nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2023‒04‒24
nineteen papers chosen by
Georg Man

  1. Do The Inward And Outward Foreign Direct Investments Spur Domestic Investment In Bangladesh? A Counterfactual Analysis By Islam, Monirul; Tareque, Mohammad; , Abu N.M. Wahid; Alam, Md. Mahmudul; Sohag, Kazi
  2. Does Institutional Quality Matter to Korean Outward FDI? A Gravity Model Analysis By Muhammad Akhtaruzzaman, Muhammad Akhtaruzzaman
  3. Real Exchange Rate Risk and FDI flows: stylized facts and theory By Jacek Rothert; Alexander McQuoid; Katherine Smith
  4. Unique Equilibria in Models of Rational Asset Price Bubbles By Tomohiro Hirano; Alexis Akira Toda
  5. Misallocation and Productivity Growth: a Meta-analysis By Maurice Bun; Theoplasti Kolaiti; Tolga Özden
  6. Potential Growth: A Global Database By Sinem Kilic Celik; M. Ayhan Kose; Franziska Ohnsorge; F. Ulrich Ruch
  7. Potential Growth Prospects: Risks, Rewards, and Policies By Sinem Kilic Celik; M. Ayhan Kose; Franziska Ohnsorge
  8. Ricardo was surely right: the abundance of “easy†rents leads to greedy and lazy elites. A tribute to Geoff Harcourt By Palma, J. G.
  9. Review of “Credit and Crisis from Marx to Minsky” by Jan Toporowski By Rogissart, Brecht
  10. Why Are the Wealthiest So Wealthy? A Longitudinal Empirical Investigation By Serdar Ozkan ⓡ; Joachim Hubmer ⓡ; Sergio Salgado ⓡ; Elin Halvorsen ⓡ; Serdar Ozkan
  11. Can governments sleep more soundly when holding international reserves? A banking and financial vulnerabilities perspective By Audrey Sallenave; Jean-Pierre Allegret; Tolga Omay
  12. Winners and losers from reducing global imbalances By Jacek Rothert; Ayse Kabukcuoglu Dur
  13. Networks and Information in Credit Markets By Gupta, Abhimanyu; Kokas, Sotirios; Michaelides, Alexander; Minetti, Raoul
  14. The March 2023 Bank Interventions in Long-Run Context – Silicon Valley Bank and beyond By Andrew Metrick; Paul Schmelzing
  15. Who Wil Run Their Bank? By Edwin Weinstein; Gulnur Muradoglu
  16. Dynamic Banking with Non-Maturing Deposits By Urban Jermann; Haotian Xiang
  17. Corporate diversification, investment efficiency and the business cycle By Yolanda Yulong Wang
  18. Big techs and the credit channel of monetary policy By Fiorella De Fiore; Leonardo Gambacorta; Cristina Manea
  19. Public money as a store of value, heterogeneous beliefs, and banks: implications of CBDC By Muñoz, Manuel A.; Soons, Oscar

  1. By: Islam, Monirul; Tareque, Mohammad; , Abu N.M. Wahid; Alam, Md. Mahmudul (Universiti Utara Malaysia); Sohag, Kazi
    Abstract: The net contribution of the decomposed measures of foreign direct investment (FDIs), e.g., the inward and outward flows of FDIs, to domestic investment is still inconclusive in the case of underdeveloped and developing countries. The current literature bears testimony to this fact. Hence, this research examines the impact of inward and outward foreign direct investments (FDIs) on the domestic investment in Bangladesh. This study considers annual time series data from 1976 to 2019 and estimates this data property under the augmented ARDL approach to cointegration. In addition, this research employs the dynamic ARDL simulation technique in order to forecast the counterfactual shock of the regressors and their effects on the dependent variable. The results from the augmented ARDL method suggest that the inward FDI has a positive impact on domestic investment, while the outward FDI is inconsequential in both the long run and the short run. Besides, our estimated findings also show the economic growth’s long-run and short-run favorable effects on domestic investment. At the same time, there is no significant impact of real interest rates and institutional quality on domestic investment in the long run or the short run in Bangladesh. In addition, the counterfactual shocks (10% positive and negative) to inward FDI positively impact domestic investment, indicating the crowding-in effect of the inward FDI on the domestic investment in Bangladesh. As the inward FDI flow is a significant determinant for sustained domestic investment in Bangladesh, the policy strategy must fuel the local firms by utilizing cross-border investment.
    Date: 2022–03–08
  2. By: Muhammad Akhtaruzzaman, Muhammad Akhtaruzzaman (Toi Ohomai InstitTechnologyute of)
    Abstract: According to Korea’s Ministry of Knowledge Economy (currently the Ministry of Trade, Industry and Energy), foreign investment has now become one of the major economic pillars driving the Korean economy over the past 15 years (Tang 2022). The Korean economy started to open up to rest of the world following the Asian financial crisis in 1997 and was the biggest FDI policy reformer among 40 developed and emerging economies over the period from 1997 to 2010 (Nicolas et al. 2013). Over the last decade, Korea’s outward FDI grew much faster than inward FDI (See Figure 1) and Korea is now a net capital exporter to the world. In 2021, Korea’s outward FDI flows totaled $76.64 billion and a total of 2323 Korean enterprises invested in overseas countries (Korea EXIM Bank 2022). Due to this increased amount of outward FDI, a large number of studies (Kim and Rhee 2009; Park and Jung 2020) investigated what determines Korea’s outward FDI (OFDI). Institutional quality is found to be a major determinant in FDI literature in general. It suggests that political risk (lack of/poor institutional quality) not only deters FDI inflows to host countries but also can lead FDI to countries with higher risks and to ‘pollution heaven’ which might have an adverse impact on long term growth and development in both host and home countries. There are strong empirical evidences in literature that lack of institutional quality or good governance is associated with lower FDI inflows. An extensive literature (Alfaro et al. 2008; Ali et al. 2010; Akhtaruzzaman et al. 2017; Bénassy‐Quéré et al. 2007) investigated FDI response to various types of institutional quality in FDI host countries. Over the last 20 years data evidenced that Korea’s OFDI flowed to developing countries with a sustained large gap existing in institutional quality between host countries and Korea (See, Fig 2 top panel); however; those countries had been offering a higher degree of capital account openness. A sharp increase in capital account openness since the early 2000s coincides with sharp increase in Korea’s OFDI to those host countries. For example, Peru was the least open economy and started to initiate measures to open capital account since the mid-90s and early 2000s. The degree of openness in Peru is now similar to that of developed countries. (the rest omitted)
    Keywords: A Gravity Model Analysis; Outward FDI; Institutional Quality
    Date: 2023–01–03
  3. By: Jacek Rothert (United States Naval Academy; Group for Research in Applied Economics (GRAPE)); Alexander McQuoid (United States Naval Academy); Katherine Smith (United States Naval Academy)
    Abstract: We document a robust negative relationship between bilateral RER volatility and bilateral FDI flows in the European Union. We then extend the standard international business cycle model to allow for domestic and foreign ownership of physical capital stock to be less than perfect substitutes. This allows the model to have meaningful predictions about the behavior of gross FDI flows. We characterize the conditions under which lower RER volatility coincides with larger bilateral FDI flows. We also show, both theoretically, and using numerical simulations, that the magnitude of the relationship between the RER volatility and FDI flows depends crucially on one parameter: the elasticity of substitution between domestic and foreign ownership of capital stock used in production. Our results suggest the existence of a new channel through which a reduction in RER volatility can be welfare improving: more efficient allocation of capital across countries (capital diversity).
    Keywords: FDI, real exchange rates, international financial integration, exchange rate risk
    JEL: E F
    Date: 2023
  4. By: Tomohiro Hirano; Alexis Akira Toda
    Abstract: Existing models of rational pure bubble models feature multiple (and often a continuum of) equilibria, which makes model predictions and policy analysis non-robust. We show that when the interest rate in the fundamental equilibrium is below the economic growth rate (R
    Keywords: bubble, dividend, equilibrium indeterminacy, growth, low interest rate. JEL codes: D53, G12.
    Date: 2023–03
  5. By: Maurice Bun; Theoplasti Kolaiti; Tolga Özden
    Abstract: We use a meta-analysis to quantify the impact of misallocation of production factors on aggregate productivity. A key estimate in empirical studies on misallocation is the implied aggregate total factor productivity (TFP) loss due to the sub-optimal allocation of resources across firms. In our meta-analysis, we correlate this effect size with various study characteristics. First, we find that the TFP growth effect size is smaller than the level effect size. Second, we make a distinction between studies following a direct or indirect approach, where the former relates misallocation to one or more specific factors while the latter quantifies the overall effect of all possible sources. We find that studies following a direct approach generally report a smaller TFP loss than those using an indirect approach. Third, we find that the extent of misallocation and the corresponding productivity loss depends on the country of analysis. In particular, there is a negative correlation between TFP loss and the level of income.
    Keywords: meta-analysis; misallocation; productivity
    JEL: C40 D24 O47
    Date: 2023–04
  6. By: Sinem Kilic Celik (IMF); M. Ayhan Kose (Prospects Group, World Bank; Brookings Institution; CEPR; CAMA); Franziska Ohnsorge (Prospects Group, World Bank; CEPR; CAMA); F. Ulrich Ruch (Prospects Group, World Bank)
    Abstract: Potential growth—the rate of expansion an economy can sustain at full capacity and employment—is a critical driver of development progress. It is also a major input in the formulation of fiscal and monetary policies over the business cycle. This paper introduces the most comprehensive database to date, covering the nine most commonly used measures of potential growth for up to 173 countries over 1981-2021. Based on this database, the paper presents three findings. First, all measures of global potential growth show a steady and widespread decline over the past decade, with all the fundamental drivers of growth losing momentum over time. In 2011-21, potential growth was below its 2000-10 average in nearly all advanced economies and roughly 60 percent of emerging market and developing economies. Second, adverse events, such as the global financial crisis and the COVID-19 pandemic, contributed to the decline. At the country-level also, national recessions lowered potential growth even five years after their onset. Third, the persistent impact of recessions on potential growth operated through weaker growth of investment, employment, and productivity.
    Keywords: Production function; filters; growth expectations; developing economies.
    JEL: E30 E32 E37 O20
    Date: 2023–04
  7. By: Sinem Kilic Celik (IMF); M. Ayhan Kose (Prospects Group, World Bank; Brookings Institution; CEPR; CAMA); Franziska Ohnsorge (Prospects Group, World Bank; CEPR; CAMA)
    Abstract: Potential output growth around the world slowed over the past two decades. This slowdown is expected to continue in the remainder of the 2020s: global potential growth is projected to average 2.2 percent per year in 2022-30, 0.4 percentage point below its 2011-21 average. Emerging market and developing economies (EMDEs) will face an even steeper slowdown, of about 1.0 percentage point to 4.0 percent per year on average during 2022-30. The slowdown will be widespread, affecting most EMDEs and countries accounting for 70 percent of global GDP. Global potential growth over the remainder of this decade could be even slower than projected in the baseline scenario—by another 0.2-0.9 percentage point a year—if investment growth, improvements in health and education outcomes, or developments in labor markets disappoint, or if adverse events materialize. A menu of policy options is available to help reverse the trend of weakening economic growth, including policies to enhance physical and human capital accumulation; to encourage labor force participation by women and older adults; to improve the efficiency of public spending; and to mitigate and adapt to climate change, including infrastructure investment to facilitate the green transition.
    Keywords: Production function; growth expectations; emerging markets; developing economies.
    JEL: E30 E32 E37 O20
    Date: 2023–04
  8. By: Palma, J. G.
    Abstract: Paul Krugman once said that two of the greatest analytical challenges of economic theory today (comparable to those faced by Keynes in the 1930s) were the huge deterioration of market inequality in high-income countries, and Latin America’s underperformance. The main aim of this paper is to tackle simultaneously both challenges, while adding a third: the post-1980 underperformance of advanced Western economies. This article tries to answer these three puzzles returning to Ricardo. For him, the original sin of capitalism is that it will always have rentiers lurking around in search of “easy†rents; and that under certain conditions, in a laissez-faire economy they can get the upper hand. If so, they were bound to transform capitalism into a self-destructing rentier paradise. In other words, what has happened in the West (North and South of the Equator) since their 1980s neo-liberal reforms are basically facets of one and the same phenomenon: the inequality augmenting and productivity-growth retarding impact of a specific type of rentier-based accumulation. And the key link between the two is the negative impact that increased inequality has had on investment. If so, Krugman’s puzzle would not really be much of a mystery after all! And this process of “rentierisation†―of which financialisation is just one (although leading) aspect― is now proving to be as toxic for inequality and productivity growth as for our democracy.
    Keywords: David Ricardo, Geoff Harcourt, Paul Krugman, inequality, productivity-growth, “easy†rents, rentiers’ paradise, “rentierisation†, financialisation, “reverse-catching-up†, neo-liberalism, middle-income trap, US, Western Europe, Latin America
    JEL: B00 E02 G01 N10 O11 O47 Q02
    Date: 2023–03–17
  9. By: Rogissart, Brecht
    Abstract: Review of “Credit and Crisis from Marx to Minsky” by Jan Toporowski.
    Date: 2023–03–23
  10. By: Serdar Ozkan ⓡ; Joachim Hubmer ⓡ; Sergio Salgado ⓡ; Elin Halvorsen ⓡ; Serdar Ozkan
    Abstract: We use Norwegian administrative panel data on wealth and income between 1993 and 2015 to study lifecycle wealth dynamics, focusing on the wealthiest households. On average, the wealthiest start their lives substantially richer than other households in the same cohort, own mostly private equity, earn higher returns, derive most of their income from dividends and capital gains, and save at higher rates. At age 50, the excess wealth of the top 0.1% group relative to mid-wealth households is accounted for in about equal terms by higher saving rates (34%), higher initial wealth (32%), and higher returns (27%), while higher labor income (5%) and inheritances (1%) account for the small residual. There is significant heterogeneity among the wealthiest: one-fourth of them—which we dub the “New Money”—start with negative wealth but experience rapid wealth growth early in life. Relative to the quartile of top owners that already started their life rich—the “Old Money”—the New Money are characterized by even higher saving rates and returns and also by higher labor income. Their excess wealth is mainly explained by higher saving rates (46%), higher returns (34%), and higher labor income (16%).
    Keywords: wealth inequality, lifecycle wealth dynamics, rate of return heterogeneity, bequests, saving rate heterogeneity
    JEL: D14 D15 E21
    Date: 2023
  11. By: Audrey Sallenave; Jean-Pierre Allegret (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - COMUE UCA - COMUE Université Côte d'Azur (2015-2019) - CNRS - Centre National de la Recherche Scientifique); Tolga Omay (Atilim Universitesi)
    Abstract: We use a sample of 40 developing and emerging countries over the period 1995- 2015 to assess the effectiveness of international reserve holding as a crisis mitigator. We test the relevance of the reserve accumulation decreasing returns assumption by estimating the most recent version of the PSTR model. We find that increasing stocks of international reserves allows domestic authorities to mitigate the negative impacts of financial and banking vulnerabilities on GDP growth rates leading to reject the decreasing returns assumption. This evidence is robust to sensitivity checks.
    Keywords: Banking vulnerabilities, Financial vulnerabilities, External shocks, Emerging and developing countries, Panel Smooth Transition Regression model, Reserves accumulation
    Date: 2023–02–16
  12. By: Jacek Rothert (United States Naval Academy; Group for Research in Applied Economics (GRAPE)); Ayse Kabukcuoglu Dur (North Carolina State University)
    Abstract: We analyze the welfare effects of various policies aimed at global rebalancing --- the elimination of persistent current account surpluses and deficits, and/or elimination of large positive and negative net foreign asset positions. Specifically, we study how these policies will affect the welfare of different groups of households, as well as overall wealth inequality within both debtor and creditor countries. We use a two-country version of a workhorse heterogeneous agents framework of Aiyagari (1994), calibrated to the U.S. (largest debtor) and a composite of its trading partners, the Rest of the World (ROW). Our results show that, relative to full financial integration, policies that reduce global imbalances via an increase in U.S. savings rates will lower global interest rates, increase capital-output ratio and total output in both countries. They will improve welfare of the poorest households and reduce wealth inequality in both countries. Conversely, policies that operate via a decrease in ROW's savings will raise global interest rates, reduce the capital-output ratio and total output in both countries. The rise in interest rates will reduce the welfare of the poor households, even though the overall wealth inequality will decline.
    Keywords: Global imbalances, wealth inequality, rebalancing, heterogeneous agents, international capital flows
    JEL: E21 F3 F32 F41
    Date: 2023
  13. By: Gupta, Abhimanyu (University of Essex); Kokas, Sotirios (University of Essex); Michaelides, Alexander (Imperial College London); Minetti, Raoul (Michigan State University, Department of Economics)
    Abstract: A large theoretical literature emphasizes financial networks, but empirical studies remain scarce. We exploit the overlapping bank portfolio structure of US syndicated loans to construct a financial network and characterize its evolution over time. Using techniques from spatial econometrics, we find large spillovers in lending conditions from peers’ decisions during normal times: a standard deviation increase in peer lending rates can increase a bank’s lending rate by 17 basis points. However, these spillovers vanish in a large recession. We rationalize these findings through the lens of a model of syndicate lending, where banks’ reliance on private signals rises during recessions.
    Keywords: Financial networks; spillovers; cost of lending; syndicated loan market
    JEL: C31 G21
    Date: 2023–03–03
  14. By: Andrew Metrick; Paul Schmelzing
    Abstract: U.S. and European banking institutions were hit by a wave of distress in March 2023. Policymakers on both sides of the Atlantic reacted with an array of interventions, some targeting individual institutions, others designed to shore up the banking sector as a whole. This paper contextualizes events using a new long-run database on banking-sector policy interventions over the last eight centuries. On that basis, recent actions have already been unusual in their policy mix and size – in the database, the vast majority of events with the same pattern of interventions ultimately evolved into “systemic” bank-distress episodes.
    JEL: G01
    Date: 2023–03
  15. By: Edwin Weinstein (The Brondesbury Group); Gulnur Muradoglu (Queen Mary University of London)
    Abstract: This study aims to identify how trust, awareness, household economics and demographic factors affect the nature and the number of people who will run a bank. The sample is drawn from seven countries. The findings focus on relationships that transcend country boundaries. The study is designed with four scenarios defined by presence/absence of deposit insurance and whether the person has their money in a troubled bank or not. The similarity of response across countries to these two key variables is strong. Across countries, under the least favourable conditions in our study, 56% of respondents said they would run their bank. Under the most favourable conditions, 21% of respondents said they would run. These massive differences have real implications for both policy and public communications.
    Keywords: deposit insurance, bank resolution
    JEL: G21 G33
    Date: 2023–02
  16. By: Urban Jermann; Haotian Xiang
    Abstract: The majority of bank liabilities are deposits typically not withdrawn for extended periods. We propose a dynamic model of banks in which depositors forecast banks’ leverage and default decisions, and withdraw optimally by trading off current against future liquidity needs. Endogenous deposit maturity creates a time-varying dilution problem that has major effects on bank dynamics. Interest rate cuts produce delayed increases in bank risk which are stronger in low rate regimes. Deposit insurance can exacerbate the deposit dilution and amplify the increase in bank risk.
    JEL: E44 G21 G28
    Date: 2023–03
  17. By: Yolanda Yulong Wang (SAFTI - Shenzhen Audencia Financial Technology Institute)
    Abstract: I document the time-varying investment efficiency of conglomerates compared with singlesegment firms. I find that, during recessions, conglomerates have higher Q-sensitivity of investment than do stand-alone firms, in contrast to the relationship during expansion periods. I also find that conglomerates, with the benefits from internal capital markets, exhibit increased dependence of investment on internal capital during recessionary periods, while stand-alone firms significantly increase cash retention and deviate their investment from its optimal level more severely. I examine the effect of the degree of diversification and find consistent evidence on investment efficiency and deployment of internal capital. I also provide evidence that conglomerates with stronger governance do not improve investment efficiency during recession, which suggests that agency costs cannot fully explain the changes in investment of conglomerates.
    Keywords: Corporate diversification Internal capital markets Capital allocation Business cycle Time-varying agency costs Corporate governance
    Date: 2023–02
  18. By: Fiorella De Fiore; Leonardo Gambacorta; Cristina Manea
    Abstract: We document some stylized facts on big tech credit and rationalize them through the lens of a model where big techs facilitate matching on the e-commerce platform and extend loans. The big tech reinforces credit repayment with the threat of exclusion from the platform, while bank credit is secured against collateral. Our model suggests that: (i) a rise in big techs' matching efficiency increases the value for firms of trading on the platform and the availability of big tech credit; (ii) big tech credit mitigates the initial response of output to a monetary shock, while increasing its persistence; (iii) the efficiency gains generated by big techs are limited by the distortionary fees collected from users.
    Keywords: Big Techs, monetary policy, credit frictions
    JEL: E44 E51 E52 G21 G23
    Date: 2023–04
  19. By: Muñoz, Manuel A.; Soons, Oscar
    Abstract: The bulk of euro-denominated cash is held for store of value purposes, with such holdings sharply increasing in times of high economic uncertainty. We develop a Diamond and Dy-bvig model with public money as a store of value and heterogeneous beliefs about bank stability that accounts for this evidence. Consumers who are sufficiently pessimistic prefer to hold cash. In our model, the introduction of a central bank digital currency (CBDC) as a store of value that is superior to cash leads to bank disintermediation as some depositors opt for switching to CBDC based on their beliefs. While CBDC partially replaces deposits, long-term lending decreases less than proportionally as remaining depositors are, on aver-age, more optimistic about bank stability and banks re-balance their portfolio accordingly. The appropriate calibration of CBDC design features such as remuneration and quantity limits can mitigate these effects. We study the individual and social welfare implications of introducing CBDC as a store of value. JEL Classification: E41, E58, G11, G21
    Keywords: bank disintermediation, bank stability, cash, central bank digital currency, welfare
    Date: 2023–03

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