nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2023‒04‒17
29 papers chosen by
Georg Man

  1. Bank Profitability and Economic Growth By Paul-Olivier Klein; Laurent Weill
  2. Bank capital and economic activity By Paul-Olivier Klein; Rima Turk-Ariss
  3. Sentiment, Productivity, and Economic Growth By George M. Constantinides; Maurizio Montone; Valerio Potì; Stella Spilioti
  4. The Effects of Startup Acquisitions on Innovation and Economic Growth By Christian Fons-Rosen; Pau Roldan-Blanco; Tom Schmitz
  5. Indebted Demand in a Two Period Consumption-Saving Model By Joshua Brault; Hashmat Khan
  6. The paradox of debt and Minsky cycle: Nonlinear effects of debt and capital, and variety of capitalism By Yuki Tada
  7. The relationship between inequality and bank credit in Australia By van Netten, Jamie
  8. Strapped for cash: The role of financial constraints for innovating firms By Esther Ann Boler; Andreas Moxnes; Karen Helene Ulltveit-Moe
  9. Lone (loan) wolf pack risk By Gao, Mingze; Hasan, Iftekhar; Qiu, Buhui; Wu, Eliza
  10. Assessing the contribution of South African Insurance Firms to Systemic Risk By Zulu, Thulani; Manguzvane, Mathias Mandla; Bonga-Bonga, Lumengo
  11. Distributional Vector Autoregression: Eliciting Macro and Financial Dependence By Yunyun Wang; Tatsushi Oka; Dan Zhu
  12. Foreign Aid Effectiveness: The Relationship Between Aid Inflows and Economic Growth By Abbas Moosvi
  13. Equal opportunity and poverty reduction: how should aid be allocated? By Patrick Guillaumont; Phu Nguyen‐van; Thi Kim Cuong Pham; Laurent Wagner
  14. Regional favoritism in access to credit: Just believe it By Osei-Tutu, Francis; Weill, Laurent
  15. At the Right Time:Eliminating Mismatch between Cash Flow and Credit Flow in Microcredit By Hisaki KONO; Abu SHONCHOY; Kazushi TAKAHASHI
  16. A revised financial satellite model for COSMO By Egan, Paul; McQuinn, Kieran; O'Toole, Conor
  17. The Financial Macro-econometric Model (FMM, 2022 Version) By Nobuhiro Abe; Kyosuke Chikamatsu; Kenji Kanai; Yusuke Kawasumi; Ko Munakata; Koki Nakayama; Tatsushi Okuda; Yutaro Takano
  18. Tracing the International Transmission of a Crisis Through Multinational Firms By Marcus Biermann; Kilian Huber
  19. Firm Heterogeneity and the Transmission of Central Bank Credit Policy By Konrad Kuhmann
  20. The cyclicality of bank credit losses and capital ratios under expected loss model By Fatouh, Mahmoud; Giansante, Simone
  21. Nonbank lenders as global shock absorbers: evidence from US monetary policy spillovers By Elliott, David; Meisenzah, Ralf R; Peydró, José-Luis
  22. Useful, usable, and used? Buffer usability during the Covid-19 crisis By Mathur, Aakriti; Naylor, Matthew; Rajan, Aniruddha
  23. Cost of Implementation of Basel III reforms in Bangladesh -- A Panel data analysis By Dipti Rani Hazra; Md. Shah Naoaj; Mohammed Mahinur Alam; Abdul Kader
  24. Supervisory policy stimulus: evidence from the euro area dividend recommendation By Dautović, Ernest; Gambacorta, Leonardo; Reghezza, Alessio
  25. Money velocity, digital currency, and inflation dynamics By Danny Hermawan; Denny Lie; Aryo Sasongko; Richard I. Yusan
  26. Asymmetric Double Tax Treaties and FDI in Developing Countries: The Role of the Relief Method and Tax Sparing By Shehaj, Pranvera; Zagler, Martin
  27. The Financial Market of Indices of Socioeconomic Wellbeing By Thilini V. Mahanama; Abootaleb Shirvani; Svetlozar Rachev
  28. Health Insurance and Agricultural Investments: Evidence from Rural Thailand By Liu, K.; Prommawin, B.; Schroyen, F.
  29. The impact of private health insurance on household savings : Evidence from Australia By Nguyen, John

  1. By: Paul-Olivier Klein (Laboratoire de Recherche Magellan - UJML - Université Jean Moulin - Lyon 3 - Université de Lyon - Institut d'Administration des Entreprises (IAE) - Lyon); Laurent Weill (EM Strasbourg - École de Management de Strasbourg, Institut d'Études Politiques [IEP] - Strasbourg)
    Abstract: Is bank profitability beneficial for economic growth? While policymakers have shown major concerns for low levels of bank profitability, the influence of bank profitability on economic growth remains an open question. While it can favor economic growth by strengthening financial stability, it can also result from lower competition and as such depress economic growth. We provide the first empirical investigation to appraise the impact of bank profitability on economic growth. We examine a panel of 132 countries during the period 1999-2013 using generalized method of moments (GMM) dynamic panel techniques. We document a positive impact of bank profitability on economic growth in both the short-run and the long-run. These findings are robust to controlling for the dynamics of banks' profits. They are also robust to alternative measures, specifications, and time periods. They support the view that bank profitability should be promoted by authorities for growth concerns.
    Keywords: Bank profitability, Economic growth, Finance-growth nexus
    Date: 2022–05
  2. By: Paul-Olivier Klein (Laboratoire de Recherche Magellan - UJML - Université Jean Moulin - Lyon 3 - Université de Lyon - Institut d'Administration des Entreprises (IAE) - Lyon); Rima Turk-Ariss (International Monetary Fund (IMF))
    Abstract: Banks argue that holding higher capital will have adverse implications on their lending activities and thereby on economic growth. Yet, the effect of a stronger capital base on economic growth remains largely unsettled. We argue that better capitalized banks improve financial stability conditions and, in dire times, they are able to sustain credit to the economy thereby containing adverse macroeconomic implications. Using various methods, we test for the presence and strength of a financial stability channel and a bank lending channel by drawing evidence from 47 advanced and developing countries over close to two decades. We find that higher capital ratios improve financial stability and help sustain bank lending, ultimately exerting a positive influence on economic activity. These effects on real GDP growth are economically significant, reaching up to 1¼ percentage points for each percentage point acceleration in capital. Our main results are robust to various sensitivity checks, supporting the conclusion that safer banking systems do not bridle economic activity.
    Keywords: Bank capital, Financial stability, Bank lending, Economic growth
    Date: 2022–10
  3. By: George M. Constantinides; Maurizio Montone; Valerio Potì; Stella Spilioti
    Abstract: Previous research finds correlation between sentiment and future economic growth, but disagrees on the channel that explains this result. In this paper, we shed new light on this issue by exploiting cross-country variation in sentiment and market efficiency. We find that sentiment shocks in G7 countries increase economic activity, but only temporarily and without affecting productivity. By contrast, sentiment shocks in non-G7 countries predict prolonged economic growth and a corresponding increase in productivity. The results suggest that sentiment can indeed create economic booms, but only in less advanced economies where noisy asset prices make sentiment and fundamentals harder to disentangle.
    JEL: G10 G30 F36 F43
    Date: 2023–03
  4. By: Christian Fons-Rosen (University of California in Merced); Pau Roldan-Blanco (Bank of Spain); Tom Schmitz (Queen Mary University of London and CEPR)
    Abstract: Innovative startups are frequently acquired by large incumbent firms. On the one hand, these acquisitions provide an incentive for startup creation and may transfer ideas to more efficient users. On the other hand, incumbents might acquire startups just to “kill” their ideas, and acquisitions can erode incumbents’ own innovation incentives. Our paper aims to assess the net effect of these forces. To do so, we build an endogenous growth model with heterogeneous firms and acquisitions, and calibrate its parameters by matching micro-level evidence on startup acquisitions and patenting in the United States. Our calibrated model implies that acquisitions raise the startup rate, but lower incumbents’ own innovation as well as the percentage of implemented startup ideas. The negative forces are slightly stronger. Therefore, a ban on startup acquisitions would increase growth by 0.03 percentage points per year, and raise welfare by 1.8%.
    Keywords: Keywords: Acquisitions, Innovation, Productivity growth, Firm dynamics.
    JEL: O30 O41 E22
    Date: 2022–12–09
  5. By: Joshua Brault (Department of Economics, Carleton University); Hashmat Khan (Department of Economics, Carleton University)
    Abstract: We construct a two period consumption-saving model with two agents where rising income inequality leads to declining equilibrium rates of interest, rising debt levels, and lower future aggregate demand. Importantly, our model does not rely on non-homothetic preferences to generate these outcomes. Instead, borrowers face a borrowing constraint which eases when income inequality increases. This feature is supported by the stylized fact that consumer credit and inequality have strongly co-moved and risen in the U.S. since the mid-1980s.
    Keywords: Income inequality, Borrowing Constraint, Interest rate, Indebted demand
    JEL: E21 E43
    Date: 2021–12–01
  6. By: Yuki Tada (Department of Economics, New School for Social Research, USA)
    Abstract: The main aim of this paper is to study the variety of financialized capitalism which are contingent on the institution, policy, and path dependency. Using the neo-Kaleckian model we study to model the US and UK shareholder-oriented financialized capitalism using our own version of the Miskyan cycle. Meanwhile, Japanese partially fledged financialized capitalism with high retention rates of firms is analyzed by using the paradox of the debt (Steindl) cycle. The analysis shows (1) instability arises when firms have a high retention rate of profit to deleverage; (2) debt-led Minsky regime and the debt-burdened paradox of debt regime can be distinguished by setting sufficiently low retention rates for the former and sufficiently high retention rate for the latter; (3) both in the Minskyan and Steindl regime we observe fixed capital investment is sluggish and observe secular stagnation in accumulation rate; (4) in the Steindl paradox of debt model, the debt-burdened economic stagnation transforms into a long wave cyclical growth with sufficiently high firms animal spirits, which exhibits the possibility of the investment-led cyclical growth after the secular stagnation from the paradox of debt.
    Keywords: Minsky, paradox of debt, capitalism, growth, financial instability, supercycle
    JEL: B52 D21 E12 E32
    Date: 2023–04
  7. By: van Netten, Jamie (Monash University)
    Abstract: This paper examines the relationship between economic inequality and expansions of bank credit in Australia throughout recent decades. This relationship is a central component of what has become colloquially known as the “Rajan hypothesis†and more technically referred to as the “inequality, credit, crisis nexus†. The findings of the paper suggest that although there is a strong positive relationship between inequality and expansions of bank credit in Australia at the most aggregated level (consistent with international studies of the phenomenon in which Australia was included in panel data), when the types of loans are examined in more detail, their correlation with inequality is not consistent with the belief that credit is channelled specifically to low income households as inequality worsens (as is suggested by the Rajan hypothesis). There are multiple ways in which the Australian case differs from the American which may contribute to the differing results, some of which include a lower levels of income inequality, more progressive taxation policy which reduces consumption inequality, and stricter macroprudential policy which resulted in fewer subprime loans.
    Keywords: Inequality ; Credit booms ; Loans ; Rajan JEL classifications: D63 ; E51 ; G21 ; G28
    Date: 2023
  8. By: Esther Ann Boler; Andreas Moxnes; Karen Helene Ulltveit-Moe
    Abstract: This paper makes use of a reform that allowed firms to use patents as stand-alone collateral, to estimate the magnitude of collateral constraints and to quantify the aggregate impact of these constraints on misallocation and productivity. Using matched firm-bank data for Norway, we find that bank borrowing increased for firms affected by the reform relative to the control group. We also find an increase in the capital stock, employment and innovation as well as equity funding. We interpret the results through the lens of a model of monopolistic competition with potentially collateral constrained heterogeneous firms. Parameterizing the model using well-identified moments from the reduced form exercise, we find quantitatively large gains in output per worker in the sectors in the economy dominated by constrained (and intangible-intensive) firms. The gains are primarily driven by capital deepening, whereas within-industry misallocation plays a smaller role.
    Keywords: intangible capital, patents, credit constraints, misallocation, productivity
    Date: 2023–03–14
  9. By: Gao, Mingze; Hasan, Iftekhar; Qiu, Buhui; Wu, Eliza
    Abstract: This paper proposes an early-warning bank risk measure based on the syndicate concentration of recent syndicated loans that a bank participates in. At the bank level, higher values of the measure predict greater risks (i.e., loan loss provisions, idiosyncratic return volatility, default probability, and frequency of lawsuits) and lower profitability at least three years ahead, especially for opaque and complex banks. Banks failing the Federal Reserve's forward-looking stress tests subsequently exhibit a reduction in the syndicate concentration measure. At the aggregate level, higher values of the measure predict both greater financial sector risks and economic slowdowns measured by private-sector investment, business activity, total factor productivity, industrial production, and gross domestic product.
    Keywords: syndicate concentration, early-warning, bank risks, financial sector risks, economic slowdowns
    JEL: G21 E02
    Date: 2023
  10. By: Zulu, Thulani; Manguzvane, Mathias Mandla; Bonga-Bonga, Lumengo
    Abstract: In light of the crucial contribution insurance firms make to global investment, this paper examines the extent of systemic risks facing emerging market insurance, with a particular focus on South Africa, one of the African continent's most prominent emerging economies. Contrary to past studies, the paper relies on delta conditional value at risk (∆CoVaR) based dynamic conditional correlation (DCC)-GARCH model to this end. Moreover, the paper assesses how selected developed economies contribute to the systemic of the South African insurance industry. The results of the empirical analysis show that Santam, Sanlam, and Momentum Holdings account for the largest systemic risks. At the same time, the least contributors are Discovery and Liberty. Meanwhile, Australia and Japan appear to contribute the most to systemic risk in the South African insurance industry. Moreover, the paper finds that periods of economic turmoil significantly increased developed markets' systemic risk contributions to the South African insurance industry.
    Keywords: Delta conditional value at risk; dcc-gjr-garch; systemically important financial institutions.
    JEL: C58 F3 G22
    Date: 2023
  11. By: Yunyun Wang; Tatsushi Oka; Dan Zhu
    Abstract: Vector autoregression is an essential tool in empirical macroeconomics and finance for understanding the dynamic interdependencies among multivariate time series. In this study, we expand the scope of vector autoregression by incorporating a multivariate distributional regression framework and introducing a distributional impulse response function, providing a comprehensive view of dynamic heterogeneity. We propose a straightforward yet flexible estimation method and establish its asymptotic properties under weak dependence assumptions. Our empirical analysis examines the conditional joint distribution of GDP growth and financial conditions in the United States, with a focus on the global financial crisis. Our results show that tight financial conditions lead to a multimodal conditional joint distribution of GDP growth and financial conditions, and easing financial conditions significantly impacts long-term GDP growth, while improving the GDP growth during the global financial crisis has limited effects on financial conditions.
    Date: 2023–03
  12. By: Abbas Moosvi (Pakistan Institute of Development Economics)
    Abstract: Has the process of foreign-led assistance/development fostered economic growth and development around the globe? Reviewing the literature, this paper charts out the foreign aid landscape, in terms of its salient stakeholders, operational dynamics, and historical evolution, following which an attempt is made to offer a comprehensive summary and analysis of the academic literature on the phenomenon.
    Date: 2022
  13. By: Patrick Guillaumont (FERDI - Fondation pour les Etudes et Recherches sur le Développement International); Phu Nguyen‐van (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique); Thi Kim Cuong Pham (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique); Laurent Wagner (FERDI - Fondation pour les Etudes et Recherches sur le Développement International)
    Abstract: This paper analyses a model of aid allocation that aims to equalize the opportunity between recipient countries to reach a common poverty reduction goal. We propose a fair and efficient aid allocation based on a multi-criteria principle. The model considers structural handicaps in recipient countries in terms of lack of human capital and economic vulnerability, their initial poverty, and the natural gap between the growth rate required to reach a development goal and the observed one. We show that our proposed aid allocation favors poor and vulnerable countries with our multi-criteria principle. It substantially differs from the observed allocation. Analyses also shed light on the impact of the donors' aversion to the low natural growth gap in recipient countries on the optimal aid allocation and the marginal efficiency of aid.
    Keywords: Development Aid, Efficiency, Equity, Growth Deviation, Poverty Reduction
    Date: 2023
  14. By: Osei-Tutu, Francis; Weill, Laurent
    Abstract: We examine the effect of regional favoritism on the access of firms to credit. Using firm-level data on a large sample of 29, 000 firms covering 47 countries, we investigate the hypothesis that firms in the birth regions of national political leaders have better access to credit. Our evidence suggests that firms located in birth regions of political leaders are less likely to be credit constrained. The effect takes place through the demand channel: firms in leader regions face fewer hurdles in applying for loans. We find no evidence, however, of preferential lending from banks to firms in leader regions. Thus, regional favoritism affects access to credit through differences in perceptions of firm managers, not deliberate changes in the allocation of resources by political leaders.
    Keywords: regional favoritism, access to credit, borrower discouragement
    JEL: D72 G21
    Date: 2023
  15. By: Hisaki KONO; Abu SHONCHOY; Kazushi TAKAHASHI
    Abstract: Despite the expansion of microcredit access, its outreach is still limited among farmers. One potential cause is a timing mismatch between cash flow and credit flow. Farmers have little income until their harvest is realized, while standard microcredit requires weekly installment payments. This mismatch causes underinvestment and borrowing for repayment, resulting in lower uptake rates. Furthermore, agricultural investment is sequential, while credit is disbursed as a lump sum. Present-biased (PB) farmers may fail to set aside sufficient money for later investment. To test these predictions, we conducted a randomized control trial modifying standard microcredit targeted at tenant farmers by setting repayment schedules to one-time repayment after harvest and making loan disbursement sequential. Discarding weekly repayment increased uptake and borrower’s satisfaction without worsening repayment rates. Sequential disbursement increased later investments among PB borrowers and reduced loan sizes. We attribute the loan size reduction to the option value: Sequential disbursement allowed borrowers to adjust the total loan size after observing credit demand shocks, eliminating the need for precautionary borrowing. Calibrated models are used to evaluate counterfactual credit designs, showing that letting borrowers set the credit limit is beneficial for PB borrowers, while credit lines will be suboptimal for PB borrowers.
    Keywords: Microcredit; Timing mismatch, Commitment; Option value; Precautionary borrowing
    JEL: G21 O16 Q14
    Date: 2023–03
  16. By: Egan, Paul; McQuinn, Kieran; O'Toole, Conor
    Date: 2022
  17. By: Nobuhiro Abe (Bank of Japan); Kyosuke Chikamatsu (Bank of Japan); Kenji Kanai (Bank of Japan); Yusuke Kawasumi (Bank of Japan); Ko Munakata (Bank of Japan); Koki Nakayama (Bank of Japan); Tatsushi Okuda (International Monetary Fund); Yutaro Takano (Bank of Japan)
    Abstract: The Financial Macro-econometric Model (FMM) is the model that the Bank of Japan (BOJ) employs in its macro stress testing to examine the risk resilience of Japan's financial system in a comprehensive and quantitative manner. The BOJ semiannually publishes the results of its analyses based on this model in the Financial System Report. The FMM is also used in the simultaneous stress testing based on common scenarios conducted periodically with the Financial Services Agency of Japan. Key characteristics of the FMM are that it (1) explicitly captures feedback loops between the domestic banking sector and the real economy, and (2) makes it possible to calculate the variables of interest (e.g. amount of loans and capital adequacy ratios of Japanese banks), not only at the sector level but also at the individual bank level. Since its development in 2011, the FMM has been continuously improved to reflect new developments in economic and financial conditions and to better incorporate the transmission mechanisms of financial shocks into the macro stress testing. This paper provides an outline of the basic macro stress testing framework and the FMM, and then describes the structure of the model as of September 2022 in detail.
    Keywords: Banks' stability; Macro stress test; Capital buffer regulation
    JEL: E10 E32 E44 E47 G10 G21 G28
    Date: 2023–03–30
  18. By: Marcus Biermann; Kilian Huber
    Abstract: We show that multinational firms transmit shocks across countries through their internal capital markets. We study a credit supply shock to parent firms in Germany. International affiliates outside Germany supported their parents through internal lending, became financially constrained themselves, and experienced lower real growth. We find that managers were "Darwinist" with respect to international affiliates but "Socialist" in the home country, that internal capital markets transmitted the credit shock more strongly than a non-financial shock, and that access to developed credit markets attenuated the real effects. The total real impact of shock transmission through multinationals on foreign economies was large.
    JEL: E4 F2 F3 G01 G2 G3
    Date: 2023–03
  19. By: Konrad Kuhmann
    Abstract: I study the role of firm heterogeneity for the transmission of unconventional monetary policy in the form of “credit policy†à la Gertler and Karadi (2011). To this end, I lay out a Two-Agent New-Keynesian model with financially constrained and unconstrained firms and a financial intermediary with an endogenous leverage constraint. I find that, when firms are heterogeneous, aggregate investment is substantially less responsive to credit policy compared to an identical firm setting. Moreover, when debt markets are segmented, credit policy directed exclusively at financially unconstrained firms is most effective. My paper provides a tractable framework to illustrate mechanisms through which firm heterogeneity affects the transmission of credit policy. According to my findings, the presence of firm heterogeneity can be expected to make credit policy less effective than predicted by a representative agent framework.
    Keywords: Credit Policy, Firm Heterogeneity, Investment, Financial Frictions
    JEL: E50 E52 E58
    Date: 2023–03–23
  20. By: Fatouh, Mahmoud (Bank of England); Giansante, Simone (University of Palermo)
    Abstract: We model the evolution of stylised bank loan portfolios to assess the impact of IFRS 9 and US GAAP expected loss model (ECL) on the cyclicality of loan write-off losses, loan loss provisions (LLPs) and capital ratios of banks, relative to the incurred loss model of IAS 39. We focus on the interaction between the changes in LLPs' charges (the flow channel) and stocks (the stock channel) under ECL. Our results show that, when GDP growth does not demonstrate high volatility, ECL model smooths the impact of credit losses on profits and capital resources, reducing the procyclicality of capital and leverage ratios, especially under US GAAP. However, when GDP growth is highly volatile, the large differences in lifetime probabilities of defaults (PDs) between booms and busts cause sharp increases in LLPs in deep downturns, as seen for US banks during the Covid-19 crisis. Volatile GDP growth makes capital and leverage ratios more procyclical, with sharper falls in both ratios in deep downturns under US GAAP, compared to IAS 39. IFRS 9 ECL demonstrates less sensitivity to lifetime PDs fluctuations due to the existence of loan stages, and hence can reduce the procyclicality of capital and leverage ratios, even when GDP is highly volatile.
    Keywords: IFRS 9; IAS 39; US GAAP; expected credit loss model; loan loss provisions; cyclicality of bank profits; leverage ratio; risk-weighted assets
    JEL: D92 G21 G28 G31 L51
    Date: 2023–01–20
  21. By: Elliott, David (Bank of England); Meisenzah, Ralf R (Federal Reserve Bank of Chicago); Peydró, José-Luis (Imperial College London, ICREA-Universitat Pompeu Fabra-CREI-Barcelona GSE, and CEPR)
    Abstract: We show that nonbank lenders act as global shock absorbers from US monetary policy spillovers. For identification, we exploit loan‑level data from the global syndicated lending market and US monetary policy surprises. We find that when US monetary policy tightens, nonbanks increase dollar credit supply to non‑US corporate borrowers, relative to banks. This partially mitigates the total reduction in dollar lending. The substitution is stronger for emerging market borrowers, riskier borrowers, and borrowers in countries subject to stronger capital inflow restrictions. Results suggest that our findings are not driven by borrower‑lender matching, zombie lending, or destabilising lending. Moreover, the credit substitution has real effects, as firms with existing relationships with nonbank lenders increase total debt, investment, and employment relative to firms without such relationships. Our findings suggest that having more diversified funding providers (nonbanks in addition to banks) reduces the volatility in capital flows and economic activity associated with the global financial cycle.
    Keywords: Nonbank lending; international monetary policy spillovers; global financial cycle; banks; US dollar funding for non-US firms
    JEL: E50 F34 F42 G21 G23
    Date: 2023–01–13
  22. By: Mathur, Aakriti (Bank of England); Naylor, Matthew (Bank of England and University of Oxford); Rajan, Aniruddha (Bank of England)
    Abstract: Macroprudential policies have been shown to be beneficial during booms but there is limited evidence on how well they operate during periods of stress. Using a difference‑in‑differences empirical strategy we test whether regulatory capital buffers, a key component of the Basel III reforms, helped to support lending provision by UK banks through Covid‑19. To identify credit supply effects, we exploit data on the universe of UK mortgages, which were outside the scope of government guaranteed lending schemes. We find that more constrained banks defended their capital surpluses to a greater extent during the pandemic, and did so by maintaining higher loan rates, lower loan values, and tighter terms on riskier lending. In contrast, banks receiving greater capital relief from the cut to the UK countercyclical capital buffer during the pandemic maintained more stable capital ratios, lending provision and risk‑taking capacity. Our results suggest regulatory buffers may be less usable than intended, but buffer releases can dampen these unintended consequences.
    Keywords: Banks; capital regulation; lending; macroprudential policy; Covid-19
    JEL: E58 G21 G28 G51
    Date: 2023–01–13
  23. By: Dipti Rani Hazra; Md. Shah Naoaj; Mohammed Mahinur Alam; Abdul Kader
    Abstract: Inspired by the recent debate on the macroeconomic implications of the new bank regulatory standards known as Basel III, we tried to find out in this study that the impact of Basel III liquidity and capital requirements in Bangladesh proposed by Basel Committee on Banking Supervision (BCBS, 2010a). A small set of macro variables, using a sample of 22 private commercial banks operating in Bangladesh for the period of 2010-2014, are used to estimate long-run relationships among the variables. The macroeconomic variables are included The profitability of banks, GDP, banks' lending to private sector, Net Stable Funding Ratio, Tier 1 capital Ratio, Interest rate spread, real interest rate. The cost is quantified using Driscoll and Kraay panel data models with fixed effect. Impact of higher capital and liquidity requirement on Interest rate spread and lending to private sector of banks were considered as the cost to the economy as a whole whereas impact of higher capital and liquidity requirement on profitability of banks(ROE) was considered as the cost of banks. Here it is found that, the interest rate level is positively affected by the tighter liquidity and capital requirements which driven toward lessen of the private sector lending of banks. The return on equity of banks varies negatively with the liquidity and capital. The economic costs are considerably below the estimated positive benefit that the reform should have by reducing the probability of banking crises and the associated banking losses (BCBS, 2010b).
    Date: 2023–03
  24. By: Dautović, Ernest; Gambacorta, Leonardo; Reghezza, Alessio
    Abstract: At the onset of the Covid-19 outbreak, central banks and supervisors introduced dividend restrictions as a new policy instrument aimed at supporting lending to the real economy and strengthening banks’ capacity to absorb losses. In this paper we estimate the impact of the ECB’s dividend recommendation on bank lending and risk-taking. To address identification issues, we rely on credit registry data and a direct measure that captures variation in compliance with the recommendation across banks in the euro area. The analysis disentangles the confounding effects stemming from the wide range of monetary and fiscal policies that supported credit during the Covid-19 downturn and investigates their interaction with the dividend recommendation. We find that dividend restrictions have been an effective policy in supporting financially constrained firms, adding capital space to banks, and limiting procyclical behaviour. The effects on lending are larger for small and medium enterprises and for firms operating in Covid-19 vulnerable sectors. At the same time, we do not find evidence of a significant increase in lending to riskier borrowers and ”zombie” firms. JEL Classification: E5, E51, G18, G21
    Keywords: Covid-19, credit supply, dividend restrictions, European Central Bank, supervisory policy
    Date: 2023–03
  25. By: Danny Hermawan; Denny Lie; Aryo Sasongko; Richard I. Yusan
    Abstract: This paper empirically investigates the impact of transaction cost-induced variations in the velocity of money on inflation dynamics, based on a structural New Keynesian Phillips curve (NKPC) with an explicit money velocity term. The money velocity effect arises from the role of money, both in physical and digital forms, in reducing the aggregate transaction costs and facilitating purchases of goods and services. We find a non-trivial aggregate impact in the context of the Indonesian economy: our benchmark estimates suggest that a 10% decrease in money velocity, which might be facilitated by a new digital currency (e.g. CBDC) issuance, would reduce the inflation rate by 0:6-1:7%, all else equal. Using the estimates and within a small-scale New Keynesian DSGE model, we analyze the potential implications of a CBDC issuance on aggregate fluctuations. A CBDC issuance that conservatively lowers the velocity of money by 5% is predicted to permanently raise the GDP level by 0:8% and lower the inflation rate by 0:8%. Both nominal and real interest rates are also permanently lower. Our findings imply that central banks could potentially use CBDCs as an additional stabilization policy tool by influencing the velocity.
    Keywords: inflation dynamics; transaction cost; velocity of money; digital money; digital currency; central bank digital currency (CBDC); aggregate fluctuations;
    Date: 2023–03
  26. By: Shehaj, Pranvera; Zagler, Martin
    Abstract: This study focuses on asymmetric tax treaties and investigates the impact of OECD member states’ double tax relief method and of treaty tax sparing provisions on investments in developing countries, while considering network effects. In addition, it analyses the impact of a residence country’s tax relief method on the source country’s tax policy. Our results suggest that having a treaty between the OECD member state and the developing country, which improves the investor’s conditions in terms of tax burden by changing the unilateral tax relief method, increases FDI to the developing country. The positive effect prevails when investigated within investments made through the direct route from home to host. Furthermore, results suggest that OECD member states offer tax sparing provisions mostly to less-developed economies, which already receive very low, if any, foreign direct investment. Finally, we find that developing countries set higher CIT when the OECD member state relieves double taxation through the exemption method, as compared to when it offers a foreign tax credit, while the inclusion of tax sparing agreements has a positive effect on the CIT.
    Keywords: Finance,
    Date: 2023
  27. By: Thilini V. Mahanama; Abootaleb Shirvani; Svetlozar Rachev
    Abstract: The financial industry should be involved in mitigating the risk of downturns in the financial wellbeing indices around the world by implementing well-developed financial tools such as insurance instruments on the underlying wellbeing indices. We define a new quantitative measure of the wellbeing of a country's population for those countries using the world development indicators provided by the World Bank. We monetize the indices of socioeconomic wellbeing, which serve as "risky assets, " and consequently develop a global financial market for them, which serves as a "market of indices of socioeconomic wellbeing." Then, we compare the wellbeing of different countries using financial econometric analysis and dynamic asset pricing theory. We provide the optimal portfolio weight composition along with the efficient frontiers of the wellbeing socioeconomic indices with different risk-return measures. We derive insurance instruments, such as put options, which allow the financial industry to monitor, manage, and trade these indices, creating the funds for insurance against adverse movements of those indices. Our findings should help financial institutions to incorporate socioeconomic issues as an additional dimension to their "two-dimensional" risk-return adjusted optimal financial portfolios.
    Date: 2023–03
  28. By: Liu, K.; Prommawin, B.; Schroyen, F.
    Abstract: Exploiting the 2001 universal health insurance reform in Thailand as a source of identification, we estimate the effects of health insurance coverage on agricultural production decisions and welfare. Our estimates suggest that the reform led to long-run increases in total cultivation investments and output, and that households shifted their cultivation portfolio towards riskier crops. We explain these findings using a model of agricultural investment, highlighting the important roles of health insurance in terms of mitigating background medical expenditure risk and improving health. We also find that the reform improved households’ welfare by reducing debts and defaults on loans.
    Keywords: Health insurance, Risk-taking, Cultivation, Investments.
    JEL: D1 G5 H51 I13 Q12
    Date: 2023–03–20
  29. By: Nguyen, John (Monash University)
    Abstract: This paper analyses for the first time, the relationship between private health insurance and household savings behaviour in Australia. Using the nationally representative longitudinal dataset from the Household, Income and Labour Dynamics in Australia (HILDA) Survey, we estimate the effect of private health insurance on savings, wealth accumulation and different types of asset holdings. We find strong evidence of a positive relationship between private health insurance and savings using a variety of panel fixed-effects, instrumental and non- instrumental methods. The magnitude of the effect is larger for households that do not receive public transfers, reside in a major city, have better health or have completed tertiary education. Our findings show that time preference is a partial mediation channel between private health insurance and savings, resulting in larger effects for non-financial asset holdings driven mostly by real estate wealth.
    Keywords: Private health insurance ; savings, wealth accumulation ; Australia JEL classifications: I13 ; D14 ; E21 ; G51
    Date: 2023

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