nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2023‒05‒29
twenty-one papers chosen by
Georg Man

  1. Wealth Distribution, Income Inequality and Financial Inclusion: A Panel Data Analysis By Patrick N. Osakwe; Olga Solleder
  2. Social and institutional determinants of digital financial inclusion in Africa: A system GMM Approach By Evans, Olaniyi
  3. Migration, remittances and well-being in Kosovo By Arapi-Gjini, Arjola
  4. The forgotten lender: the role of multilateral lenders in sovereign debt and default By María Bru Muñoz
  5. Self-Fulfilling Debt Crises with Long Stagnations By Joao Ayres; Gaston Navarro; Juan Pablo Nicolini; Pedro Teles
  6. The Secular Decrease in UK Safe Asset Market Power By Jason Choi; Duong Q. Dang; Rishabh Kirpalani; Diego J. Perez
  7. Interest Rate Liberalization, Permanent Technology Shocks, and Macroeconomic Volatility in China By Qiaoyu Liang; Yihao Xue; Bing Tong
  8. In Search of Dominant Drivers of the Real Exchange Rate By Wataru Miyamoto; Thuy Lan Nguyen; Hyunseung Oh
  9. Trade Credit and Exchange Rate Risk Pass Through By Bryan Hardy; Felipe E. Saffie; Ina Simonovska
  10. Macroprudential FX Regulations: Sacrificing Small Firms for Stability? By María Alejandra Amado
  11. Identifying Financial Crises Using Machine Learning on Textual Data By Mary Chen; Matthew DeHaven; Isabel Kitschelt; Seung Jung Lee; Martin Sicilian
  12. Estimating the impact of supply chain network contagion on financial stability By Zlata Tabachov\'a; Christian Diem; Andr\'as Borsos; Csaba Burger; Stefan Thurner
  13. Too-many-to-fail and the Design of Bailout Regimes By Wolf Wagner; Jing Zeng
  14. The Bitcoin–Macro Disconnect By Gianluca Benigno; Carlo Rosa
  15. A Simple Model of a Central Bank Digital Currency By Bineet Mishra; Eswar S. Prasad
  16. Monetary policy and the joint distribution of income and wealth: The heterogeneous case of the euro area By Anna Stelzer
  17. Drivers of Private Equity Activity across Europe: An East-West Comparison By Evzen Kocenda; Shivendra Rai
  18. The changing financial practises of Brazilian and Turkish firms under financial subordination, a mixed-methods analysis By Annina Kaltenbrunner; Elif Karaçimen; Joel Rabinovich
  19. Clean innovation and heterogeneous financing costs By Emanuele Campiglio; Alessandro Spiganti; Anthony Wiskich
  20. What are Large Global Banks Doing About Climate Change? By Daniel O. Beltran; Pinar Uysal
  21. U.S. Banks’ Exposures to Climate Transition Risks By Hyeyoon Jung; João A. C. Santos; Lee Seltzer

  1. By: Patrick N. Osakwe; Olga Solleder
    Abstract: This working paper examines the impact of income inequality on the distribution of wealth using panel data and controlling for the roles of financial inclusion and other potential drivers of wealth inequality. We find evidence that lagged wealth and savings rates increase wealth inequality globally as well as in the developed and developing countries samples.
    Date: 2023
  2. By: Evans, Olaniyi
    Abstract: African nations have shown remarkable promise in digital financial services in recent years. However, much more remains to be done. Given this background, this study empirically investigates the social and institutional determinants of digital financial inclusion for a panel of 42 African countries using system GMM for the period 1995-2018. The empirical results show that social factors such as literacy, infrastructure, unemployment rate and standard of living have significant influence on digital financial inclusion. These results suggest that social realities matter for digital financial services. Equally, institutional factors such as political stability and absence of violence, control of corruption, regulatory quality, government effectiveness and rule of law have statistically significant and positive effects. These results suggest that better governance and better institutions correlate with faster digital financial inclusion. The estimates are robust to changes in estimation methods.
    Keywords: digital financial services, social and institutional determinants
    JEL: O3 O33 O35
    Date: 2022
  3. By: Arapi-Gjini, Arjola
    Keywords: Community/Rural/Urban Development, Food Security and Poverty, Labor and Human Capital
    Date: 2022
  4. By: María Bru Muñoz (Banco de España)
    Abstract: The role of multilateral lenders in sovereign default has been traditionally overlooked by the literature. However, these creditors represent a significant share of lending to emerging markets and feature very distinct characteristics, such as lower interest rates and seniority. By including these creditors in a traditional DSGE model of sovereign default, I reproduce the high debt levels found in the data while maintaining default probabilities within realistic values. Additionally, I am able to analyze the role of multilateral debt in emerging economies. Multilateral loans complement private financing and reduce the incompleteness of international financial markets. Also, multilateral funding acts as an insurance mechanism in bad times, providing countries with some degree of consumption smoothing, opposite to the role of front-loading consumption fulfilled by private financing.
    Keywords: sovereign debt and default, IFIs, multilateral institutions, seniority, consumption smoothing, emerging markets
    JEL: F34 F35 G15
    Date: 2023–01
  5. By: Joao Ayres; Gaston Navarro; Juan Pablo Nicolini; Pedro Teles
    Abstract: We assess the quantitative relevance of expectations-driven sovereign debt crises, focusing on the Southern European crisis of the early 2010’s and the Argentine default of 2001. The source of multiplicity is the one in Calvo (1988). Key for multiplicity is an output process featuring long periods of either high growth or stagnation that we estimate using data for those countries. We find that expectations-driven debt crises are quantitatively relevant but state dependent, as they only occur during stagnations. Expectations are a major driver explaining default rates and credit spread differences between Spain and Argentina.
    Keywords: Self-fulfilling debt crises; Sovereign default; Multiplicity; Stagnations
    JEL: E44 F34
    Date: 2023–02–14
  6. By: Jason Choi; Duong Q. Dang; Rishabh Kirpalani; Diego J. Perez
    Abstract: We document the decline in market power of the U.K. in safe assets and quantify the resulting losses. We estimate an increasing elasticity of demand for U.K. public debt during the latter half of the 20th century. This is in sharp contrast to the U.S., which displays the opposite pattern with decreasing elasticities of demand during this time. We argue that the decline in market power of the U.K. in safe assets resulted in a sizable decline in seigniorage revenues.
    JEL: E0 F3
    Date: 2023–04
  7. By: Qiaoyu Liang (School of Economics at Henan University, Kaifeng, Henan); Yihao Xue (School of Economics at Henan University, Kaifeng, Henan); Bing Tong (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan)
    Abstract: Are technology shocks contractionary or expansionary when interest rates are inflexible? This paper studies this issue based on Chinese data during the interest rate reform. We decompose the technology shock into permanent and transitory components and investigate their macroeconomic effects based on the New Keynesian model and the local projection method. Our empirical results show that interest rate fixation amplifies the effects of permanent technology shocks: a positive shock generates higher output and inflation during the period of fixed interest rates. This result is consistent with the New Keynesian model's prediction for permanent technology shocks. However, the empirical results for transitory technology shocks are insignificant.
    Keywords: Technology Shock, Interest rate liberalization, Total factor productivity (TFP), Macroeconomic Volatility
    JEL: E31 E42 E43 E52 E58
    Date: 2023–04
  8. By: Wataru Miyamoto; Thuy Lan Nguyen; Hyunseung Oh
    Abstract: We uncover the major drivers of macro aggregates and the real exchange rate at business cycle frequencies in Group of Seven countries. The estimated main drivers of key macro variables resemble each other and account for a modest fraction of the real exchange rate variances. Dominant drivers of the real exchange rate are orthogonal to main drivers of business cycles, generate a significant deviation of the uncovered interest parity condition, and lead to small movements in net exports. We use these facts to evaluate international business cycle models accounting for the dynamics of both macro aggregates and the real exchange rate.
    Keywords: Real exchange rate; International business cycles; Uncovered interest parity
    JEL: E32 F31
    Date: 2023–03–31
  9. By: Bryan Hardy; Felipe E. Saffie; Ina Simonovska
    Abstract: We show that trade credit mitigates exchange rate risk pass through along supply chains. We develop a theory of trade credit provision along supply chains that involve large intermediate-good suppliers and small final-good producers, both of which face bank borrowing constraints. Motivated by empirical findings, we assume that large suppliers borrow in foreign currency, while small final-good producers borrow in domestic currency at higher rates. Trade credit loosens borrowing constraints and allows for higher production scale. Additionally, the model predicts that unconstrained suppliers fully absorb increasing costs of borrowing in foreign currency when domestic currency depreciates: specifically, suppliers settle for lower profits but maintain unchanged trade credit lines with their trade partners. We verify the model's predictions using firm-level data for over 11, 000 large firms in 19 emerging markets over the 2004-2020 period.
    JEL: E30 F2 F3 F4 G15 G3
    Date: 2023–03
  10. By: María Alejandra Amado (Banco de España)
    Abstract: Macroprudential FX regulation may reduce systemic risk; however, little is known about its unintended consequences. I propose a theoretical mechanism in which currency mismatch acts as a means for relaxing small firms’ borrowing constraints, and show that policies taxing dollar lending may increase financing disparities between small and large firms. To verify this empirically, I study the implementation of a macroprudential FX tax by the Central Bank of Peru. I construct a novel dataset that combines confidential credit register data with firm-level data on employment, sales, industry and geographic location for the universe of formally registered firms. I show that a 10% increase in bank exposure to the tax significantly increases disparities in the growth of total loans between small and large firms by 1.6 percentage points. When accounting for firms switching to soles financing from different banks, the effect on large firms’ debt is only compositional. Using a confidential dataset on the universe of FX derivative contracts, I show that firms that are mostly affected by the policy are not hedged through FX derivatives. Additional findings using survey data suggest that this policy has potential heterogeneous implications for firms’ real outcomes.
    Keywords: macroprudential FX regulations, currency mismatch, small firms, FX derivatives, emerging markets, borrowing constraints, bank lending channel
    JEL: E43 E58 F31 F38 F41
    Date: 2022–10
  11. By: Mary Chen; Matthew DeHaven; Isabel Kitschelt; Seung Jung Lee; Martin Sicilian
    Abstract: We use machine learning techniques on textual data to identify financial crises. The onset of a crisis and its duration have implications for real economic activity, and as such can be valuable inputs into macroprudential, monetary, and fiscal policy. The academic literature and the policy realm rely mostly on expert judgment to determine crises, often with a lag. Consequently, crisis durations and the buildup phases of vulnerabilities are usually determined only with the benefit of hindsight. Although we can identify and forecast a portion of crises worldwide to various degrees with traditional econometric techniques and using readily available market data, we find that textual data helps in reducing false positives and false negatives in out-of-sample testing of such models, especially when the crises are considered more severe. Building a framework that is consistent across countries and in real time can benefit policymakers around the world, especially when international coordination is required across different government policies.
    Keywords: Financial crises; Machine learning; Natural language processing
    JEL: C53 C55 G01
    Date: 2023–03–31
  12. By: Zlata Tabachov\'a; Christian Diem; Andr\'as Borsos; Csaba Burger; Stefan Thurner
    Abstract: Realistic credit risk assessment, the estimation of losses from counterparty's failure, is central for the financial stability. Credit risk models focus on the financial conditions of borrowers and only marginally consider other risks from the real economy, supply chains in particular. Recent pandemics, geopolitical instabilities, and natural disasters demonstrated that supply chain shocks do contribute to large financial losses. Based on a unique nation-wide micro-dataset, containing practically all supply chain relations of all Hungarian firms, together with their bank loans, we estimate how firm-failures affect the supply chain network, leading to potentially additional firm defaults and additional financial losses. Within a multi-layer network framework we define a financial systemic risk index (FSRI) for every firm, quantifying these expected financial losses caused by its own- and all the secondary defaulting loans caused by supply chain network (SCN) shock propagation. We find a small fraction of firms carrying substantial financial systemic risk, affecting up to 16% of the banking system's overall equity. These losses are predominantly caused by SCN contagion. For every bank we calculate the expected loss (EL), value at risk (VaR) and expected shortfall (ES), with and without accounting for SCN contagion. We find that SCN contagion amplifies the EL, VaR, and ES by a factor of 4.3, 4.5, and 3.2, respectively. These findings indicate that for a more complete picture of financial stability and realistic credit risk assessment, SCN contagion needs to be considered. This newly quantified contagion channel is of potential relevance for regulators' future systemic risk assessments.
    Date: 2023–05
  13. By: Wolf Wagner (Erasmus University and CEPR); Jing Zeng (University of Bonn and CEPR)
    Abstract: We analyze the design of bailout regimes when investment is distorted by a too-many-to-fail problem. The first-best allocation equalizes benefits from more banks investing in high-return projects with endogenously higher systemic risk due to more banks failing simultaneously. A standard bailout policy cannot implement the first-best, as bailouts cause herding by banks. However, a bailout policy that assigns banks to separate bailout regimes eliminates herding and achieves the first-best. When such a policy is not feasible, targeted bailouts can be implemented by decentralizing bailout decisions to independent regulators. Our results have various implications for the optimal allocation of regulatory powers, both at the international level and domestically.
    Keywords: systemic risk, too-many-to-fail, optimal investment, bailouts
    JEL: G1 G2
    Date: 2023–05
  14. By: Gianluca Benigno; Carlo Rosa
    Abstract: This paper investigates the link between Bitcoin and macroeconomic fundamentals by estimating the impact of macroeconomic news on Bitcoin using an event study with intraday data. The key result is that, unlike other U.S. asset classes, Bitcoin is orthogonal to monetary and macroeconomic news. This disconnect is puzzling as unexpected changes in discount rates should, in principle, affect the price of Bitcoin even when interpreting Bitcoin as a purely speculative asset.
    Keywords: Bitcoin; asset prices; United States; high-frequency data; monetary surprises; macroeconomic announcements
    JEL: F3 F4 G1
    Date: 2023–02–01
  15. By: Bineet Mishra; Eswar S. Prasad
    Abstract: We develop a general equilibrium model that highlights the trade-offs between physical and digital forms of retail central bank money. The key differences between cash and central bank digital currency (CBDC) include transaction efficiency, possibilities for tax evasion, and, potentially, nominal rates of return. We establish conditions under which cash and CBDC can co-exist and show how government policies can influence relative holdings of cash, CBDC, and other assets. We illustrate how a CBDC can facilitate negative nominal interest rates and helicopter drops, and also how a CBDC can be structured to prevent capital flight from other assets.
    JEL: E4 E5 E61
    Date: 2023–04
  16. By: Anna Stelzer
    Abstract: This papers aims to establish the empirical relationship between income, net wealth and their joint distribution in a selected group of euro area countries. I estimate measures of dependence between income and net wealth using a semiparametric copula approach and calculate a bivariate Gini coefficient. By combining structural inference from vector autoregressions on the macroeconomic level with a simulation using microeconomic data, I investigate how conventional and unconventional monetary policy measures affect the joint distribution. Results indicate that effects of monetary policy are highly heterogeneous across different countries, both in terms of the dependence of income and net wealth on each other, and in terms of inequality in both income and net wealth.
    Date: 2023–04
  17. By: Evzen Kocenda (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague; Institute of Information Theory and Automation of the CAS, Prague; CESifo Munich; IOS Regensburg.); Shivendra Rai (Institute of Economic Studies, Charles University, Prague, Czech Republic)
    Abstract: We investigate the key macroeconomic and institutional determinants of fundraising and investment activities and compare them across Europe, covering 13 Central and Eastern European (CEE) and 16 Western European (WE) countries. Five macroeconomic variables and nineteen institutional variables are selected. These variables are studied using panel data analysis with fixed effects and random effects models over an eleven-year observation period (2010-2020). Bayesian Model Averaging (BMA) is applied to select the key variables. Our results suggest that macroeconomic variables have no significant impact on fundraising and investment activity in either region. Investment activity is a significant driver of fundraising across Europe. Similarly, fundraising and divestment activity are significant drivers of investments across Europe. Institutional variables, however, affect fundraising and investment activity differently. While investment freedom has a significant effect on funds raised in the WE and CEE countries, government integrity and trade freedom are both significant determinants of investments in both European regions. In addition, the results demonstrate that, in contrast to the WE region, fundraising in the CEE region is not country specific.
    Keywords: Private equity (PE), Fundraising, Investment, Central and Eastern Europe (CEE), Western Europe (WE), Bayesian Model Averaging (BMA)
    JEL: C11 C23 C52 E22 G15 G24 G28 O16
    Date: 2023–05
  18. By: Annina Kaltenbrunner; Elif Karaçimen; Joel Rabinovich
    Abstract: This article investigates the changing financial behavior of non-financial corporations (NFCs) in emerging markets (EMs) with a particular focus on Brazil and Turkey. Studies analysing new financial operations of EM NFCs have been cursory and few in number, focusing either on aggregate balance sheet analysis or single case study countries. Additionally, these studies have paid little attention to what underlying motives are and how structural pressures facing the EM NFCs mediate financial behaviours of NFCs. This lacuna is significant as specific manifestations of NFCs changing interaction with financial markets are highly variegated and shaped by the hierarchic world economy. Undertaking a comparative analysis of financial behaviours of NFCs in Brazil and Turkey based on balance sheet analysis and semi structured interviews, this paper shows how EM firms behaviour differs from that of their developed counterpart due their subordinate integration into the world economy. It departs from explanations focusing on carry-trading in order to account for high levels of debt and liquid resources. On the contrary, this article argues that firm financial behaviour in EMs takes a dualistic and heterogenous nature manifested in the type of firm engaged with financial markets and its sectoral belonging. The paper also shows not only the crucial but also the contradictory role state play in mediating the behaviours of EMs firms.
    Keywords: financialization, subordination, firm strategy, market-based finance
    JEL: F36 G30 L20
    Date: 2023–05
  19. By: Emanuele Campiglio (Department of Economics, University of Bologna; RFF-CMCC European Institute on Economics and the Environment (EIEE), Milan; LSE Grantham Research Institute on Climate Change and the Environment, London); Alessandro Spiganti (RFF-CMCC European Institute on Economics and the Environment (EIEE), Milan; Department of Economics, Ca’ Foscari University of Venice); Anthony Wiskich (Centre for Applied Macroeconomic Analysis, Australian National University, Canberra)
    Abstract: Access to finance is a major barrier to clean innovation. We incorporate heterogeneous and endogenous financing costs in a directed technical change model and identify optimal climate mitigation policies. The presence of a financing experience effect pushes the policymaker to strengthen policies in the short-term, both to shift innovation and production towards clean sectors and to reduce the financing cost differential across technologies, which further facilitates the transition. The optimal climate policy mix between carbon taxes and clean research subsidies depends on the drivers of the experience effect. In our benchmark scenario, where clean financing costs decline as cumulative clean output increases, we find an optimal carbon price premium of 47% in 2025, relative to a case with no financing costs.
    Keywords: carbon tax, directed technological change, endogenous growth, financing experience effect, innovation policy, low-carbon transition, optimal climate policy, sustainable finance
    JEL: H23 O31 O44 Q55 Q58
    Date: 2023
  20. By: Daniel O. Beltran; Pinar Uysal
    Abstract: We review the "climate action plans" of Global Systemically Important Banks (GSIBs) and the progress they are making toward achieving them. G-SIBs have identified the drivers of climate risk and their transmission channels to credit and other risks. Additionally, some have started to measure and model these risks. While most GSIBs have committed to fully offsetting their emissions by mid-century, they are only beginning to measure financed emissions resulting from their loans and investments, which comprise the vast majority of their emissions. G-SIBs have also committed to increase green finance and have started to do so. All told, despite some progress by large global banks to address climate change considerations, much work lies ahead to properly measure and disclose climate-related risks, and to better align financing activities with their net-zero targets.
    Keywords: banks; climate finance; environmental reporting; climate change
    JEL: Q54 Q56 G21
    Date: 2023–01
  21. By: Hyeyoon Jung; João A. C. Santos; Lee Seltzer
    Abstract: We build on the estimated sectoral effects of climate transition policies from the general equilibrium models of Jorgenson et al. (2018), Goulder and Hafstead (2018), and NGFS (2022a) to investigate U.S. banks’ exposures to transition risks. Our results show that while banks’ exposures are meaningful, they are manageable. Exposures vary by model and policy scenario with the largest estimates coming from the NGFS (2022a) disorderly transition scenario, where the average bank exposure reaches 9 percent as of 2022. Banks’ exposures increase with the stringency of a carbon tax policy but tend to benefit from a corporate or capital tax cut redistribution policy relative to a lump sum dividend. Also, banks’ exposures increase, although not dramatically in stress scenarios. For example, according to Jorgenson et al. (2018), banks’ exposures range from 0.5—3.5 percent as of 2022. Assuming that loans to industries in the top two deciles most affected by the transition policy lose their entire value, banks’ exposures would increase to 12—14 percent. Finally, there is a downward trend in banks’ exposures to the riskiest industries, which appears to be at least in part due to banks gradually reducing funding to these industries.
    Keywords: climate risk; transition risk; climate; Network for Greening the Financial System (NGFS) scenarios
    JEL: G21 H23 Q54
    Date: 2023–04–01

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