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on Financial Development and Growth |
| By: | Alberto Bucci (Department of Economics, Management and Quantitative Methods (DEMM) - University of Milan, and ICEA (International Center for Economic Analysis, Canada); Riccardo Calcagno (Department of Management and Production Engineering, Polytechnic University of Turin); Simone Marsiglio (Department of Economics and Management, University of Pisa); Tiago Miguel Guterres Neves Sequeira (University of Coimbra, Centre for Business and Economics Research, CeBER and Faculty of Economics) |
| Abstract: | We extend a two-sector endogenous growth model based on human capital accumulation along two different directions. First, by postulating that individuals may invest time-resources not only in the accumulation of human capital (general knowledge) but also in the accumulation of financial literacy (specific financial knowledge). Second, we maintain that the efficiency with which savings are transferred intertemporally may improve over time, e.g. through the presence of a financial system. We use the model to analyze the relationship between financial literacy and economic growth in the long run. We show that the properties of the balanced growth path equilibrium critically depend on how human capital and financial literacy affect the efficiency of the financial system. Moreover, finance promotes long-run economic growth through two alternative channels, driven either by dynamics of financial returns or by human capital accumulation, respectively. By calibrating the model to the US economy over the 1950-2019 period, we quantitatively assess the effect of financial literacy on long-term growth and the relative magnitude of the two channels. |
| Keywords: | Economic Growth, Financial Literacy, Financial Return, Human Capital. |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:gmf:papers:2022-08&r=fdg |
| By: | Mathias Drehmann; Mikael Juselius; Anton Korinek |
| Abstract: | We examine a propagation mechanism that arises from households' long-term borrowing and show empirically that it has sizable real effects. The mechanism recognises that when there is long-term debt, an impulse to new borrowing generates a predictable hump-shaped path of future debt service. We confirm this pattern using a novel multi-country dataset of debt flows. Whereas new borrowing boosts output contemporaneously, debt service depresses output. Credit booms thus lead to predictable reversals in real economic activity several years later. This long-term debt propagation channel is the main reason for why indicators of credit cycles have predictive power for future economic activity. |
| Keywords: | new borrowing, debt service, financial cycle, financial flows and real effects |
| JEL: | E17 E44 G01 D14 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1098&r=fdg |
| By: | Tommaso Gasparini |
| Abstract: | Uncertainty shocks play a crucial role in driving business cycle fluctuations. This paper investigates the impact of changes in banking competition on the propagation of uncertainty shocks. Using a panel dataset of 44 countries, I show that lower banking competition amplifies the negative impact of uncertainty on output growth. I further explore this relationship through a dynamic stochastic general equilibrium model featuring imperfect banking competition and financial frictions. The model shows that lower banking competition leads to higher borrowing rates and increased risk-taking by entrepreneurs. As a result, when the number of competitors is lower, uncertainty shocks have a stronger negative impact on defaults, investment and output due to increased risk-taking. |
| Keywords: | Financial Frictions, Financial Intermediaries, Heterogeneous Agents, Market Power, Uncertainty |
| JEL: | E32 E44 G21 L13 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2023_416&r=fdg |
| By: | Morán, Marthín; Nivín, Rafael; Quintana, Derry (Banco Central de Reserva del Perú) |
| Abstract: | El grado de estrés financiero puede tener implicancias en la dinámica de las variables macroeconómicas. Este trabajo construye un índice de estrés financiero para Perú, empleando la metodología de componentes principales, sobre un conjunto amplio de variables que incluye a los intermediarios de crédito, el mercado de capitales y el mercado monetario y cambiario. Posteriormente, para evaluar el impacto del estrés financiero en variables del sector real, se realiza un análisis de impulsos respuesta, usando la metodología de Proyección Local desarrollada por Jordà (2005), en su extensión no lineal por Gorodnichenko y Auerbach (2013), dado que el impacto del estrés financiero en las variables macroeconómicas es no lineal. El resultado muestra que, durante periodos de estabilidad financiera la dinámica macroeconómica es consistente con el resultado del modelo Neokeynesiano, donde la política monetaria tiene un rol estabilizador en la economía ante choques de demanda. Sin embargo, durante episodios de estrés financiero, la efectividad de la política monetaria se ve reducida ante un mismo choque. |
| Keywords: | Financial stress index, principal component analysis, local projection. |
| JEL: | C32 E32 E52 E44 G01 G21 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2022-002&r=fdg |
| By: | Arun Gupta; Horacio Sapriza |
| Abstract: | We construct a novel signal of bank expectations utilizing confidential data and a regulatory constraint imposed on bank internal capital markets during the 2008 crisis that made internal equity injections to commercial bank subsidiaries difficult to reverse. When the US government initiated a $176 billion recapitalization program during the crisis, this constraint made it costly ex-ante for multi-bank holding companies (MBHC) to use these funds for the purpose of recapitalizing subsidiaries against future anticipated losses; in contrast, lending the funds to subsidiaries was exempt from the constraint and thus carried an option value for future reallocations across sibling subsidiaries. Several findings emerge. First, we show that MBHCs treated internal equity injections as a scarce resource when emergency funds arrived, whereas single-bank holding companies did not because the constraint was not costly for them. Second, we find that excess internal equity injections by MBHCs form a signal of their expectations for post-crisis subsidiary outlook—i.e., future profitability, supervisory ratings, and credit originations. Third, the geographical aggregation of these individual bank signals predicts the long-run real effects of the 2008 crisis on small businesses across US states—i.e., post-crisis growth in small business revenues, employment, establishments, payroll, and wages. Our study provides a more direct test of "banks as efficient information producers" (e.g., Diamond (1984), Fama (1985)), and is the first to show that credible signals of this bank knowledge can be extracted from the internal capital markets, allowing regulators to forecast in real time a geographical rank-order for post-crisis real outcomes at small firms. This new policy tool can be seen as a potential side benefit of government-sponsored bank recapitalization programs, of which there have been 33 in the past 40 years worldwide. |
| Keywords: | Macrofinance; Financial Crises; Banks; financial intermediation; internal capital markets; SME; TARP |
| JEL: | G01 G21 G28 G30 |
| Date: | 2022–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:95579&r=fdg |
| By: | Joseph Abadi; Markus K. Brunnermeier; Yann Koby |
| Abstract: | The reversal interest rate is the rate at which accommodative monetary policy reverses and becomes contractionary for lending. We theoretically demonstrate its existence in a macroeconomic model featuring imperfectly competitive banks that face financial frictions. When interest rates are cut too low, further monetary stimulus cuts into banks’ profit margins, depressing their net worth and curtailing their credit supply. Similarly, when interest rates are low for too long, the persistent drag on bank profitability eventually outweighs banks’ initial capital gains, also stifling credit supply. We quantify the importance of this mechanism within a calibrated New Keynesian model. |
| Keywords: | Monetary Policy; Lower Bound; Negative Rates; Banking |
| JEL: | E43 E44 E52 G21 |
| Date: | 2022–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:94694&r=fdg |
| By: | Le, Vo Phuong Mai (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School) |
| Abstract: | Developed economies have experienced slower growth since the 2008 Önancial crisis, creating fears of "secular stagnation." Rational expectations models have forward-looking bubble solutions, which could cause this; here we investigate the case of Japan. We show that a New Keynesian model with a weak equilibrium growth path driven by pessimism sunspot belief shocks matches economic behaviour. Another possibility is a conventional model where productivity growth has simply slowed down for unknown reasons. Nevertheless, a welfare-optimising approach implies Öscal policy should commit to eliminating the potential sunspot while being prepared to revert to normal policy if ináation rises. |
| Keywords: | Secular stagnation; Pessimism sunspot; Indirect Inference; DSGE model |
| JEL: | E5 E6 E32 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2023/13&r=fdg |
| By: | Yusuf Soner Başkaya; Bryan Hardy; Sebnem Kalemli-Ozcan; Vivian Yue |
| Abstract: | We use an exogenous fiscal shock to identify the transmission of government risk to bank lending due to banks holding government bonds. We illustrate with a theoretical model that for banks with higher exposure to government bonds, a higher sovereign default risk implies lower bank net worth and less lending. Our empirical estimates confirm the model's predictions. The exogenous change in sovereign default risk of Turkish government debt as a result of the 1999 Earthquake impacts banks whose balance sheets were exposed more to government bonds. The resulting lower bank net worth translates into lower credit supply. We rule out alternative explanations. Our estimates suggest this channel can explain half of the decline in bank lending following the earthquake. This underlines the importance of the bank balance-sheet channel in transmitting a higher sovereign default risk to reduced real economic activity. |
| Keywords: | banking crisis, bank balance sheets, lending channel, public debt, credit supply, sovereign-bank nexus |
| JEL: | E32 F15 F36 O16 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1093&r=fdg |
| By: | Claudio Borio; Marc Farag; Fabrizio Zampolli |
| Abstract: | Tackling the fiscal policy-financial stability nexus is essential to ensure financial and hence macroeconomic stability. In this paper, we review the literature on this topic and suggest how policy could best tackle the link. Doing so involves action on two fronts. First, incorporating financial stability considerations in the design of fiscal policy. This means, in particular, considering the risk of financial crises when assessing fiscal space, recognising the flattering effects of financial booms on fiscal positions and removing or reducing fiscal incentives to private debt accumulation. Second, acknowledging that domestic currency-denominated public debt is not fully risk-free in the design of the prudential regulation of financial institutions. This calls for carefully balanced risk-sensitive capital charges or other measures to limit banks' sovereign exposures with due regard to the special role of government bonds in the financial system and country-specific characteristics. That said, prudent regulation cannot substitute for fiscal prudence. |
| Keywords: | financial crises; doom loops; sovereign exposures; prudential policy; fiscal policy |
| JEL: | E6 G2 G3 H1 H3 H6 H8 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1090&r=fdg |
| By: | Wei Xiong |
| Abstract: | This article examines the risks faced by China's real estate sector within its distinct hybrid economy, which combines market mechanisms with comprehensive state planning and government intervention. The real estate sector holds particular importance as land sale revenues are a crucial source of funding for local governments, enabling them to finance infrastructure projects and stimulate economic growth. Banks are highly exposed to debt secured by real estate properties, not only involving real estate firms and households but also extending to local governments and affiliated companies. The hybrid structure gives the government a strong commitment and the ability to delay a real estate crisis. However, China’s real estate risk is ultimately tied to the country’s overall economic growth and remains susceptible to policy-related risks. |
| JEL: | O18 O2 R0 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31118&r=fdg |
| By: | Sylvain Barthélémy (TAC Economics, Saint-Hilaire-des-Landes, France); Fabien Rondeau (Univ Rennes, CNRS, CREM – UMR6211, F-35000 Rennes France); Virginie Gautier (TAC Economics and University of Rennes, France.) |
| Abstract: | Currency crises, recurrent events in economic history for developing, emerging and developed countries, generate disastrous economic consequences. This paper proposes an early warning system for currency crises using sophisticated recurrent neural networks like Long Short-Term Memory (LSTM) and Gated Recurrent Unit (GRU). These models were initially used in language processing where they performed well. Such models are increasingly used in forecasting nancial asset prices, including exchange rates, but they have not yet been applied to the prediction of currency crises. As for all recurrent neural networks, they allow to take into account non-linear interactions between variables and the inuence of past data in a dynamic form. For a set of 68 countries including developed, emerging and developing economies over the period 1995-2020, LSTM and GRU outperformed our benchmark models. LSTM and GRU correctly sent continous signals within a two-year warning window to alert 91% of the crises. For LSTM, false signals represent only 14% of the emitted signals compared to 23% for the logistic regression, making them ecient early warning systems for policymakers. |
| Keywords: | currency crises, early warning system, neural network, long short-term memory, gated recurrent unit |
| JEL: | F14 F31 F47 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:tut:cremwp:2023-05&r=fdg |
| By: | Giorgos Gouzoulis (University of Bristol, School of Magagement); Panagiotis (Takis) Iliopoulos (KU Leuven, Faculty of Economics and Business); Giorgos Galanis (Queen Mary, University of London, School of Business and Management) |
| Abstract: | Recent contributions within the disconnected capitalism literature argue that personal financial insecurity related to household indebtedness and pension fund financialisation is positively associated with underemployment. This is because financially insecure workers are more likely to accept worsening working conditions on the fear of losing their job and defaulting. Using quarterly data from the Eurostat for the period 2008Q3-2020Q4, this paper shows that the persistent rise of underemployment rates in post-crisis Greece is robustly associated with the household debt ratio and pension fund investments in financial derivatives. We also demonstrate that while the effects of financialisation are similar for men and women, the employment-tied and gendered nature of social benefits in the country has disproportionately induced underemployment for women in the context of austerity. The paper concludes that personal financial insecurity is a key missing factor behind rising employment precariousness in Greece since 2008 |
| Keywords: | Financialisation, Labour Process, EU Integration, Underemployment, Greece |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:cgs:wpaper:112&r=fdg |
| By: | NISHITATENO Shuhei |
| Abstract: | Given the growing pressure on donors to curtail foreign aid budgets, analyzing the effectiveness of bilateral official development assistance (ODA) in realizing national interests has become more significant than ever before. From the viewpoint of economic interests, prior research has revealed that ODA can help expand donor exports and outward foreign direct investments. This study provides evidence that ODA can also help firms from donor countries win infrastructure project contracts in recipient countries. Employing unique contract data on Japanese overseas infrastructure projects, I estimate a fixed effects Poisson model with a panel dataset for 158 recipients for the period between 1970 and 2020. The results suggest that 17% of the total number of overseas infrastructure projects contracted to Japanese firms during 1970–2020 were attributable to Japanese ODA disbursement. I also explore the potential mechanism, finding that the Japanese ODA-infrastructure link is strengthened when Japanese loans and grants are simultaneously provided to a recipient country. This finding is consistent with the view that pre-investment studies conducted as part of technical cooperation could generate goodwill effects for Japanese firms during their bidding for Japanese yen loan projects. |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:23029&r=fdg |
| By: | Cormier, Benjamin |
| Abstract: | Why do some developing countries obtain more official finance from China vis-a-vis Western sources? This study finds borrower transparency significantly affects which governments borrow more from China. From a supply side perspective, Chinese lending agencies have incentives to lend more to untransparent borrowers. From a demand side perspective, untransparent borrowers have incentives to use Chinese finance to avoid Western pressure to become more transparent. These findings and explanations have three implications. First, they help explain variation in external debt composition across developing countries using official credit. Second, they have implications for the international political economy of developing countries’ financial ties to China. Third, they imply the use of Chinese finance may allow untransparent governments to remain so, an important implication for the political economy of development. |
| Keywords: | China; Transparency; Official finance; Aid; International political economy; Development; Springer deal |
| JEL: | F3 G3 |
| Date: | 2023–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:115294&r=fdg |
| By: | Judit Kiss (Institute of World Economics, Centre for Economic and Regional Studies, ELRN) |
| Abstract: | The aim of the paper is to introduce and analyse the positive and negative micro- and macroeconomic effects of remittances in its complexity, in the migration-remittances- development context and to draw the overall balance from a political economy perspective in the case of Sub-Saharan Africa. The impact of remittances is mainly determined by the motivation to remit and the determinants of remittances. In the case of Africa, the main motivation is still altruism mixed with self-interest based on endogenous migration-, exchange- and portfolio- approaches with countercyclical and procyclical nature. The size and frequency of fixed and discretionary remittances inflow depend on the stock, type, legal status, personal character, individual behaviour, qualification and educational attainment of migrants, the political and economic situation of the host and the home country, and the transaction costs. The micro- and macroeconomic impacts of the yearly 50 billion remittances inflow is analysed according to remittance-developmental pluralist school of thought where the causes and the use of remittances are also considered. Though the results are not in all cases straightforward, Africa should promote and sustain the inflow of remittances as an alternative, non-debt generating source of financing development and strengthen the positive impact on economic growth, savings and investment, financial and human development, poverty and inequality reduction, and minimize/handle the negative consequences, like corruption, inflation, moral hazard, brain drain, Dutch disease |
| Keywords: | Sub-Saharan Africa, remittances, micro and macroeoconomic impacts |
| JEL: | F F |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:iwe:workpr:270&r=fdg |
| By: | Giulia Bettin (Universitá Politecnica delle Marche and MoFiR.); Amadou Jallow (University of the Gambia.); Alberto Zazzaro (University of Naples Federico II, CSEF and MoFiR.) |
| Keywords: | migrants’ remittances, international migration, natural disasters. |
| JEL: | F24 F22 Q54 |
| Date: | 2023–05–02 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:673&r=fdg |
| By: | Ablam Estel Apeti (LEO - Laboratoire d'Économie d'Orleans [2022-...] - UO - Université d'Orléans - UT - Université de Tours - UCA - Université Clermont Auvergne); Jean-Louis Combes (LEO - Laboratoire d'Économie d'Orleans [2022-...] - UO - Université d'Orléans - UT - Université de Tours - UCA - Université Clermont Auvergne); Eyah Denise Edoh (LEO - Laboratoire d'Économie d'Orleans [2022-...] - UO - Université d'Orléans - UT - Université de Tours - UCA - Université Clermont Auvergne) |
| Abstract: | This paper examines the impact of mobile money adoption on entrepreneurship in a large panel of 105 developing countries over the period 2006-2020 using entropy balancing method. Results indicate that countries with mobile money have higher entrepreneurial activities. Specifically, countries with mobile money experienced an increase of 0.35 percentage points in their entrepreneurial activity compared to nonmobile money countries. This result is robust to several robustness tests, including altering the definition of mobile money, the definition of entrepreneurship, placebo tests, adding additional control variables, changing the sample design, and alternative estimation methods such as panel fixed effects, and the GMM system. Furthermore, the heterogeneity tests performed indicate the sensitivity of our results to the intensity of mobile money use, some structural factors such as democracy, conflict, regulatory quality, corruption, financial development, internet, and education. |
| Keywords: | Mobile money, entrepreneurship, entropy balancing, developing countries |
| Date: | 2023–04–25 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-04081304&r=fdg |
| By: | Simplice A. Asongu (Yaounde, Cameroon); Sara le Roux (Oxford Brookes University, Oxford, UK) |
| Abstract: | The study examines how mobile money innovations transform unemployed women to self-employed women. The empirical evidence is based on interactive quantile regressions focusing on data in 44 countries from sub-Saharan Africa for the period 2004 to 2018. The hypothesis that mobile money innovations transform female unemployment to female self-employment is tested. Eight mobile money innovation dynamics presented in four categories are employed. Three main common findings are apparent from interactions between female unemployment, eight mobile money innovation dynamics and female self-employment: (i) the investigated hypothesis is valid exclusively at the top quantiles of female self-employment; (ii) the net effects are consistently negative and (iii) the corresponding conditional or interactive effects upon which the net effects are based are consistently positive. This is an indication that critical masses at which money innovation innovations have an overall positive net effect on female self-employment are apparent. The corresponding mobile money innovation policy thresholds at which the net effects on female self-employment change from negative to positive are provided. Policy implications are discussed. |
| Keywords: | Mobile phones; financial inclusion; women; inequality; sub-Saharan Africa |
| JEL: | G20 O40 I10 I20 I32 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:agd:wpaper:23/016&r=fdg |
| By: | Yunfang Hu; Takuma Kunieda; Kazuo Nishimura; Ping Wang |
| Abstract: | We construct a dynamic general equilibrium model of foreign direct investment (FDI) and foreign technology adoption, incorporating adoption barriers, international technology spillover, and relative price advantages. A higher FDI conversion efficacy, a lower adoption barrier, or a stronger international technology spillover, together with a lower relative price of FDI, can propel an economy to exhibit a flying geese paradigm escaping from a middle-income trap and catching up with the world frontier. We calibrate the model to eight representative Asian economies, including Asian Tigers and less-developed countries. Growth accounting exercises show that total factor productivity, FDI conversion efficacy, and foreign technology spillover drive Asian Tigers’ growth miracle, whereas a reduced adoption barrier and a favorable relative price of FDI are more crucial for the growth of less-developed Asian economies. The counterfactual analysis confirms that technology-embodied FDI serves as a flying propeller, explaining almost two-thirds of their economic growth. |
| JEL: | E20 F21 O40 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31159&r=fdg |
| By: | Dave Costenaro |
| Abstract: | Income and wealth allocation are foundational components of how economies operate. These are complex distributions, and it is hard to get a real sense for their dynamics using simplifications like average or median. One metric that characterizes such distributions better is the Gini Index, which on one extreme is 0, a completely equitable distribution, and on the other extreme is 1, the most inequitable, where a single individual has all the resources. Most experts agree that viable economies cannot exist at either extreme, but identifying a preferred range has historically been a matter of conflicting political philosophies and emotional appeals. This research explores instead whether there might be a theoretical and empirical basis for a preferred Gini Index. Specifically, I explore a simple question: Before financial systems existed, how were natural assets allocated? Intrinsic human attributes such as height, strength, & beauty were the original measures of value in which human social groups traded. Each of these attributes is distributed in a diverse and characteristic way, which I propose has gradually established the acceptable bounds of inequality through evolutionary psychology. I collect data for a wide array of such traits and calculate a Gini Index for them in a novel way assuming their magnitudes to be analogous to levels of financial wealth. The values fall into a surprisingly intuitive pattern ranging from Gini=0.02 to 0.51. Income distributions in many countries are within the top half of this range after taxes and transfers are applied (0.2 to 0.4). Wealth distributions on the other hand are mostly outside of this range, with the United States at a very inequitable 0.82. Additional research is needed on the interconnections between this range of "natural" Gini Indexes and human contentment; and whether any explicit policy goals should be considered to target them. |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2304.09971&r=fdg |
| By: | Eoin McLaughlin; Cristián Ducoing; Les Oxley |
| Abstract: | We introduce a new database of historical Genuine Savings (GS), an indicator of sustainable development promoted by the World Bank and widely used in contemporary economic research. GS derives from the theoretical work on wealth accounting, and addresses shortcomings in conventional metrics of economic development by incorporating broader measures of saving and investment, including human capital (education), and natural resource depletion. Its value as an indicator is determined by its ability to be used to predict future well-being. This article provides consistent historical estimates of GS since 1850 for 25 countries to enhance, complement, and contextualise the work of the World Bank and others. |
| JEL: | N10 N50 Q01 Q32 Q56 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31155&r=fdg |
| By: | Océane Blomme; Jérôme Héricourt |
| Abstract: | This paper investigates the complex relationship between current account balance and income inequality, putting specific emphasis on the potential sources of non-linearities in the latter. Based on a dataset for 52 developed and developing countries over the period 1990-2019, we first show a one-standard-deviation increase in various income inequality indicators generates a decrease in the ratio of current account over GDP by -0.5 to -0.9 percentage points in developed countries, but no significant impact when the sample is expanded to include emerging and developing countries. We then show those average impacts are distorted along the distribution of economic and financial development variables: for those countries displaying low GDP per capita, low levels of financial deregulation and of capital account openness, additional income inequality actually improves the current account balance. Conversely, the impact of income inequality on current account is all the more negative that financial markets are bigger, more deregulated and more open. In addition, the decrease in the current account balance is 1.2 to 1.4 times more important in countries with higher financial development or more open capital account when the increase in inequality is driven by the income of top earners relative to the middle class rather than by the increase in top earners' incomes at the expense of the lowest percentiles of the distribution. Those results are robust to various robustness checks for endogeneity concerns, possible impact of the Great Financial Crisis, and variable definitions. |
| Keywords: | Current Account;Finance;Inequality;Middle Class |
| JEL: | D31 E25 E44 F32 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2023-11&r=fdg |
| By: | Michael B. Devereux; Charles Engel; Steve Pak Yeung Wu |
| Abstract: | We construct a two-country New Keynesian model in which US government debt has an advantage as a superior collateral asset in the balance sheets of banks. The model can account for the observed response of the US dollar and US bond returns to a global downturn, in particular when the downturn is associated with a global financial crisis. In our model, the U.S. enjoys an “exorbitant privilege” as its government bonds are desired by banks both in the U.S. and abroad as superior collateral. In times of global stress, the dollar appreciates and the “convenience yield” earned by U.S. government bonds increases. There is “retrenchment” - each country reduces its holdings of foreign assets - a critical determinant of which is the endogenous response of prices and returns. In addition, the model displays a U.S. real exchange rate appreciation despite that domestic absorption in the US falls relative to the rest of the world during a global downturn, thus addressing the “reserve currency paradox” highlighted by Maggiori (2017). |
| JEL: | F30 F40 G15 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31164&r=fdg |
| By: | S. Lakshmi Naaraayanan; Daniel Wolfenzon |
| Abstract: | We compare the investment of standalone firms across regions after a positive shock to the investment opportunities generated by a large-scale highway development project. We show that the standalones’ investment sensitivity is lower in regions with a higher density of business groups in the local area. We investigate mechanisms driving our results and find support for a financing mechanism whereby banks allocate capital preferentially to group-affiliated firms in responding to the increase in credit demand. Overall, our study documents that business groups have spillover effects on standalone firms. |
| JEL: | G31 G32 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31107&r=fdg |
| By: | Laura Bakkensen; Toan Phan; Russell Wong |
| Abstract: | We theoretically and empirically investigate how climate risks affect collateralized debt markets. First, we develop a debt model where agents have different beliefs over a long-run risk. In contrast with existing two-period competitive-equilibrium models, our infinite-horizon competitive-search model predicts more pessimistic agents are more likely to make leveraged investments on risky collateral assets. They also tend to use longer maturity debt contracts, which are more exposed to the long-run risk. Second, employing large data on real estate and mortgage transactions, combined with high resolution sea-level-rise maps, we find robust evidence for these findings. We also show how monetary and securitization policies affect mortgage climate risk exposure. Our results highlight the importance of heterogeneous beliefs in understanding the effects of climate change on the financial system. |
| Keywords: | climate finance; sea-level rise; heterogeneous beliefs; real estate; mortgage; search and matching; monetary policy |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:95450&r=fdg |