|
on Financial Development and Growth |
| By: | Luintel, Kul B (Cardiff Business School); Li, GuangJie (Cardiff Business School); Khan, Mosahid |
| Abstract: | A growing body of post-global financial crisis (2007–2008) literature documents several undesirable effects of enlarged financial sectors. One of these effects is the ‘growth cost’ of excessive finance, which reports that the finance–growth relationship is non-monotonic, and that a credit threshold of above 100% of GDP costs economic growth. Since most industrialized countries exceed this threshold by a large margin (reaching as high as 200% in some cases), the policy implications of these findings can hardly be overstated. Moreover, if a tipping point in the finance–growth relationship could be established beyond reasonable doubt then this would be a pathbreaking finding. Extensive, rigorous, and widely replicative empirical evidence—gathered through a unified approach across wide-ranging analytical trajectories—could serve as the ‘burden of evidence’ and minimize the odds of false positives. We offer such scrutiny regarding three propositions of finance–growth nexus: (i) the inverted U-shaped relationship, (ii) the relevance of financial development for growth, and (iii) the ‘vanishing effects.’ We analyze fourteen measures of financial development across twenty-two panels—two global datasets and a further twenty country panels based on distinct geographic, economic, and the relative financial development characteristics. The ‘burden of evidence’ from more than 7, 000 well-structured cross-sectional and panel estimates fails to show any robust support to any of these three propositions. We document several other bizarre findings, viz., that the advanced economies need to scale back their relative levels of financial development to those of Eastern Europe to avoid the growth costs associated with overdeveloped financial systems. Surprisingly, the burden of evidence does not support even the widely reported results that financial development is significant under log-linear specifications. This study is unique in cross checking a set of well-accepted empirical results against the ‘burden of evidence’, and it certainly contests the mainstream cross-country literature. However, this does not disprove the potential role of finance for growth. Alternative approaches that analyze finance and growth at more disaggregated levels by linking sectoral and/or firmlevel production initiatives to their sources of finance may be more effective in unraveling the finance-growth nexus. |
| Keywords: | Finance and growth, non-monotonicity, credit threshold, generalized methods of moments. |
| JEL: | E44 G2 O11 O16 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2023/8&r=fdg |
| By: | Andrej Sokol; Michael Kumhof; Marco Pinchetti; Phurichai Rungcharoenkitkul |
| Abstract: | We study the consequences for business cycles and welfare of introducing an interest-bearing retail CBDC, competing with bank deposits as medium of exchange, into an estimated 2-country DSGE environment. According to our estimates, financial shocks account for around half of the variance of aggregate demand and inflation, and for the bulk of the variance of financial variables. CBDC issuance of 30% of GDP increases output and welfare by around 6% and 2%, respectively. An aggressive Taylor rule for the interest rate on reserves achieves welfare gains of 0.57% of steady state consumption, an optimized CBDC interest rate rule that responds to a credit gap achieves additional welfare gains of 0.44%, and further gains of 0.57% if accompanied by automatic fiscal stabilizers. A CBDC quantity rule, a response to an inflation gap, CBDC as generalized retail access to reserves, and especially a cash-like zero-interest CBDC, yield significantly smaller gains. CBDC policies can substantially reduce the volatilities of domestic and cross- border banking flows and of the exchange rate. Optimal policy requires a steady state quantity of CBDC of around 40% of annual GDP. |
| Keywords: | central bank digital currencies, monetary policy, bank deposits, bank loans, monetary frictions, money demand, money supply, credit creation |
| JEL: | E41 E42 E43 E44 E52 E58 F41 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1086&r=fdg |
| By: | Carola Frydman; Chenzi Xu |
| Abstract: | This paper surveys the recent empirical literature on historical banking crises, defined as events taking place before 1980. Advances in data collection and identification have provided new insights into the causes and consequences of crises both immediately and over the long run. We highlight three overarching threads that emerge from the literature: first, leverage in the financial system is a systematic precursor to crises; second, crises have negative effects on the real economy; and third, government interventions can ameliorate these effects. Contrasting historical episodes reveals that the process of crisis formation and evolution does vary significantly across time and space. Thus, we also highlight specific institutions, regulations and historical contexts that give rise to these divergent experiences. We conclude by identifying important gaps in the literature and discussing avenues for future research. |
| JEL: | E44 E58 G01 G21 N10 N20 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31092&r=fdg |
| By: | Matthew S. Jaremski; Gary Richardson; Angela Vossmeyer |
| Abstract: | A nationwide banking panic forced President Franklin Roosevelt to declare a nationwide banking holiday immediately after his inauguration in March 1933. The government reopened sound banks sequentially, with some resuming operations sooner and others later. Within three weeks, 11, 000 of the nation’s 18, 000+ banks had reopened. Another 3, 000 reopened over the next three months. A comprehensive bank-level database reveals the public responded to signals sent by regulators’ actions. Rapidly reopened banks received more deposits than banks that reopened only a few weeks later. The stigma of late reopening lasted through the decade. While these signals and stigmas shifted substantial resources from stigmatized to lauded banks and from counties whose banks on average reopened slowly to counties whose banks reopened rapidly, the shifts in resources among institutions had no measurable impact on the rate at which the localities recovered. This result raises questions concerning the conventional wisdom regarding intervening in a banking system amidst a systemic crisis. |
| JEL: | E5 G21 N22 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31088&r=fdg |
| By: | Axelle Arquié |
| Abstract: | In this paper, we introduce a new mechanism into a banking model featuring distressed sale of assets (fire sales). As in reality, depositors choose between the liquid deposits of banks and the illiquid assets of funds from which early withdrawals are not possible. Our model reflects that dynamics, showing that two inefficiencies arise due to a pecuniary externality. The first inefficiency is well-known: banks do not keep enough liquidity buffers. The second inefficiency is that depositors do not invest the optimal amount into institutions that can be subject to runs (banks) relative to institutions that are preserved from runs (such as pension funds). To investigate whether there is too much deposits in banks or in pension funds, the direction of the inefficiency is studied numerically. Simulations show that the banking sector can be too big relative to pension funds, and that liquidity ratios -aimed at making banks less riskycan decrease welfare by increasing incentives to deposit into banks. |
| Keywords: | Fire Sales;Liquidity ratios;Bank Run;Saving Allocation |
| JEL: | E44 G01 G18 G21 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2023-09&r=fdg |
| By: | International Monetary Fund |
| Abstract: | Sweden recovered rapidly from the Covid1-19 crisis, and GDP reached its prepandemic level in mid-2021. In the context of a robust supervision and regulation framework, the financial sector exited the crisis with substantial capital and liquidity buffers. Going forward, growth is expected to slow amid higher energy prices, tighter financial conditions, and reduced confidence following sharply lower house prices. Given stubborn inflation, the Riksbank has been normalizing rates more aggressively than expected last year. Systemic risks to the financial system arise from (i) high exposure of banks to the commercial real estate (CRE) sector; (ii) limited liquidity in corporate bond markets; (iii) high indebtedness of households and sensitivity to higher interest rates. The banking system is nearly three times 2021 GDP and is interconnected domestically and regionally. |
| Date: | 2023–03–16 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfscr:2023/113&r=fdg |
| By: | Gan-Ochir Doojav (Bank of Mongolia); Munkhbayar Gantumur (Bank of Mongolia) |
| Abstract: | This study investigates the causal effects of the banking sector cleanup on lending conditions. To overcome the banking crisis consequences of 2014–2016, the National Bank of Ukraine changed its regulation approach to strict intolerance towards financially weak and opaque banks and launched the development of the macroprudential regulation concept. As a result, a significant number of banks, accounting for approximately one-third of pre-crisis banking assets, were declared insolvent or withdrawn from the market for other reasons. We analyze bank-firm-loan level data merged with information from borrowers' financial statements. Examining a significant set of loan, bank, and borrower characteristics, we cannot conclude that lending conditions have definitely tightened since the cleanup of the banking sector. On the one hand, banks reduce large exposures in response to stricter regulatory requirements, primarily for lending to related parties, thereby decreasing the loan amount on average. On the other hand, loan interest rates decline due to monetary policy easing. As the risks for banks gradually decreased over time, interest spreads also narrowed, which was reflected in lower loan prices. At the same time, banks deteriorate lending conditions for loss-making firms- loan size significantly decreases compared to the whole sample of firms, and interest rates rise. Furthermore, bank requirements for financial performance of corporates become more stringent and generally do not ease to pre-policy levels over time. Finally, the results suggest that the crucial factors for corporate borrowers to receive a loan from a new bank after their bank closure are firm profitability at the time of a new match and loans quality in closed banks. |
| Keywords: | Banking sector cleanup; Bank liquidations; lending conditions |
| JEL: | C21 C41 G21 G28 |
| Date: | 2023–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp06-2023&r=fdg |
| By: | Laura Felber; Simon Beyeler |
| Abstract: | In this paper, we assess the value of high-frequency payments data for nowcasting economic activity. Focusing on Switzerland, we predict real GDP based on an unprecedented 'complete' set of transaction payments data: a combination of real-time gross settlement payment system data as well as debit and credit card data. Following a strongly data-driven machine learning approach, we find payments data to bear an accurate and timely signal about economic activity. When we assess the performance of the models by the initially published GDP numbers (pseudo real-time evaluation), we find a state-dependent value of the data: the payment models slightly outperform the benchmark models in times of crisis but are clearly inferior in 'normal' times. However, when we assess the performance of the models by revised and more final GDP numbers, we find payments data to be unconditionally valuable: the payment models outperform the benchmark models by up to 11% in times of crisis and by up to 12% in 'normal' times. We thus conclude that models based on payments data should become an integral part of policymakers' decision-making. |
| Keywords: | Nowcasting, GDP, machine learning, payments data, COVID-19 |
| JEL: | C52 C53 C55 E37 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2023-01&r=fdg |
| By: | Thepthida Sopraseuth; Eleni Iliopulos (Université de Cergy-Pontoise, THEMA) |
| Abstract: | In this paper, we examine the current state of the international macroeconomic literature, focusing specically on international spillovers and the international transmission of countryspeci c shocks. Using a general equilibrium framework, we analyze the standard two-country RBC model and its ability to replicate empirical evidence on international correlation of output, consumption, and international risk sharing. We then survey attempts in the literature to address the limitations of the model, including incorporating nominal rigidities and nancial frictions, as well as recent contributions bridging the gap between open-economy macroeconomics and international nance. These works have the potential to explain the international transmission of shocks among advanced countries by accounting for factors aecting international risk sharing. |
| Keywords: | international business cycles, cross-country co-movement, quantity puzzle |
| JEL: | E44 F41 F42 F44 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2023-03&r=fdg |
| By: | Michael Irwin |
| Abstract: | Using data from patents, citations, inter-sectoral sales and customs, we examine the international diffusion of technology through imports of sectoral knowledge and production inputs. We construct measures of the flow of technology embodied in imports. These measures are weighted by inter-sectoral knowledge and production input-output linkages that capture the relevance of this technology for generating new innovations in different sectors in importing countries. We develop an instrumental variable strategy to identify the causal effects of technology embodied in imports on innovation and diffusion outcomes. For sectors in importing countries, increases in both knowledge- and production-weighted embodied technology imports lead to technology diffusion (measured using backward citations in new patent applications) and increases in the rate of new innovations (measured using the forward citations those patents receive). Effects are substantially larger for knowledge-weighted imports of embodied technology, which also lead to improvements in the average quality of new innovations. |
| Keywords: | Business fluctuations and cycles; Credit and credit aggregates; Economic models; Fiscal policy; Labour markets |
| JEL: | E24 E32 E44 E62 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:23-22&r=fdg |
| By: | Audrey Allegret Sallenave (LEAD - Laboratoire d'Économie Appliquée au Développement - UTLN - Université de Toulon); 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); Dalia Ibrahim (Banque de France - Banque de France - Banque de France) |
| Abstract: | This paper assesses financial asymmetries between the Euro area and the United Stats using a financial accelerator framework. We estimate a GVAR model from 1995Q1 to 2016Q4 and find (i) that American financial shocks have a global influence whereas those of the Euro area are regional and (ii) that American financial shocks have larger effects in size than those of the Euro area. We develop an International Political Economy framework based on the concept of asymmetrical interdependence to point out policy suggestions whose the main objective is to increase the autonomy of the Euro area. |
| Keywords: | Complex Interdependence, Financial Accelerator, United States, Euro area, GVAR |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04036046&r=fdg |
| By: | Sacha Dray; Camille Landais; Stefanie Stantcheva |
| Abstract: | We study the history and geography of wealth accumulation in the US, using newly collected historical property tax records since the early 1800s. The US General Property Tax was a comprehensive tax on all types of property (real, personal, and financial), making it one of the first “wealth taxes.” Drawing on many historical records, we construct long-run, consistent, high-frequency wealth series at the county, state, and national levels. We first document the long-term evolution of household wealth in the US since the early 1800s. The US experienced extraordinary wealth accumulation after the Civil war and until the Great Depression. Second, we reveal that spatial inequality in the US has been large and highly persistent since the mid-1800s, driven mainly by Southern states, whose long-run divergence from the rest of the US predated the Civil War. Before the Civil war, enslaved people were assessed as personal property of the enslavers, representing almost one-half of total taxable property in Southern states. In addition to the moral and ethical issues involved, this system wrongly counted forced labor income as capital. The regional distribution of wealth and the effects of the Civil war appear very different if enslaved people are not included in the property measure. Third, we investigate the determinants of long-term wealth growth and capital accumulation. Among others, we find that counties with a higher share of enslaved property before the Civil War or higher levels of wealth inequality experienced lower subsequent long-run growth in property. |
| JEL: | E01 H20 H71 J15 N31 R12 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31080&r=fdg |
| By: | Ogunjumo, Rotimi Ayoade |
| Abstract: | Using yearly data from 1986 to 2020, the study looked at whether the Nigeria's financial sector development is connected to the country’s ever increasing crude oil exports. The results of the utilized Autoregressive Distributed Lag (ARDL) model demonstrated that, both in the short and long periods, there is no connection between Nigeria's financial sector development and crude oil exports. Additionally, the research indicated that the country's financial system is not yet adequately established to sustain exports of goods other than crude oil in the short term. |
| Date: | 2023–03–23 |
| URL: | http://d.repec.org/n?u=RePEc:osf:osfxxx:yubj2&r=fdg |
| By: | Alberto Martin; Sergio Mayordomo; Victoria Vanasco |
| Abstract: | Many countries implemented large-scale programs to guarantee private credit in response to the outbreak of COVID-19. Yet the role of banks in allocating guarantees - and thus in shaping their effects - is not well understood. We study this role in an economy where entrepreneurial effort is crucial for efficiency but it is not contractible, giving rise to a debt overhang problem. In such an environment, credit guarantees increase efficiency to the extent that they allow firms to reduce their repayment obligations. We show that banks follow a pecking order when allocating guarantees, prioritizing riskier, highly indebted, firms, from whom they can extract more surplus. The competitive equilibrium is constrained inefficient: all else equal, the planner would tilt the allocation of guarantees towards more productive, safer firms, and would fully pass-through the benefits of guarantees to firms in the form of lower repayments. We confirm the model's main predictions on the universe of all credit guarantees granted in Spain following the outbreak of COVID. |
| Keywords: | Credit guarantees, debt overhang, liquidations. |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1862&r=fdg |
| By: | Theo Cotrim Martins; Rafael Schiozer; Fernando de Menezes Linardi |
| Abstract: | Using unique administrative data on firm-to-firm payments and bank-to-firm lending, we investigate how lending to a firm is affected by same-bank lending to the firm’s customers and suppliers. We show that bank lending increases when the same bank also lends to the firm’s customers or suppliers. Additionally, we find that the revelation of negative information about the creditworthiness of a firm’s major customer causes an increase in the cost and a reduction in the duration of the loans provided to the firm. These results suggest that lending to firms connected through the supply chain conveys valuable information to banks. |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:577&r=fdg |
| By: | José Liberti (De Paul University and Northwestern University); Jason Sturgess (Queen Mary University of London); Andrew Sutherland (MIT Sloan School of Management) |
| Abstract: | We use the introduction of a U.S. commercial credit bureau to study when lenders adopt voluntary information sharing technology and the resulting consequences for competition and credit access. Our results suggest that lenders trade off access to new markets against heightened competition for their own borrowers. Lenders that do not share initially lose borrowers to competitors that share, which ultimately compels them to share and leads to the formation of an information sharing system. We find access to credit improves but only for high-quality borrowers in markets with greater lender adoption. Our results offer the first direct evidence on when financial intermediaries adopt information sharing technologies and how sharing systems form and evolve. |
| Keywords: | information sharing, access to credit, financial intermediation, fintech, SMEs. |
| JEL: | G21 G23 G32 |
| Date: | 2021–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:927&r=fdg |
| By: | Lucas A. Mariani; Jose Renato Haas Ornelas; Bernardo Ricca |
| Abstract: | We investigate how the presence of physical bank branches moderates financial technology diffusion. Our identification strategy uses services suspensions caused by criminal groups that perform hit-and-run raids and explode branch facilities, rendering them inoperable for a couple of months. We show that the shock depletes the cash inventory of branches, but the stock of credit and deposits remain unaffected. We then provide evidence that customers increase their usage of noncash payments after the event. More specifically, we focus on a new instant payment technology called Pix and show that, after robbery events, Pix usage and the number of users increase in the affected municipalities. We find that these effects are mediated by the number of alternative branches to access cash. Interestingly, we find Pix usage spillover effects beyond cash substitution. First, the number of Pix transactions and users increases when either the payer or the payee is in a municipality that was not affected by the robbery. Second, we show that the population affected by such robberies start to perform Pix transactions and use other financial services at digital financial institutions, indicating that cash dependence can be an impediment to their expansion. Our results shed light on the determinants of technology adoption and the consequences of the transition in the banking industry from a physical branch-based model to an increasing reliance on digital services. |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:576&r=fdg |
| By: | Mustansar, Talreja |
| Abstract: | An increasing trend of development in the financial system, with the use of information technology and the modernization of products and services, has led to financial innovation being considered one of the most important topics in the research community. The paper discusses the role of financial innovation and its importance in the modern financial system. We have proxied financial innovation in three dimensions, namely Fintech infrastructure, Fintech number of transactions, and Fintech amount of transactions; and we have tested the impact of these financial innovation variables, along with some control variables, on the profitability of the banking system. The study uses time series data from 2008 Q1 to 2021 Q4 and the ARDL Bounds test for analysis purposes. Using the ARDL model, a few proxies (LATM, ADVTODEP, COSTTOINC, NETNPLTONETLOAN, POSTRAM) of financial innovation demonstrate a positive and significant relationship in long run implying that financial innovation has an effect on the profitability of the financial sector in long run. |
| Date: | 2023–03–14 |
| URL: | http://d.repec.org/n?u=RePEc:osf:osfxxx:8wy95&r=fdg |