, predominantly developing, countries, from 2006 to 2015. We find a strong positive relationship between cultural orientation towards secrecy in a country and financial constraints faced by its firms. Our results are robust to several considerations and emphasise the adverse consequence of societal secrecy for perpetuating financing obstacles for firms.
    Keywords: financial constraints, access to credit, societal secrecy, national culture, firm-level data
    JEL: G20 G30 O16 Z1
    Date: 2023–02–21
  21. By: Marianne Fay (The World Bank); David Martimort (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Stéphane Straub (TSE-R - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: Attracting private nancing is high on the agenda of policy makers concernedwith closing the infrastructure gap in developing countries. To date, however, private nance represents a minor share of overall infrastructure financing and the poorest countries struggle to attract any private investors. This paper develops a model that rationalizes these facts. We characterize the structure of financial and regulatory infrastructure contracts and derive conditions under which public and private finance coexist. This requires a combination of regulated prices and public subsidies sufficiently attractive for outside nanciers pointing at a fundamental trade-off between financial viability and social inclusion. While improvementsin the efficiency of bankruptcy procedures facilitate access to private finance, institutional changes l owering the cost of public funds make public finance more attractive.
    Keywords: Infrastructure, Private finance, Regulation
    Date: 2021–05
  22. By: Juliano Assunção; Flávia Chein; Giovanni Leo Frisari; Sérgio Mikio Koyama
    Abstract: We evaluate the impact of climate-related events on the Brazilian banking sector. The analysis of physical risks reveals that, although short-run weather fluctuations and extreme events (droughts and floods) have limited impact on financial outcomes, climate change projections are expected to generate sizeable consequences to deposits and credit. We also document relevant geographical heterogeneity in the results and the importance of bank adaptation responses, avoiding areas with more considerable climate risks. The analysis of transition risks shows that the exposure of banks to green sectors concerning high impact sectors has a U-shape, growing since 2011.
    Date: 2023–01
  23. By: Giulio Cornelli; Jon Frost; Leonardo Gambacorta; Ouarda Merrouche
    Abstract: Billions of dollars in private and public capital have poured into climate tech in the United States since 2005. This raises questions around the social efficiency and financial performance of these investments. We find that more private capital is allocated to technologies with a higher emission reduction potential and that investors have prioritised more mature technologies. Moreover, more private capital is directed to innovative companies as the sector matures and grows and financial frictions abate. Higher allocative efficiency of investments is in turn associated with better financial performance, both at the company level and at the investor level. US government subsidies have been allocated more to technologies attracting less private capital. Their crowding-in effect is greater when allocated to nascent technologies that are not yet patented.
    Keywords: climate change, climate tech, venture capital, innovation
    JEL: G11 G14 G24 Q54
    Date: 2023–02

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