nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2023‒05‒15
27 papers chosen by
Georg Man

  1. Does economic openness matter in the impact of financial development on income inequality? By Roya Taherifar; Mark J. Holmes; Gazi M. Hassan
  2. COVID-19 and the Role of Remittances on Sustainable Development: Insights from Sub-Saharan Africa By Waliu O. Shittu; Gazi M. Hassan; Frank G. Scrimgeour
  3. The Effect of Official Development Assistance on Inclusive Development: Evidence for Sub-Sahara Africa By Woldegiorgis, Mesfin M.
  4. China as an International Lender of Last Resort By Sebastian Horn; Bradley C. Parks; Carmen M. Reinhart; Christoph Trebesch
  5. Credit Guarantee and Fiscal Costs By Huixin Bi; Yongquan Cao; Wei Dong
  6. Enhancing intraregional investment in South Asia By Kshitiz Dahal
  7. Foreign Direct Investment in Ukraine By Puzikova, Valentyna
  8. Asset Pricing with Optimal Under-Diversification By Vadim Elenev; Tim Landvoigt
  9. Intertemporal equilibrium with physical capital and financial asset: role of dividend taxation By Pham, Ngoc-Sang
  10. Sovereign Uncertainty By Silgado-Gómez, Edgar
  11. Technological Shocks and Stock Market Volatility Over a Century: A GARCH-MIDAS Approach By Afees A. Salisu; Riza Demirer; Rangan Gupta
  12. Financial intermediation and new technology: theoretical and regulatory implications of digital financial markets By Maurizio Trapanese; Michele Lanotte
  13. Fintech, investor sophistication and financial portfolio choices By Leonardo Gambacorta; Romina Gambacorta; Roxana Mihet
  14. Central Bank Digital Currency and Financial Inclusion By Brandon Tan
  15. Monetary Policy Implications of Central Bank Digital Currencies: Perspectives on Jurisdictions with Conventional and Islamic Banking Systems By Ms. Inutu Lukonga
  16. Mobile Money, Interoperability and Financial Inclusion By Markus K. Brunnermeier; Nicola Limodio; Lorenzo Spadavecchia
  17. Bank Concentration and Monetary Policy Pass-Through By Isabel Gödl-Hanisch
  18. Unconventional Monetary Policy and Local Fiscal Policy By Huixin Bi; Nora Traum
  19. The Impact of Remittances on Monetary Transmission Mechanism in Remittance-recipient Countries: with Focus on Credit and Exchange Rate Channels By Jahan Abdul Raheem; Gazi M. Hassan; Mark J. Holmes
  20. Capital Controls or Macroprudential Regulation: Which is Better for Land Booms and Busts? By Yang Zhou; Shigeto Kitano
  21. Capital Controls in Times of Crisis – Do They Work? By Annamaria Kokenyne; Romain Bouis; Umang Rawat; Apoorv Bhargava; Manuel Perez-Archila; Ms. Ratna Sahay
  22. Liquidity, Debt Denomination, and Currency Dominance By Coppola, Antonio; Krishnamurthy, Arvind; Xu, Chenzi
  23. Currency Usage for Cross Border Payments By Ms. Longmei Zhang; Hector Perez-Saiz; Roshan Iyer
  24. The impact of credit substitution between banks on investment By Francesco Bripi
  25. Exploring the Determinants of Capital Adequacy in Commercial Banks: A Study of Bangladesh's Banking Sector By Md Shah Naoaj
  26. Credit Risk and Financial Performance of Commercial Banks: Evidence from Vietnam By Ha Nguyen
  27. The signaling value of legal form in debt financing By Felix Bracht; Jeroen Mahieu; Steven Vanhaverbeke

  1. By: Roya Taherifar (University of Waikato); Mark J. Holmes (University of Waikato); Gazi M. Hassan (University of Waikato)
    Abstract: Despite increasing academic attention on the income distributional impact of financial development, the debate has remained controversial. Hence, this study argues that economic openness to international trade and capital flows may impact the nexus between financial development and income inequality. Using a panel of 71 developing and developed countries for 1994–2017, we first use split-sampling and interaction analyses to examine the role of the country's level of openness on the relationship between financial development and income inequality. However, these two approaches do not provide specific information on the threshold value, if any, at which the effect changes. For this reason, we also employ the dynamic panel threshold method to investigate whether a financial or trade openness threshold exists beyond which financial development worsens income inequality. We find evidence that financial development generally fosters income inequality, but the level of financial and trade openness impacts the inequality effect of financial development. Our results assert that a higher level of financial and trade openness strengthens the pro-inequality impact of financial development.
    Keywords: Financial Development;Income Inequality;Trade Openness;Financial Openness
    JEL: D31 D63 F02 O11
    Date: 2023–04–18
  2. By: Waliu O. Shittu (University of Waikato); Gazi M. Hassan (University of Waikato); Frank G. Scrimgeour (University of Waikato)
    Abstract: The role of remittances has received considerable attentions at various national and regional economies due to their significant influence on growth and development indicators. Because of COVID-19, however, re-examining this relationship is necessary given the realities to trade and investment occasioned by the pandemic. Also, the extant literature has largely measured the effects of this variable on economic growth and development without expansion into sustainable development. Observing this relationship is, thus, considered appropriate due to the global outcry on climate change and the environment, which sustainable development better captures. Given these, this research measures the impact of COVID-19 on the nexus between remittances and sustainable development in SSA. Based on both static and dynamic estimators on a panel data from thirty-eight SSA countries, the empirical findings suggest that remittances raise sustainable development, though a negative effect sets in where remittances exceed 0.388 percent of the SSA region’s adjusted net savings. More so, the sign of the coefficient of COVID-19 is negative and the magnitude shows a severe impact. Finally, the interaction effect of remittances with COVID-19 is such that COVID-19 reduces the positive effect of remittances on sustainable development. The appropriate polices are discussed based on the findings of the study.
    Keywords: Remittances;COVID-19;sustainable development;instrumental variables;Sub-Saharan Africa
    JEL: C26 F24 G01 Q01
    Date: 2023–04–20
  3. By: Woldegiorgis, Mesfin M.
    Abstract: The effect of international aid on the economic development of recipient countries has not been conclusive, nor is aid effectiveness metrics simple and robust. This paper scrutinizes the nexus of official development assistance (ODA) and inclusive development. The data covers 34 African countries for the period 1991 to 2018. The simple OLS regression shows a negative association between ODA and inclusive development. Numerous researchers have claimed the same thing about the relationship between foreign aid and economic growth. However, paper statistically proves that the negative association between ODA and inclusive development is due to an omitted variable. Accordingly, this paper's unique addition is that it uses the instrumental variable in the two-stage linear square (2SLS) regression model and claims that ODA is a statistically significant positive determinant of inclusive development and ODA should be channelled to climate change, demographic pressure, and CPIA.
    Keywords: Impact of foreign assistance, Dutch disease, Inclusiveness, Aid fatigue
    JEL: O1 O19 O2 O4
    Date: 2022–06–29
  4. By: Sebastian Horn; Bradley C. Parks; Carmen M. Reinhart; Christoph Trebesch
    Abstract: This paper shows that China has launched a new global system for cross-border rescue lending to countries in debt distress. We build the first comprehensive dataset on China’s overseas bailouts between 2000 and 2021 and provide new insights into China’s growing role in the global financial system. A key finding is that the global swap line network put in place by the People’s Bank of China is increasingly used as a financial rescue mechanism, with more than USD 170 billion in liquidity support extended to crisis countries, including repeated rollovers of swaps coming due. The swaps bolster gross reserves and are mostly drawn by distressed countries with low liquidity ratios. In addition, we show that Chinese state-owned banks and enterprises have given out an additional USD 70 billion in rescue loans for balance of payments support. Taken together, China’s overseas bailouts correspond to more than 20 percent of total IMF lending over the past decade and bailout amounts are growing fast. However, China’s rescue loans differ from those of established international lenders of last resort in that they (i) are opaque, (ii) carry relatively high interest rates, and (iii) are almost exclusively targeted to debtors of China's Belt and Road Initiative. These findings have implications for the international financial and monetary architecture, which is becoming more multipolar, less institutionalized, and less transparent.
    JEL: F2 F33 F42 F65 G15 H63 N25
    Date: 2023–04
  5. By: Huixin Bi; Yongquan Cao; Wei Dong
    Abstract: This paper studies the effectiveness of government-backed credit guarantees to the infrastructure sector, a policy tool adopted by a range of countries during recessions. We propose a two-sector model with financial intermediary frictions so that infrastructure producers rely on bank loans to finance their risky production. Governments can intervene in the credit market by providing a partial guarantee on those bank loans. We find that a credit guarantee increases infrastructure production, leading to a high fiscal multiplier in the longer run. In the near term, however, higher wages in the infrastructure sector crowd out labor supply in the private sector, dampening economic activity. Importantly, the higher leverage associated with credit expansion raises non-performing loans, and this channel is particularly pronounced if the government-backed credit guarantee lingers for a long period of time.
    Keywords: fiscal policies; markets
    JEL: E62 E44
    Date: 2022–09–02
  6. By: Kshitiz Dahal (South Asia Watch on Trade, Economics and Environment)
    Abstract: This issue brief, drawing primarily from the World Bank publication “Regional Investment Pioneers in South Asia: The Payoff of Knowing Your Neighbors†and the presentation of its findings delivered in a webinar, focuses on enhancing intraregional investment in South Asia, which is one of the fastest-growing regional economies but also one of the least integrated regions in the world. The brief highlights the challenges and opportunities for intraregional investment and identifies weak knowledge connectivity as a significant barrier to intra-regional investment flows.
    Keywords: South Asia, intraregional investment, FDI, OFDI, IFDI, regional integration, economic integration, knowledge connectivity
    Date: 2022–12
  7. By: Puzikova, Valentyna
    Abstract: The Ukrainian economy cannot ensure economic reconstruction after the war and needs new opportunities for its development. Foreign direct investment (FDI) is an important instrument that can help. FDI provides capital relevant for increasing the profitability of economic sectors. FDI is also part of political investment - should be given priority in government activities. For this reason, it triggers economic growth and improves macroeconomic performance when it is used to develop the market and its infrastructure. In this article, I give an overview of the understanding of FDI and its actual situation in Ukraine. The arguments reflect mainly an investor's point of view. This helps to emphasize the importance of realistic and informative data for assessing the attractiveness of Ukraine. A first step in this direction is made with reference to international indices. I will try to review a reflection of relevant indices, which provide an assessment of the macroeconomic situation in Ukraine. The main results of the article: an overview of the real situation with FDI in Ukraine and the importance of using international indices during the FDI processes. The benefits of FDI do not appear automatically. It depends on the investment policy of host countries, especially Ukraine. My contribution to this article is to draw attention to the current situation with FDI in Ukraine and the issue of the lack of systematic use of international indices during the FDI processes. Without a clear understanding of these issues, it is impossible to answer the following questions that need to be studied, such as how to solve the challenges with FDI and attract new foreign capital to Ukraine. The article will be of interest to those who are interested in the issue of investment policy in the context of Ukraine, study this issue at the scientific level, and practically develop and implement the strategy of investment policy in Ukraine. The main conclusion of the article is to show the importance of revising the approaches to political investment in Ukraine, taking into account the international evaluation indices.
    Keywords: FDI; FDI net inflows; long-lasting linkns; economic growth; investment
    JEL: F21 F60
    Date: 2023–04
  8. By: Vadim Elenev; Tim Landvoigt
    Abstract: We study sources and implications of undiversified portfolios in a production-based asset pricing model with financial frictions. Households take concentrated positions in a single firm exposed to idiosyncratic shocks because managerial effort requires equity stakes, and because investors gain private benefits from concentrated holdings. Matching data on returns and portfolios, we find that the marginal investor optimally holds 45% of their portfolio in a single firm, incentivizing managerial effort that accounts for 4% of aggregate output. Investors derive control benefits equivalent to 3% points of excess return, rationalizing low observed returns on undiversified holdings in the data. A counterfactual world of full diversification would feature higher risk free rates, lower risk premiums on fully diversified and concentrated assets, less capital accumulation, yet higher consumption and welfare. Exposure to undiversified firm risk can explain approximately 40% of the level and 20% of the volatility of the equity premium. A targeted subsidy that decreases diversification improves welfare by increasing managerial effort and reducing financial frictions.
    JEL: E21 G11 G12 G32
    Date: 2023–04
  9. By: Pham, Ngoc-Sang
    Abstract: The paper introduces dividend taxation and productive government spending in an infinite-horizon general equilibrium model with heterogeneous agents and financial market imperfections. We point out that imposing a dividend tax and using the revenue from this tax to finance productive government spending may prevent economic recession and promote economic growth. We also investigate the issue of optimal dividend taxation and the role of dividend taxation on the asset price bubble.
    Keywords: Intertemporal equilibrium, recession, economic growth, productive government spending, dividend taxation, asset price bubbles
    JEL: D5 D9 E4 E44 O4
    Date: 2023–03–01
  10. By: Silgado-Gómez, Edgar (Central Bank of Ireland)
    Abstract: This paper investigates the impact and the transmission of uncertainty regarding the future path of government finances on economic activity. I first employ a data-rich approach to extract a novel proxy that captures uncertainty surrounding public finances, which I refer to as sovereign uncertainty, and demonstrate that the estimated measure exhibits distinct fluctuations from macro-financial and economic policy uncertainty indices. Next, I analyze the behavior of sovereign uncertainty shocks and detect the presence of significant and long-lasting negative effects in the financial and macroeconomic sectors using state-ofthe-art identification strategies, within the context of a Bayesian vector autoregression framework. I show that a shock to sovereign uncertainty differs from a macro-financial uncertainty shock — while the former dampens the economy in the medium-run and points to deflationary dynamics, the latter displays a short-lived response in real activity and generates inflationary pressures. Finally, I study the role of sovereign uncertainty in a New Keynesian dynamic stochastic general equilibrium model augmented with recursive preferences and financial intermediaries. I find that a sovereign uncertainty shock in the model is able to capture the empirical slowdowns in economic aggregates if there is lack of reaction by the monetary authority in the aftermath of the shock. The model also emphasizes the importance of financial frictions in transmitting the effects of sovereign uncertainty shocks and highlights the minor role played by nominal rigidities.
    Keywords: Sovereign Uncertainty Index, Government Finances, Economic Activity, Eventbased Identification, Bayesian VARs, Non-Linear DSGE Models.
    JEL: C32 E32 E44 E60
    Date: 2022–12
  11. By: Afees A. Salisu (Centre for Econometrics & Applied Research, Ibadan, Nigeria; Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Riza Demirer (Department of Economics and Finance, Southern Illinois University Edwardsville, Edwardsville, IL 62026-1102, USA); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)
    Abstract: This paper provides a novel perspective to the innovation-stock market nexus by examining the predictive relationship between technological shocks and stock market volatility using data over a period of more than 140 years. Utilizing annual patent data for the U.S. and a large set of economies to create proxies for local and global technological shocks and a mixed-sampling data (MIDAS) framework, we present robust evidence that technological shocks capture significant predictive information regarding future realizations of stock market volatility, both in- and out-of-sample and at both the short and long forecast horizons. Further economic analysis shows that investment portfolios created by the volatility forecasts obtained from the forecasting models that incorporate technological shocks as predictors in volatility models experience significantly lower return volatility in the out-of-sample horizons, which in turn helps to improve the risk-return profile of those portfolios. Our findings present a novel take on the nexus between technological innovations and stock market dynamics and paves the way for several interesting avenues for future research regarding the role of technological innovations on asset pricing tests and portfolio models.
    Keywords: Patents, Technology shocks, Stock market volatility, Forecasting
    JEL: C32 C53 E37 G15 O33
    Date: 2023–04
  12. By: Maurizio Trapanese (Banca d'Italia); Michele Lanotte (Banca d'Italia)
    Abstract: Technological progress in finance has been accelerating over the last decade. In the future, it is likely that financial intermediaries may undergo significant challenges as regards their traditional business model and functions, since an increasing share of payments may be settled without banks’ deposits and capital markets may increasingly provide direct credit to the economy. This paper aims to outline the theoretical and regulatory implications stemming from digital financial markets, with a particular focus on the growing importance of BigTech and FinTech firms. We study the importance of information and communication in financial intermediation, and outline the impact of technological progress on the core functions traditionally performed by banks and other financial institutions, and on payment systems. In this context, we discuss the role of public policies, and the main issues for regulation, supervision, competition, and consumer protection.
    Keywords: firm behaviour, international financial markets, financial institutions, financial policy and regulation, risk management JEL Classification: D21, G15, G20, G28, G32
    Date: 2023–04
  13. By: Leonardo Gambacorta (Bank for International Settlements); Romina Gambacorta (Bank of Italy); Roxana Mihet (HEC Lausanne)
    Abstract: This paper analyses the links between advances in financial technology, investors' sophistication, and their financial portfolios' composition and returns. We develop a simple portfolio choice model under asymmetric information and derive some theoretical predictions. Using detailed micro data from the Bank of Italy, we test these predictions for Italian households over the period 2004-2020. In general, heterogeneity in portfolio composition and in returns between sophisticated and unsophisticated investors grows with improvements in financial technology. This heterogeneity is reduced only if financial technology is accessible by everyone and if investors have a similar capacity to use it.
    Keywords: inequality, inclusion, fintech, innovation, Matthew effect
    JEL: G1 G5 G4 D83 L8 O3
    Date: 2023–04
  14. By: Brandon Tan
    Abstract: In this paper, we develop a model incorporating the impact of financial inclusion to study the implications of introducing a retail central bank digital currency (CBDC). CBDCs in developing countries (unlike in advanced countries) have the potential to bank large unbanked populations and boost financial inclusion which can increase overall lending and reduce bank disintermediation risks. Our model captures two key channels. First, CBDC issuance can increase bank deposits from the previously unbanked by incentivizing the opening of bank accounts for access to CBDC wallets (offsetting potential flows from deposits to CBDCs among those already banked). Second, data from CBDC usage allows for the building of credit to reduce credit-risk information asymmetry in lending. We find that CBDC can increase overall lending if (1) bank deposit liquidity risk is low, (2) the size and relative wealth of the previously unbanked population is large, and (3) CBDC is valuable to households as a means of payment or for credit-building. CBDC can still be optimal for household welfare even when overall lending decreases as households benefit from the value of using CBDC for payments, CBDC provides an alternative "safe" savings vehicle, and CBDC generates greater surplus in lending by reducing credit-risk information asymmetry. Most countries are considering a "two-tier" CBDC model, where central banks issue CBDC to commercial banks which in turn distribute them to consumers. If non-bank payment system providers can distribute CBDC, fewer funds will flow into deposit accounts from the unbanked because a bank account is no longer needed to access CBDC. If CBDC data is shareable with banks, those without bank accounts can still build credit and access lower interest rate loans. This design is optimal for welfare if the gains from greater access to CBDC outweigh the contraction in lending.
    Keywords: CBDC; Financial Inclusion; Digital currency; CBDC issuance; credit-risk information asymmetry; CBDC data; CBDC model; CBDC wallet; Central Bank digital currencies; Commercial banks; Deposit rates; Loans; Global
    Date: 2023–03–17
  15. By: Ms. Inutu Lukonga
    Abstract: Central bank digital currencies (CBDCs) promise many benefits but, if not well designed, they could have undesired consequences, including for monetary policy. Issuing an unremunerated CBDC or a wholesale CBDC does not change the objectives of monetary policy or the operational framework for monetary policy. CBDCs can, however, induce changes in the retail, wholesale and cross border payments that have negative spillover effects on monetary policy, through their effects on money velocity, bank deposit disintermediation, volatility of bank reserves, currency substitution, and capital flows. Countries most vulnerable are those with banking systems dominated by small retail deposits and demand deposits, low levels of digital payments and weak macro fundamentals. Proposed CBDC design features, such as caps on CBDC holdings and unremunerating the CBDC can moderate disintermediation risks, but they are not sufficient. Central banks will need to ensure that unintended macroeconomic risks are comprehensively identified and mitigated.
    Keywords: Central Bank Digital Currencies; CBDC; CBDC Pilots; Monetary Policy; Islamic Finance; impact monetary policy implementation; design option; unremunerated CBDC; monetary policy implication; deposit disintermediation; Commercial banks; Velocity of money; Islamic banking; Monetary base; Global
    Date: 2023–03–17
  16. By: Markus K. Brunnermeier; Nicola Limodio; Lorenzo Spadavecchia
    Abstract: This paper explores the tradeoff between competition and financial inclusion given by the vertical integration between mobile network and money operators. Joining novel data on mobile money fees built through the WayBack machine, with sources on network coverage and financials, we examine the staggering across African operators and countries of platform interoperability – a policy that promotes transactions and competition across mobile money operators. Our findings show that interoperability lowers mobile money fees and reduces network coverage and mobile towers, especially in rural and poor districts. Interoperability also results in a decline in various survey metrics of financial inclusion. Keywords: Mobile Money, Interoperability, Financial inclusion JEL Codes: E42, L14, O10
    Date: 2023
  17. By: Isabel Gödl-Hanisch
    Abstract: This paper analyzes the implications of the gradual rise in bank concentration since the 1990s for the transmission of monetary policy. I use branch-level data on deposit and loan rates to evaluate the monetary policy pass-through conditional on the level of local bank concentration and bank capitalization. I find that banks operating in high-concentration markets and under-capitalized banks adjust short-term lending rates more. I then build a theoretical model with heterogeneous banks that rationalizes the empirical findings and explains the underlying mechanism. In the model, monopolistic competition in local deposit and loan markets, along with bank capital requirements, lead to frictions on the pass-through to the real economy. Counterfactual analyses highlight that the rise in bank concentration alters monetary policy pass-through by two channels: the market power and capital allocation channels. Both channels further strengthen monetary policy transmission to output and investment, amplify the credit cycle, and flatten the Phillips curve.
    Keywords: monetary transmission, bank heterogeneity, monopolistic competition, bank regulation
    JEL: E44 E51 E52 G21
    Date: 2023
  18. By: Huixin Bi; Nora Traum
    Abstract: Following the onset of the pandemic, the Federal Reserve employed an unconventional monetary policy that directly intervened in municipal bond markets. We characterize the fiscal and macroeconomic implications of such central bank actions in a New Keynesian model of a monetary union. We assume that state and local governments are subject to a loan-in-advance constraint, reflecting that with lumpy cash flows, they often finance a fraction of expenditures by issuing short-term bonds. The municipal debt is held by financial intermediaries, who also supply credit to the private sector. Direct central bank purchases can transmit to the economy through two main channels: 1) by alleviating cash flow problems of the regional governments and 2) by accelerating lending to the private sector if credit constraints ease more broadly. By quantifying the relative importance of these channels, we highlight that the central bank’s actions lead to sizable increases in private investment but have more muted effects on state and local government expenditures. In addition, we also show the transmission of direct federal government aid through intergovernmental transfers is markedly different from unconventional policy.
    Keywords: monetary policy; quantitative easing; municipal debt; Municipal Liquidity Facility (MLF)
    JEL: E52 E58 E62
    Date: 2022–11–07
  19. By: Jahan Abdul Raheem (University of Waikato); Gazi M. Hassan (University of Waikato); Mark J. Holmes (University of Waikato)
    Abstract: Remittances contribute to welfare enhancement and poverty alleviation in many remittance-recipient economies. However, recent literature also focuses on the macroeconomic impact of remittances due to their increasing inflow into these economies. We use an unbalanced heterogeneous panel Structural Vector Autoregression (SVAR) methodology to study the impact of remittances on intermediate monetary transmission channels in remittance-recipient countries. In particular, we analyse the effect of remittances on credit and exchange rate channels in these economies. We, initially, estimate credit and exchange rate impulse responses (IRs) to a shock in remittances. The IRs estimates suggest a significant variation among countries in credit and exchange rates in response to a shock in remittances. In the next stage, we run a cross-section regression of these responses to identify the factors influencing the IRs of these variables. We find that the magnitude of remittances received by an economy significantly impacts the exchange rate channel thus affecting the smooth functioning of the monetary transmission mechanism. However, the effect of remittances on the credit channel is dependent on the level of remittance inflows and savings in remittance-recipient economies. Our finding also reveals that remittances weaken the functioning of the credit channel at a higher level of remittance inflows, especially, when the remittances are higher than approximately five percent of GDP in remittance-recipient economies. Overall, our findings have broad policy implications revealing that policymakers have to pay attention to the possible effects of remittances on intermediate monetary transmission channels in achieving the monetary policy targets.
    Keywords: remittances;monetary policy;monetary transmission mechanism
    JEL: E5 E52 F24
    Date: 2023–04–20
  20. By: Yang Zhou (Institute of Developing Economies, Japan External Trade Organization and Junir Research Fellow, Research Institute for Economics & Business Administration (RIEB), Kobe University, JAPAN); Shigeto Kitano (Research Institute for Economics and Business Administration (RIEB), Kobe University, JAPAN)
    Abstract: Emerging markets have experienced land booms and busts along with international capital inflows and outflows repeatedly. This study quantitatively examines the effectiveness of (i) macroprudential policies targeting land markets and (ii) capital controls targeting capital inflows and outflows. We analyze which policy better manages the coincidence between land booms (busts) and capital inflows (outflows). We build a small open economy NK-DSGE model in which banks choose their asset portfolio between physical capital and land subject to financial constraints. The quantitative results show that the superiority of the two policies depends on the type of shock impacting a small open economy. In the case of domestic land market shocks, macroprudential policies enhance welfare, whereas capital controls reduce welfare. Conversely, in the case of foreign interest rate shocks, the superiority of the two policies is reversed: capital controls enhance welfare, while macroprudential policies deteriorate welfare.
    Keywords: Capital control; Macroprudential policy; Financial frictions; Balance sheets channel; DSGE
    JEL: E69 F32 F38 F41
    Date: 2023–04
  21. By: Annamaria Kokenyne; Romain Bouis; Umang Rawat; Apoorv Bhargava; Manuel Perez-Archila; Ms. Ratna Sahay
    Abstract: This paper provides an analysis of the use and effects of capital controls in 27 AEs and EMDEs which experienced at least one financial crisis between 1995 and 2017. Countries often turn to using capital controls in crisis: some ease inflow controls while others tighten controls on outflows. A key finding is that countries with pervasive controls before the start of the crisis are shielded compared to countries with more open capital accounts, which see a significant decline in capital flows during crises. In contrast, the effectiveness of capital controls introduced during crises appears to be weak and difficult to identify. There is also some evidence that the introduction of outflow controls during crises is negatively associated with sovereign debt ratings, but that investors may actually forgive with time.
    Keywords: Capital controls; capital outflows; financial crises; inflow control; outflow controls Introduced; outflow control; controls on outflow; tightening control; Capital account; Capital flows; Caribbean; Global
    Date: 2023–03–17
  22. By: Coppola, Antonio (Stanford U); Krishnamurthy, Arvind (Stanford U); Xu, Chenzi (Stanford U)
    Abstract: We provide a liquidity-based theory for the dominant use of the US dollar as the unit of denomination in global debt contracts. Firms need to trade their revenue streams for the assets required to extinguish their debt obligations. When asset markets are illiquid, as modeled via endogenous search frictions, firms optimally choose to denominate their debt in the unit of the asset that is easiest to obtain. This gives central importance to the denomination of government-backed assets with the largest safe, liquid, short-term float and to financial market institutions that facilitate safe asset creation. Equilibria with a single dominant currency emerge from a positive feedback cycle whereby issuing in the more liquid denomination endogenously raises its liquidity, incentivizing more issuance. We rationalize features of the current dollar-dominant international financial architecture and relate our theory to historical experiences, such as the prominence of the Dutch florin and pound sterling, the transition to the dollar, and the ongoing debate about the potential rise of the Chinese renminbi.
    Date: 2023–02
  23. By: Ms. Longmei Zhang; Hector Perez-Saiz; Roshan Iyer
    Abstract: While the global usage of currencies other than the U.S. dollar and the euro for cross-border payments remains limited, rapid technological (e.g. digital money) or geopolitical changes could accelerate a regime shift into a multipolar or more fragmented international monetary system. Using the rich Swift database of cross-border payments, we empirically estimate the importance of legal tender status, geopolitical distance, and other variables vis-à-vis the large inertia effects for currency usage, and perform several forecasting simulations to better understand the role of these variables in shaping the future payments landscape. While our results suggest a substantially more fragmented international monetary system would be unlikely in the short and medium term, the impact of new technologies remains highly uncertain, and much more rapid geopolitical developments than expected could accelerate the transformation of the international monetary system towards multipolarity.
    Keywords: Cross border payments; Swift; currency dominance; legal tender; international monetary system (IMS)
    Date: 2023–03–24
  24. By: Francesco Bripi (Bank of Italy)
    Abstract: This paper estimates the elasticity of substitution across banks using matched bank-firm data and assuming monopolistic competition in local credit markets. It also quantifies the impact of credit supply shocks on corporate investment as shaped by this elasticity. Credit supply shocks have significant effects on firms’ investments in industries with a lower degree of substitutability. In these industries, where firms find it difficult to acquire funding and obtain better credit conditions from other banks, a 1 per cent increase in credit supply increases firms’ investment rates by 0.2 per cent. The effect of lenders substitutability on investment offsets that of bank specialization, thus highlighting that the risks of excessive bank concentration in specific industries may be alleviated by lenders substitution. Overall, the evidence suggests that considering the demand side, i.e. the heterogeneous effects of the elasticity of substitution in credit markets, is crucial for a better understanding of the bank lending channel.
    Keywords: banks, credit, substitution, investments
    JEL: G21 D22 E22
    Date: 2023–04
  25. By: Md Shah Naoaj
    Abstract: This study investigates the factors that influence the capital adequacy of commercial banks in Bangladesh using panel data from 28 banks over the period of 2013-2019. Three analytical methods, including the Fixed Effect model, Random Effect model, and Pooled Ordinary Least Square (POLS) method, are employed to analyze two versions of the capital adequacy ratio, namely the Capital Adequacy Ratio (CAR) and Tier 1 Capital Ratio. The study reveals that capital adequacy is significantly affected by several independent variables, with leverage and liquidity risk having a negative and positive relationship, respectively. Additionally, the study finds a positive correlation between real GDP and net profit and capital adequacy, while inflation has a negative correlation. For the Tier 1 Ratio, the study shows no significant relationship betweenleverage and liquidity risk, but a positive correlation with the number of employees, net profit, and real GDP, while a negative correlation with size and GDP deflator. Pooled OLS analysis reveals a negative correlation with leverage, size, and inflation for both CAR and Tier 1 Capital Ratio, and a positive correlation with liquidity risk, net profit, and real GDP. Based on the Hausman test, the Random Effect model is deemed moresuitable for this dataset. These findings have important implications for policymakers, investors, and bank managers in Bangladesh by providing insights into the factors that impact the capital ratios of commercial banks.
    Date: 2023–03
  26. By: Ha Nguyen
    Abstract: Credit risk is a crucial topic in the field of financial stability, especially at this time given the profound impact of the ongoing pandemic on the world economy. This study provides insight into the impact of credit risk on the financial performance of 26 commercial banks in Vietnam for the period from 2006 to 2016. The financial performance of commercial banks is measured by return on assets (ROA), return on equity (ROE), and Net interest margin (NIM); credit risk is measured by the Non-performing loan ratio (NPLR); control variables are measured by bank-specific characteristics, including bank size (SIZE), loan loss provision ratio (LLPR), and capital adequacy ratio (CAR), and macroeconomic factors such as annual gross domestic product (GDP) growth and annual inflation rate (INF). The assumption tests show that models have autocorrelation, non-constant variance, and endogeneity. Hence, a dynamic Difference Generalized Method of Moments (dynamic Difference GMM) approach is employed to thoroughly address these problems. The empirical results show that the financial performance of commercial banks measured by ROE and NIM persists from one year to the next. Furthermore, SIZE and NPLR variables have a significant negative effect on ROA and ROE but not on NIM. There is no evidence found in support of the LLPR and CAR variables on models. The effect of GDP growth is statistically significant and positive on ROA, ROE, and NIM, whereas the INF is only found to have a significant positive impact on ROA and NIM.
    Date: 2023–04
  27. By: Felix Bracht; Jeroen Mahieu; Steven Vanhaverbeke
    Abstract: We examine if a startup's legal form choice is used as a signal by credit providers to infer its risk to default on a loan. We propose that choosing a legal form with low minimum capital requirements signals higher default risk. Arguably, small relationship banks are more likely to use legal form as a screening device when deciding on a loan. Using data from Orbis and the IAB/ZEW Start-up Panel for a sample of German firms, we find evidence consistent with our hypotheses but inconsistent with predictions of several competing explanations, including differential demand for debt or growth opportunities.
    Keywords: legal form, minimum capital requirements, signaling, access to debt, financial constraint
    Date: 2023–04–17

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