nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2023‒03‒20
thirty-one papers chosen by
Georg Man

  1. Impact of financial inclusion on economic growth in secular and religious countries By Ozili, Peterson K; Lay, Sok Heng; Syed, Aamir
  2. A Survey on Financial Inclusion: Theoretical and Empirical Literature Review By Shah, Shahid Manzoor; Ali, Amjad
  3. The Production of Financial Literacy By Giovanni Gallipoli; Sebastian Gomez-Cardona
  4. The role of personality traits in household loan expectations and borrowing constraints By Goldfayn-Frank, Olga; Vellekoop, Nathanael
  5. Impact of financial resources on agricultural growth in Sub-Saharan Africa By Nigo, Ayine; Gibogwe, Vincent
  6. The Interplay of Interest Rates and Debt-Financed Government Spending By Bev Dahlby; Ergete Ferede
  7. The Debt-to-GDP Ratio as a Tool for Debt Management: Not Good for LICs By J. Atsu Amegashie
  8. Public Debt as Private Liquidity: Optimal Policy * By George-Marios Angeletos; Fabrice Collard; Harris Dellas
  9. When it rains, it pours: Mexico's bank nationalization and the debt crisis of 1982 By Flores Zendejas, Juan
  10. Loan guarantees, bank underwriting policies and financial fragility By Carletti, Elena; Leonello, Agnese; Marquez, Robert
  11. Correlated lending to government and the private sector: what do we learn from the Great Recession? By Ozili, Peterson K
  12. Corporate Taxes and Economic Inequality: A Credit Channel By Delis, Manthos; Galariotis, Emilios; Iosifidi, Maria
  13. Non-bank lending during crises By Iñaki Aldasoro; Sebastian Doerr; Haonan Zhou
  14. Leakages from macroprudential regulations: the case of household-specific tools and corporate credit By Bhargava, Apoorv; Gόrnicka, Lucyna; Xie, Peichu
  15. Macroprudential Policies in Response to External Financial Shocks By Mr. Irineu E de Carvalho Filho; DingXuan Ng
  16. The distributional impact of local banking. Evidence from the financial and sovereign-debt crises By Valentina Peruzzi; Pierluigi Murro; Stefano Di Colli
  17. Argentina Banking System in the Interwar Period: Stylized Facts in the Light of a New Database, 1925-1935 By Sebastian Alvarez; Gianandrea Nodari
  18. Weather, Credit, and Economic Fluctuations: Evidence from China By Chen, Zhenzhu; Li, Li; Tang, Yao
  19. Age, wealth, and the MPC in Europe: A supervised machine learning approach By Dutt, Satyajit; Radermacher, Jan W.
  20. Stock market correlation and geographical distance: does the degree of economic integration matter? By Bonga-Bonga, Lumengo; Manguzvane, Mathias Mandla
  21. Financial Integration and European Tourism Stocks By Guglielmo Maria Caporale; Stavroula Yfanti; Menelaos Karanasos; Jiaying Wu
  22. CBDC and financial stability By Ahnert, Toni; Hoffmann, Peter; Leonello, Agnese; Porcellacchia, Davide
  23. To Demand or Not to Demand: On Quantifying the Future Appetite for CBDC By Mr. Marco Gross; Elisa Letizia
  24. Age and market capitalization drive large price variations of cryptocurrencies By Arthur A. B. Pessa; Matjaz Perc; Haroldo V. Ribeiro
  25. Firm Size and Financing Behavior during the COVID-19 Pandemic: Evidence from SMEs in Istanbul By Aysan, Ahmet Faruk; Babacan, Mehmet; Gür, Nurullah; Süleyman, Selim
  26. Euro area banks’ market power, lending channel and stability: the effects of negative policy rates By Altunbas, Yener; Avignone, Giuseppe; Kok, Christoffer; Pancaro, Cosimo
  27. What drives Bank Income Smoothing? Evidence from Africa By Ozili, Peterson K
  28. Foreign Direct Investment and Strategic Minerals By Tanguy Bonnet
  29. The effects of unconventional monetary policy on stock markets and household incomes in Japan By Israel, Karl-Friedrich; Sepp, Tim Florian; Sonnenberg, Nils
  30. The puzzling change in the international transmission of U.S. macroeconomic policy shocks By Ilzetzki, Ethan; Jin, Keyu
  31. Effects of foreign and domestic central bank government bond purchases in a small open economy DSGE model: Evidence from Sweden before and during the coronavirus pandemic By Akkaya, Yildiz; Belfrage, Carl-Johan; Di Casola, Paola; Strid, Ingvar

  1. By: Ozili, Peterson K; Lay, Sok Heng; Syed, Aamir
    Abstract: Empirical research on the relationship between financial inclusion and economic growth has neglected the influence of religion or secularism. We investigate the effect of financial inclusion on economic growth in religious and secular countries. The financial inclusion indicators are the number of ATMs per 100, 000 adults and the number of bank branches per 100, 000 adults. The findings reveal that bank branch contraction significantly increases economic growth in secular countries. Bank branch expansion combined with greater internet usage increases economic growth in secular countries while high ATM supply combined with greater internet usage decreases economic growth in secular countries. We also find that bank branch expansion, in the midst of a widening poverty gap, significantly increases economic growth in religious countries, implying that financial inclusion through bank branch expansion is effective in promoting economic growth in poor religious countries. It was also found that internet usage is a strong determinant of economic growth in secular countries.
    Keywords: financial inclusion, economic growth, ATMs per 100, 000 adults, bank branches per 100, 000 adults, poverty, internet usage, access of finance, religion, religious countries, secular countries.
    JEL: E32 E51 G21
    Date: 2023
  2. By: Shah, Shahid Manzoor; Ali, Amjad
    Abstract: Recently, policymakers and researchers have shifted their attention toward financial inclusion to control poverty, the black economy, tax collection, and financial development. Empirical and Theoretical literature shows that financial inclusion has become a fundamental requirement for economic development. This study provides a detailed literature review covering recent development in financial inclusion among different nations as well as in different reigns. This study highlights the major factors which influence financial inclusion i.e., financial literacy, financial innovations, financial regulation, financial stability, income, information communication technology, gender differences, cost of financial services, economic conditions, and political situations. These indicators are different across countries which becomes the major reason for variations in financial inclusion among countries. This study also highlights some demand-side and supply-side factors of financial inclusion. This study suggests that availability, accessibility, and usage are the major dimensions of financial inclusion which are measured by saving, lending, no of ATMs, no of bank branches, and no. of bank accounts. The study also has several dimensions of financial inclusion for future research.
    Keywords: financial inclusion, financial technology, financial stability, financial institutions
    JEL: G10 G20
    Date: 2022
  3. By: Giovanni Gallipoli (Vancouver School of Economics, UBC); Sebastian Gomez-Cardona (University of British Columbia)
    Abstract: We study the accumulation of financial competencies in a model of dynamic skill formation. We find evidence of complementarities between financial literacy and risk attitudes. Risk tolerance facilitates experimentation and learning-by-doing. Latent risk attitudes and financial literacy are unevenly distributed across households and do not align with general human capital. Linking estimates with data on household portfolios, we show that early-life differences in financial literacy may account for more than half of the standard deviation of wealth by age 60. Dynamic complementarities in skill formation imply that early interventions could reduce later-life inequality while boosting wealth growth.
    Keywords: financial literacy, inequality, wealth returns, skills, risk attitudes
    JEL: I24 D31 J24 D81
    Date: 2023–02
  4. By: Goldfayn-Frank, Olga; Vellekoop, Nathanael
    Abstract: We explore how personality traits are related to household borrowing behavior. Using survey data representative for the Netherlands, we consider the Big Five personality traits (openness, conscientiousness, agreeableness, extraversion and neuroticism), as well as the belief that one is master of one's fate (locus of control). We hypothesize that personality traits can complement as well as substitute financial knowledge of a household. We present three sets of results. First, we find that personality traits are positively correlated with borrowing expectations. Locus of control, extraversion and agreeableness are correlated with informal borrowing expectations, which is the expectation that one can borrow from family and friends. With respect to expectations on the approval of a formal loan application, it is locus of control and conscientiousness that are positively associated. Effect sizes are large and economically meaningful. Second, we find that personality traits are important for borrowing constraints. A more internal locus of control and higher neuroticism are correlated with being denied for credit, as well as discouraged borrowing. Our third set of results reports findings on personality traits and loan regret, and how traits are correlated with dealing with loan troubles. Many households in our sample express regret (21%), but more open, more agreeable and more neurotic individuals are more likely to express regret. Our results are not driven by financial knowledge, time preferences or risk attitudes. Overall these findings imply that non-cognitive traits are important for borrowing behavior of households.
    Keywords: borrowing constraints, personality traits, household finance
    Date: 2023
  5. By: Nigo, Ayine; Gibogwe, Vincent
    Abstract: This study contributes to the literature on financial efficiency and growth. We show that banking development exerts a statistically significant and positive impact on local economic growth. We use the ARDL method to find the impact of institutional financial quality on agriculture sector growth in 14 Sub-Saharan African countries from 1990 to 2020. Our results show that land, rural population, and per capita agricultural income growth have long-run and significant (at 1% level) causal effects on the magnitude of agricultural value added as a percentage of GDP.
    Keywords: foreign direct investment, economic growth, absorptive capacity, human capital, market liberalization
    JEL: F36 F63 G21 O15 O19 O47 O55
    Date: 2023–01–23
  6. By: Bev Dahlby; Ergete Ferede
    Abstract: Proponents focus on the average fiscal cost of program spending when the interest rate on government debt is less than the economy’s growth rate. They ignore the potentially large marginal fiscal cost of deficit-financed increases in spending that arise when a higher public debt increases interest rates on government debt and lowers growth rates.
    Date: 2023
  7. By: J. Atsu Amegashie
    Abstract: There have been criticisms of debt sustainability analysis in general, including the IMF’s own evaluation of the usefulness of its debt sustainability methodology (e.g., IMF, 2017). This paper’s focus is narrow. On the basis of theoretical arguments and empirical evidence, it argues that the debt-to-GDP ratio is a poor metric for debt management in low-income countries (LICs). It makes a case for explicit revenue-based metrics of debt management. In LICs or countries with weak institutions, the debt-to-GDP may be manipulated by understating the stock of debt, resorting to dubious accounting methods, and there is a weak correlation between GDP and revenue as result of inefficiencies in the tax administration and a large informal sector. It is also arelatively inefficient predictor of debt distress. Other reasons are given in the paper.
    Keywords: debt-to-GDP ratio. debt service-to-revenue ratio, debt sustainability, liquidity, solvency
    JEL: H63 E62
    Date: 2023
  8. By: George-Marios Angeletos (MIT Department of Economics - MIT - Massachusetts Institute of Technology); Fabrice Collard (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); Harris Dellas (University of Bern)
    Abstract: We study optimal policy in an economy in which public debt is used as collateral or liquidity buffer. Issuing more public debt raises welfare by easing the underlying financial friction; but this easing lowers the liquidity premium and increases the government's cost of borrowing. These considerations, which are absent in the basic Ramsey paradigm, help pin down a unique, long-run level of public debt. They require a front-loaded tax response to government-spending shocks, instead of tax smoothing. And they explain why a financial recession, more than a traditional one, makes government borrowing cheaper, optimally supporting larger fiscal stimuli. * This paper supersedes an earlier draft, entitled "Optimal Public Debt Management and Liquidity Provision", which was concerned with the same topic but did not contain the present paper's theoretical contribution. We are grateful to Behzad Diba for his collaboration on the earlier project; to Pedro Teles and Per Krusell for illuminating discussions; and to various seminar participants for their feedback. Angeletos also thanks the University of Bern, Study Center Gerzensee, and the Swiss Finance Institute for their hospitality.
    Date: 2023–01–02
  9. By: Flores Zendejas, Juan
    Abstract: How are expropriations related to governments' debt defaults? The literature has shown that expropriation episodes and debt defaults have rarely coincided, suggesting that each event resulted from a different set of factors. The aim of this article is twofold. First, I analyze expropriation-default relationships in the years previous to the debt crisis of 1982. I show that while expropriation and default episodes did not always coincide, countries that expropriated at least once during the period were also those that defaulted more often. I observe that countries that expropriated had worse macroeconomic indicators than countries that did not. Second, I focus on the case of Mexico, when its announcement of a debt moratorium in August 1982 was followed, less than one month later, by the nationalization of its banking system. Both events were outcomes of an acute economic crisis. The nationalization announcement aggravated the crisis, because an agreement with the IMF seemed increasingly uncertain. I provide evidence from the largely overlooked bond market (on which the government never defaulted) that shows that investors reacted negatively to the bank nationalization. Finally, I present original, published, and unpublished primary sources to demonstrate that commercial banks, as well as international organizations, expressed misgivings about the bank nationalization. This fact may have hindered the country's economic recovery through the deterioration of public confidence and a decline in foreign investment.
    Keywords: Sovereign debt crises, Expropriations, IMF
    JEL: N0
    Date: 2022
  10. By: Carletti, Elena; Leonello, Agnese; Marquez, Robert
    Abstract: Loan guarantees represent a form of government intervention to support bank lending. However, their use raises concerns as to their effect on bank risk-taking incentives. In a model of •nancial fragility that incorporates bank capital and a bank incentive problem, we show that loan guarantees reduce depositor runs and improve bank underwriting standards, except for the most poorly capitalized banks. We highlight a novel feedback effect between banks•' underwriting choices and depositors' •run decisions, and show that the effect of loan guarantees on banks' incentives is different from that of other types of guarantees, such as deposit insurance. JEL Classification: G21, G28
    Keywords: bank monitoring, charter value, fundamental runs, panic runs
    Date: 2023–02
  11. By: Ozili, Peterson K
    Abstract: The purpose of the study is to investigate the correlation between credit supply to government and credit supply to the private sector to determine whether there is a crowding-out or crowding-in effect of credit supply to government on credit supply to the private sector. The findings show a significant positive correlation between credit supply to government and credit supply to the private sector. There is also a significant positive relationship between credit supply to government and credit supply to the private sector, implying a crowding-in effect of government borrowing on private sector borrowing. The positive correlation between credit supply to government and credit supply to the private sector by banks is stronger and highly significant in the period before the Great Recession, while the positive correlation is weaker and less significant during the Great Recession, and the correlation further weakens after the Great Recession. The regional analyses show that the positive correlation between credit supply to government and credit supply to the private sector by banks is stronger and highly significant in the African region than in the Asian region and the region of the Americas.
    Keywords: Domestic credit to private sector, government borrowing, crowding-out, credit supply, private sector, government, bank credit, recession, Africa, Asia, Europe, America, correlation.
    JEL: E51 E63
    Date: 2023
  12. By: Delis, Manthos; Galariotis, Emilios; Iosifidi, Maria
    Abstract: Corporate taxation can have redistributive effects on income and wealth. We hypothesize and empirically establish such an effect working via bank credit. Using a unique sample of majority-owned firms that apply for credit, we show that after a decrease in corporate tax rates the relative-ly poor get easier access to credit. However, this policy also considerably increases loan amounts and decreases loan spreads for the relatively rich. Ultimately, reducing the corporate tax rate pre-dominantly increases the future income and wealth of relatively rich business owners.
    Keywords: Corporate taxes; Economic inequality; Bank credit; Credit score
    JEL: D63 G20 G21 H25
    Date: 2023–02–19
  13. By: Iñaki Aldasoro; Sebastian Doerr; Haonan Zhou
    Abstract: This paper shows that non-banks curtail their syndicated credit by significantly more than banks during crises, even after accounting for time-varying lender and borrower characteristics. We provide novel evidence that differences in the value of lending relationships explain most of the gap: unlike for banks, relationships with non-banks – whether measured by duration or intensity – do not improve borrowers' access to credit during crises. The rise of non-banks could therefore lead to a shift from relationship towards transaction lending and exacerbate the repercussions of financial crises.
    Keywords: Non-banks, syndicated loans, financial crises, financial stability, relationship lending
    JEL: F34 G01 G21 G23
    Date: 2023–02
  14. By: Bhargava, Apoorv; Gόrnicka, Lucyna; Xie, Peichu
    Abstract: Sector-specific macroprudential regulations can increase the riskiness of credit to other sec-tors. First, using cross-country bank-level data we find that after a tightening of household-specific macroprudential policy during a credit expansion, banks with larger portfolios of residential mortgages increase their corporate lending by more than banks with smaller mortgage portfolios. Second, we compute three country-level measures of the riskiness of corporate credit allocation based on firm-level data. Consistently across the measures, an unexpected tightening of household-specific macroprudential tools during a credit expansion is followed by an increase in riskiness of corporate credit. These effects are quantitatively meaningful: the riskiness of corporate credit increases by around 10 percent of the historical standard deviation following an unexpected policy tightening. Further evidence from bank lending standards surveys suggests that the leakage effects are stronger for larger firms com-pared to SMEs, consistent with recent evidence on the use of personal real estate as loan collateral by small firms. JEL Classification: G21, G28, G38
    Keywords: corporate credit risk, corporate loan growth, macroprudential regulations, sector-specific financial regulations
    Date: 2023–02
  15. By: Mr. Irineu E de Carvalho Filho; DingXuan Ng
    Abstract: This paper examines how countries use Macroprudential Policies (MaPs) to respond to external shocks such as US monetary policy surprises or fluctuations in capital flows. Constructing a model of a small open economy with financial frictions and a MaP authority that adjusts loan to value (LTV) ratio limits on borrowers and capital adequacy ratio (CAR) limits on banks, we show that using MaPs where stochastic external financial shocks are present entails a trade-off between macro-financial volatility and GDP growth. The terms of the trade-off are a function of a few country characteristics that amplify financial channels of external monetary shocks. Estimating MaP reaction functions for a panel of 41 countries in the period 2000–2017, we find that countercyclical macroprudential policy in response to surprise US monetary tightening is more likely for countries with net short currency mismatches (that is, foreign currency denominated liabilities larger than foreign currency denominated assets), consistent with the model’s predictions. The paper also finds that domestic credit and interest rates are more insulated from US monetary tightening for countries that employ MaPs countercyclically.
    Keywords: Macroprudential policy; external shocks; loan to value; figures entry; map authority; Model simulation; foreign currency; interest rate shock; bank profit; Credit; Real exchange rates; Financial statements; Bank credit; Self-employment; Global
    Date: 2023–01–20
  16. By: Valentina Peruzzi (Sapienza University of Rome); Pierluigi Murro (LUISS University); Stefano Di Colli (Confindustria Research Department)
    Abstract: This paper investigates whether local cooperative banks mitigated income inequality in Italian municipalities after the two main crises that characterized the European landscape between 2008 and 2015, i.e. the financial and sovereign-debt crises. Estimation results reveal that, although in the post-crisis periods income inequality increased, this increase was lower in municipalities with at least one cooperative bank branch. The same result, that is a mitigation of income inequality, is not found for non-cooperative banks. Also the size of the cooperative banking system mattered after the crises: where cooperative banks extended more loans and collected more deposits income inequality was lower. The distributional impact of cooperative banks after the two crises was particularly relevant in small municipalities, and where the level of industrial and financial development was higher.
    Keywords: Cooperative banking; income inequality; financial development; financial crisis; municipalities
    JEL: G21 G38 O15
    Date: 2023–02
  17. By: Sebastian Alvarez (Universidad Adolfo Ibañez, Santiago, Chile); Gianandrea Nodari (Université de Genève, Geneva, Switzerland)
    Abstract: This article explores the evolution of the Argentine banking system between 1925 and 1935. In order to reach this goal, we gathered individual banks' monthly balance sheets and offer a novel and comprehensive database on the Argentine banking system of the time. Using this new source, our analysis displays that the situation of Argentine banks during the Great Depression was more complex and dramatic than has been generally recognized. Although intense and deep, the banking crisis was not, however, homogeneous. The nature and timing of the problems, as well as their causes and scope, varied significantly between individual banks or groups of banks. As the article shows, the reasons and motives behind the heterogeneity of banks' problems seem to be linked both to national political episodes of instability as well as to the contagion of the financial crisis from the core countries.
    Keywords: Argentina, Great Depression, Banking crisis, International Finance
    JEL: G01 G21 N16 N26
    Date: 2023–03
  18. By: Chen, Zhenzhu; Li, Li; Tang, Yao
    Abstract: We constructed an Actuary Climate Index to measure extreme weather risks in China. Analyzing macroeconomic data through a structural vector auto-regression model suggests that a negative weather shock leads to persistently low GDP and credit obtained by non-financial firms. In our regression analysis of a panel of firms listed in China, the negative effects of weather shocks on firm level loans were statistically and practically significant. Further analysis suggests that credit risk and expectations are two important impact channels. A high existing credit risk or low confidence among firm managers, amplifies the negative effects of extreme weather on loans.
    Keywords: extreme weather shocks, credit risk, expectations, Chinese economy
    JEL: E32 E44 G32 Q54
    Date: 2023–02–16
  19. By: Dutt, Satyajit; Radermacher, Jan W.
    Abstract: We investigate consumption patterns in Europe with supervised machine learning methods and reveal differences in age and wealth impact across countries. Using data from the third wave (2017) of the Eurosystem's Household Finance and Consumption Survey (HFCS), we assess how age and (liquid) wealth affect the marginal propensity to consume (MPC) in the Netherlands, Germany, France, and Italy. Our regression analysis takes the specification by Christelis et al. (2019) as a starting point. Decision trees are used to suggest alternative variable splits to create categorical variables for customized regression specifications. The results suggest an impact of differing wealth distributions and retirement systems across the studied Eurozone members and are relevant to European policy makers due to joint Eurozone monetary policy and increasing supranational fiscal authority of the EU. The analysis is further substantiated by a supervised machine learning analysis using a random forest and XGBoost algorithm.
    Date: 2023
  20. By: Bonga-Bonga, Lumengo; Manguzvane, Mathias Mandla
    Abstract: This paper investigates the effects of geographical distance on stock market correlations between countries within economic blocs. Specifically, this paper examines whether the degree of economic integration influences the nexus between geographical distance and stock market correlation. As the study compares two economic blocs, the European Union (EU) and the North Atlantic Free Trade Area (NAFTA), it finds that geographical distance negatively affects stock market correlations in the two economic blocs, but that effect is less significant for economic blocs with advanced economic integration. Contrary to past studies, this paper postulates that the negative impact of geographical distance on stock market correlation is a result of portfolio reallocation by foreign investors seeking high yields and safe havens in the local stock market when taking advantage of possible capital market liberalization.
    Keywords: stock market correlation; geographical distance; gravity model; economic integration.
    JEL: C13 F38 G1
    Date: 2023
  21. By: Guglielmo Maria Caporale; Stavroula Yfanti; Menelaos Karanasos; Jiaying Wu
    Abstract: This study examines the macro drivers of the time-varying (dynamic) connectedness between eleven European tourism sectors. Financial integration between the travel and leisure markets, measured by their dynamic correlations or co-movement, is explained by common global fundamentals. The empirical results provide new evidence on the counter-cyclical behaviour of the correlations; in particular, stronger cross-country interdependence can be attributed to economic slowdowns characterized by higher uncertainty and geopolitical risk, tighter credit and liquidity conditions, and sluggish economic and real estate activity. Further, economic and political uncertainty is found to intensify the macro effects on tourism correlations. Finally, crises such as the 2008 financial turmoil, the subsequent European debt crisis, and the recent Covid-19 pandemic crash, also magnify the impact of macro drivers on the evolution of co-movement and integration in the tourism sector.
    Keywords: cross-country tourism correlations, economic policy uncertainty, financial/health crisis, financial integration, sectoral contagion, travel and leisure industry
    JEL: C32 D80 G01 L83 Z39
    Date: 2023
  22. By: Ahnert, Toni; Hoffmann, Peter; Leonello, Agnese; Porcellacchia, Davide
    Abstract: What is the effect of Central Bank Digital Currency (CBDC) on financial stability? We answer this question by studying a model of financial intermediation with an endogenously determined probability of a bank run, using global games. As an alternative to bank deposits, consumers can also store their wealth in remunerated CBDC issued by the central bank. Consistent with widespread concerns among policymakers, higher CBDC remuneration increases the withdrawal incentives of consumers, and thus bank fragility. However, the bank optimally responds to the additional competition by offering better deposit rates to retain funding, which reduces fragility. Thus, the overall relationship between CBDC remuneration and bank fragility is U-shaped. JEL Classification: D82, G01, G21
    Keywords: bank fragility, central bank digital currency, demand deposits, global games
    Date: 2023–02
  23. By: Mr. Marco Gross; Elisa Letizia
    Abstract: We set up a model of banks, the central bank, the payment system, and the surrounding private sector economic environment. It is a structural, choice-theoretic model which is deeply rooted in data. We use the model to conduct a structural counterfactual that introduces a Central Bank Digital Currency (CBDC) which is optionally interest-bearing. The model can be used to provide estimates of the emerging CBDC-in-total-money shares, the drop of deposit rate spreads to policy rates, the impact on reserve needs, the implied rotation of profits away from banks toward central banks, and the extent to which monetary policy pass-through may become stronger. We obtain upper bound estimates for the CBDC-in-money shares of about 25 percent and 20 percent, respectively for the U.S. and euro area, when CBDC would be remunerated at the policy rates and be perceived as “deposit-like” by the public. Actual take-up may likely be below such upper bound estimates. The model codes—to replicate all results and to apply them to other countries—are made available along with the paper.
    Keywords: Central bank digital currency; bank funding costs; central bank seigniorage; monetary policy pass-through; reinforcement learning; Authorss e-mail; bank agent; Central Bank digital currencies; Deposit rates; Central bank policy rate; Monetary base; Bank deposits; Global
    Date: 2023–01–20
  24. By: Arthur A. B. Pessa; Matjaz Perc; Haroldo V. Ribeiro
    Abstract: Cryptocurrencies are considered the latest innovation in finance with considerable impact across social, technological, and economic dimensions. This new class of financial assets has also motivated a myriad of scientific investigations focused on understanding their statistical properties, such as the distribution of price returns. However, research so far has only considered Bitcoin or at most a few cryptocurrencies, whilst ignoring that price returns might depend on cryptocurrency age or be influenced by market capitalization. Here, we therefore present a comprehensive investigation of large price variations for more than seven thousand digital currencies and explore whether price returns change with the coming-of-age and growth of the cryptocurrency market. We find that tail distributions of price returns follow power-law functions over the entire history of the considered cryptocurrency portfolio, with typical exponents implying the absence of characteristic scales for price variations in about half of them. Moreover, these tail distributions are asymmetric as positive returns more often display smaller exponents, indicating that large positive price variations are more likely than negative ones. Our results further reveal that changes in the tail exponents are very often simultaneously related to cryptocurrency age and market capitalization or only to age, with only a minority of cryptoassets being affected just by market capitalization or neither of the two quantities. Lastly, we find that the trends in power-law exponents usually point to mixed directions, and that large price variations are likely to become less frequent only in about 28\% of the cryptocurrencies as they age and grow in market capitalization.
    Date: 2023–02
  25. By: Aysan, Ahmet Faruk; Babacan, Mehmet; Gür, Nurullah; Süleyman, Selim
    Abstract: This paper examines how small and medium-size enterprises (SMEs) in Istanbul managed their financial needs during the COVID-19 pandemic. A unique survey was conducted in May–June 2021 to analyze the effect of the pandemic on financial conditions and access to finance. The paper maps the differences between firms in terms of their financing conditions and behavior based on their size during the pandemic. The novel data set helps to conceptualize the impact of the COVID-19 pandemic on SMEs. The paper makes a contribution to the literature through using a large number of variables related to firms’ financial conditions and opportunities (e.g., credit restructuring, debt postponing, capital injection). The paper hypothesizes that SMEs are less likely than large firms to access formal finance opportunities, but they tend to rely more on informal financing. The empirical findings suggest that, during the pandemic, micro and small firms tend to borrow more from their acquaintances, such as relatives and friends. Micro firms are less likely to restructure their outstanding loans, borrow from banks, or inject capital. Furthermore, micro firms tend to cut their costs more to avoid further difficulty in their financial positions. Micro and small firms tend to apply for bank loans less than large firms, while medium-size firms are more likely to apply. Micro and small firms are more inclined to report difficulty in accessing credit.
    Keywords: COVID-19, emerging markets, finance, small and medium-size enterprises (SMEs)
    JEL: D22
    Date: 2023
  26. By: Altunbas, Yener; Avignone, Giuseppe; Kok, Christoffer; Pancaro, Cosimo
    Abstract: This paper investigates to what extent the introduction of negative monetary policy rates altered competitive behaviour in the euro area banking sector. Specifically, it analyses the effect that negative policy rates had on euro area banks’ market power in comparison to banks that have not been subject to negative rates. The analysis, considering a sample of 4, 223 banks over the period 2011–2018 and relying on a difference-in-differences methodology, finds that negative monetary policy rates led to an increase in euro area banks’ market power. Furthermore, it shows that, during the negative interest rate policy period, change in banks’ competitive behaviour affected the bank lending channel and discouraged banks from taking excessive risks. JEL Classification: E44, E52, E58, G20, G21
    Keywords: Bank lending channel, Bank Stability, DiD, Lerner index, NIRP
    Date: 2023–02
  27. By: Ozili, Peterson K
    Abstract: We investigate whether banks use loan loss provisions to smooth income and whether this behaviour is influenced by foreign bank presence, ownership and institutional quality differences across African countries. We examine 370 banks from 21 African countries from 2002 to 2021. We find evidence that African banks use LLPs to smooth their income when they are more profitable during economic boom or recession. Income smoothing is persistent (i) among banks with a widely dispersed ownership, (ii) among banks with strong government ownership and (iii) among banks with weak government ownership. Income smoothing is also persistent in African countries that have greater corruption control, better regulatory quality and political stability. In contrast, moderate concentrated ownership reduces bank income smoothing. Bank income smoothing is reduced in African countries that have strong rule of law, high government effectiveness, strong foreign bank presence and strong voice and accountability institutions. The implication is that effective corporate governance and institutional quality can constrain the extent of income smoothing by African banks.
    Keywords: Ownership concentration, foreign banks, income smoothing, loan loss provisions, Africa, institutional quality, banks, positive accounting theory, corporate governance.
    JEL: M40 M41 M42
    Date: 2023
  28. By: Tanguy Bonnet
    Abstract: This paper investigates the links between strategic minerals and foreign direct investment. I contribute to the literature on the FDI-resource curse by studying strategic minerals, the fundamental raw material of the energy transition.The paper presents a precise overview of strategic minerals, their uses, and the geographical distribution of mineral production. This presentation highlights the novelties and peculiarities of strategic minerals which, due to their plurality, complexity and interdependencies, represent an energy commodity quite different from hydrocarbons, but of capital interest for the needs of the energy transition. The econometric study in panel data at the macroeconomic level allows to find the results of the literature, namely a negative relationship between foreign direct investments and the presence of hydrocarbons, the FDI-resource curse. The core of my results contributes to the literature by showing a positive relationship between FDI and the presence of strategic minerals. Strategic minerals thus escape the FDI-resource curse. These results can be explained by the new and particular characteristics of strategic minerals which represent new stakes and do not obey the same rules as hydrocarbons. The paper therefore discusses the ambiguous economic consequences of this positive relationship between minerals and foreign investment.Finally, the paper raises the consequences in terms of geopolitical strategies around strategic minerals issues, in terms of production, needs and energy sovereignty, and highlights China's global strategy and foresight.
    Keywords: strategic minerals, foreign direct investments, resource curse
    JEL: Q4 F21 C23
    Date: 2023
  29. By: Israel, Karl-Friedrich; Sepp, Tim Florian; Sonnenberg, Nils
    Abstract: In this study, we investigate the impact of monetary policy on Japanese household incomes using the Family Income and Expenditure Survey. Our analysis focuses on the savings and income structure of households, and covers the period from Q1 2007 to Q2 2021. We find that households in the highest income brackets have a higher proportion of their savings invested in stocks, while middle and lower income households hold a greater share of their savings in bank deposits. Our hypothesis is that the Bank of Japan's monetary policies have boosted stock markets in particular, leading to disproportionate benefits for high-income households through capital gains and dividends. Using local projections, we first identify a positive, lasting cumulative effect of both conventional and unconventional monetary expansion on Japanese stock markets. We then examine how stock market performance impacts household incomes, and find that the effect is strongest for high-income households, decreases for middle-income households, and disappears for lower-income households. Our results suggest that monetary policy may have contributed to the persistent growth in income inequality in Japan, as measured by metrics such as the Gini coefficient and top-to-bottom income ratios.
    Keywords: monetary policy, inequality, Japan, household income
    JEL: D31 D63 E52
    Date: 2023
  30. By: Ilzetzki, Ethan; Jin, Keyu
    Abstract: We demonstrate a dramatic change over time in the international transmission of US monetary policy shocks. International spillovers from US interest rate policy have had a different nature since the 1990s than they did in post-Bretton Woods period. Our analysis is based on a panel of 21 high income and emerging market economies. Prior to the 1990s, the US dollar appreciated, and ex-US industrial production declined, in response to increases in the US Federal Funds Rate, as predicted by textbook open economy models. The past decades have seen a shift, whereby increases in US interest rates depreciate the US dollar but stimulate the rest of the world economy. Results are robust to several identification methods. We sketch a simple theory of exchange rate determination in face of interest-elastic risk aversion that rationalizes these findings.
    Keywords: international spillovers; exchange rates; P004253/1; 71828301
    JEL: N0 F3 G3
    Date: 2021–05–01
  31. By: Akkaya, Yildiz (Monetary Policy Department, Central Bank of Sweden); Belfrage, Carl-Johan (Monetary Policy Department, Central Bank of Sweden); Di Casola, Paola (European Central Bank); Strid, Ingvar (Monetary Policy Department, Central Bank of Sweden)
    Abstract: This paper evaluates the macroeconomic effects of foreign and domestic central bank government bond purchases on the Swedish economy before and during the Corona pandemic using a small open economy DSGE model with segmented asset markets. In this model, the effects of foreign and domestic quantitative easing on the Swedish economy occur mainly through the exchange rate channel. The calibrated model is able to broadly capture the movements in foreign and domestic bond yields, capital flows and the Krona exchange rate associated with QE since the global financial crisis in 2007-2009. We find that foreign quantitative easing strengthened the Krona exchange rate and had modestly negative effects on Swedish GDP and inflation. Domestic QE, on the other hand, depreciated the Krona and had modestly positive macroeconomic effects. In 2015-2019 the government bond purchases on average depreciated the Krona by 2.5 percent, increased GDP by 0.2 percent, and increased inflation by 0.2 percentage points. The government bond purchases following the pandemic, which were more limited in size, had roughly half of these effects.
    Keywords: Unconventional Monetary Policy; Quantitative Easing; Effective Lower Bound; International Spillovers; DSGE model
    JEL: E44 E52 F41
    Date: 2023–02–01

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