nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2023‒06‒19
25 papers chosen by
Georg Man

  1. The Historical Effects of Banking Distress on Economic Activity By Falk Bräuning; Viacheslav Sheremirov
  2. The effect of inequality on poverty and severity of poverty in SSA: the role of financial development institutions By Asongu, Simplice A; Odhiambo, Nicholas M
  3. Role of ICT Dissemination and Digital Finance in Poverty Eradication and Income Inequality Reduction: A Sub-national Level Study from India By Simontinti Das; Amrita Chatterjee
  4. Why Not Borrow, Invest, and Escape Poverty? By Dagmara Celik Katreniak; Alexey Khazanov; Omer Moav; Zvika Neeman; Hosny Zoabi
  5. Determinants of Financial Inclusion in Africa and OECD Countries By Evzen Kocenda; Samuel Fiifi Eshun
  6. Macroeconomic factors and Stock exchange return: A Statistical Analysis By Md. Fazlul Huq Khan; Md. Masum Billah
  7. Financial and Macroeconomic Data Through the Lens of a Nonlinear Dynamic Factor Model By Pablo Guerrón-Quintana; Alexey Khazanov; Molin Zhong
  8. Changing Forecasts - Forecasting Change: The US market for savings deposits in econometric models and the market for econometric models among depository institutions, 1960s to 1980s By Knake, Sebastian
  9. The Effects of FDI Liberalization on Structural Transformation and Demographic Change: Evidence from China By Erten, Bilge; Leight, Jessica; Zhu, Lianming
  10. Inward Foreign Direct Investment, Transactions, and Domestic Firms' Performance: Evidence from firm-to-firm transaction linkage By ITO Tadashi; TANAKA Ayumu
  11. Barbarians at the gate? FDI and target firms’ management quality By Beccari, Gabriele; Pisicoli, Beniamino; Vocalelli, Giorgio
  12. Cross-border Spillovers: How US Financial Conditions affect M&As Around the World By Katharina Bergant; Prachi Mishra; Raghuram Rajan
  13. Long-run competitive spillovers of the credit crunch By McShane, William
  14. Financial Stability and Interest Rates By Ozge Akinci; Gianluca Benigno; Marco Del Negro; Ethan Nourbash; Albert Queraltó
  15. Knockin' on H(e)aven's door. Financial crises and hidden wealth By Silvia Marchesi; Giovanna Marcolongo
  16. A Financial Stress Index for a Small Open Economy: The Australian Case By Pedro Gomis-Porqueras; Romina Ruprecht; Xuan Zhou
  17. Unequal access to The Global Financial Safety Net: An index for the quality of crisis finance By Zucker Marques, Marina; Mühlich, Laurissa; Fritz, Barbara
  18. Retrospective wisdom: Long-term orientation and the rating downgrades of financial institutions By Huong Dieu Dang
  19. On the Essentiality of Credit and Banking at Zero Interest Rates By Paola Boel; Christopher J. Waller
  20. Will Central Bank Digital Currency Disintermediate Banks? By Whited, Toni M.; Wu, Yufeng; Xiao, Kairong
  21. The Macroeconomic Implications of CBDC: A Review of the Literature By Sebastian Infante; Kyungmin Kim; André F. Silva; Robert J. Tetlow
  22. Nigeria’s eNaira, One Year After By Jookyung Ree
  23. Bankruptcy recovery rate and small businesses' innovation By Luca Fare; Marcus Dejardin; Eric Toulemonde
  24. Clean Innovation and Heterogeneous Financing Costs By Emanuele Campiglio; Alessandro Spiganti; Anthony Wiskich
  25. Too Low for Too Long: Could Extended Periods of Ultra Easy Monetary Policy Have Harmful Effects? By Mr. Etibar Jafarov; Enrico Minnella

  1. By: Falk Bräuning; Viacheslav Sheremirov
    Abstract: The failures of several U.S. regional banks have stimulated discussions about the macroeconomic effects of a likely credit contraction triggered by the recent banking turmoil. Drawing on historical evidence from advanced economies, this study documents a sizable and persistent decline in output and rise in unemployment following non-systemic financial distress. The effects of a systemic banking crisis are two to four times as large. High corporate leverage exacerbates banking turmoil, whereas high bank capitalization and a relatively large share of market financing in corporate debt mitigate it. These channels approximately offset one another so that the estimates tailored to the current U.S. economy are in line with the average effect.
    Keywords: banking distress; real economy; financial crises
    JEL: E44 F30 G01 G21
    Date: 2023–05–25
  2. By: Asongu, Simplice A; Odhiambo, Nicholas M
    Abstract: The present study investigates the incidence of financial institutions' dynamics of depth and access in the effect of income inequality on poverty and the severity of poverty in 42 Sub-Saharan African countries from 1980 to 2019. The Gini index is used to measure income inequality while poverty is measured as the poverty headcount ratio, and the severity of poverty is generated as the squared of the poverty gap index. An interactive quantile regression approach is used as an empirical strategy. Income inequality unconditionally increases poverty dynamics while the financial institutions' depth and access mitigate the adverse effects of income inequality on poverty dynamics. Financial institutions? policy thresholds or minimum financial institutions levels needed to completely dampen the adverse effects of income inequality on poverty dynamics are provided. The findings are contingent on existing levels of poverty, poverty measurement and proxies for financial institutions. Policy implications are discussed.
    Keywords: financial development; poverty alleviation; Africa
    Date: 2023–05
  3. By: Simontinti Das (Assistant Professor, Jadavpur University, Kolkata); Amrita Chatterjee ((Corresponding author), Assistant Professor, Madras School of Economics, Chennai, India)
    Abstract: Information and Communication technology (ICT) can boost economic growth and at the same time can create digital divide. The present paper explores both direct impact of ICT dissemination and its indirect impact through the channel of digital finance on poverty eradication and income inequality reduction at the sub-national level in India, considering rural-urban bifurcation. States are classified according to the incidence of poverty and income inequality. Ordered probit estimation confirms that the spread of ICT dissemination directly reduces the persistence of poverty in both urban and rural areas. Moreover, the application of ICT innovation in the financial sector or digital finance also has a positive impact on poverty eradication. However, in case of inequality removal, ICT innovation has no direct impact, though financial inclusion reduces inequality in both rural and urban areas. Interestingly, ICT diffusion in the banking sector dampens the positive role of financial inclusion on urban inequality reduction, whereas it has no impact on rural inequality. An important policy prescription should be strengthening ICT infrastructure along with a wider and uniform spread of digital finance among rural as well as urban populations so that more people can take advantage of ICT diffusion.
    Keywords: ICT innovation, Digital Finance, Poverty incidence, Income inequality, Rural-urban disparity
    JEL: O33 G2 I32 O18 R12
  4. By: Dagmara Celik Katreniak; Alexey Khazanov; Omer Moav; Zvika Neeman; Hosny Zoabi
    Abstract: Take up of microcredit by the poor for investment in businesses or human capital turned out to be very low. We show that this could be explained by risk aversion, without relying on fixed costs or other forms of non-convexity in the technology, if the investment is aimed at increasing the probability of success. Under this framework, rational risk-averse agents choose corner solutions, unlike in the case of a risky investment with an exogenous probability of success. Our online experiment confirms our theoretical predictions about how agents' choices differ when facing the two types of investments.
    Date: 2023–05
  5. 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.); Samuel Fiifi Eshun (Institute of Economic Studies, Charles University, Prague, Czech Republic.)
    Abstract: Using a dynamic panel data analysis, we explore the factors influencing financial inclusion in Sub-Saharan Africa (SSA) and countries belonging to the Organization for Economic Co-operation and Development (OECD). We employ the System Generalized Method of Moments (GMM) estimator and assess 31 SSA and 38 OECD countries from 2000-2021. We found that the differences in trade openness, banks' efficiency, income, and remittances are some macro-level factors that explain the variation in financial inclusion levels. We highlight the importance of quality literacy policies, trade improvement with restrictions on cross-border capital flows, and a more efficient financial system to promote financial inclusion.
    Keywords: Financial Inclusion, Financial Inclusion Index, Sub-Saharan Africa (SSA), Organization for Economic Co-operation and Development (OECD), System Generalized Methods of Moments (GMM)
    JEL: C23 E44 F65 G21 O16 O57
    Date: 2023–05
  6. By: Md. Fazlul Huq Khan; Md. Masum Billah
    Abstract: The purpose of this research is to examine the relationship between the Dhaka Stock exchange index return and macroeconomic variables such as exchange rate, inflation, money supply etc. The long-term relationship between macroeconomic variables and stock market returns has been analyzed by using the Johnson Cointegration test, Augmented Dicky Fuller (ADF) and Phillip Perron (PP) tests. The results revealed the existence of cointegrating relationship between stock prices and the macroeconomic variables in the Dhaka stock exchange. The consumer price index, money supply, and exchange rates proved to be strongly associated with stock returns, while market capitalization was found to be negatively associated with stock returns. The findings suggest that in the long run, the Dhaka stock exchange is reactive to macroeconomic indicators.
    Date: 2023–05
  7. By: Pablo Guerrón-Quintana; Alexey Khazanov; Molin Zhong
    Abstract: Through the lens of a nonlinear dynamic factor model, we study the role of exogenous shocks and internal propagation forces in driving the fluctuations of macroeconomic and financial data. The proposed model 1) allows for nonlinear dynamics in the state and measurement equations; 2) can generate asymmetric, state-dependent, and size-dependent responses of observables to shocks; and 3) can produce time-varying volatility and asymmetric tail risks in predictive distributions. We find evidence in favor of nonlinear dynamics in two important U.S. applications. The first uses interest rate data to extract a factor allowing for an effective lower bound and nonlinear dynamics. Our estimated factor coheres well with the historical narrative of monetary policy. We find that allowing for an effective lower bound constraint is crucial. The second recovers a credit cycle. The nonlinear component of the factor boosts credit growth in boom times while hinders its recovery post-crisis. Shocks in a credit crunch period are more amplified and persist for longer compared with shocks during a credit boom.
    Keywords: Interest rates; Effective lower bound; Credit cycle; Asymmetric dynamics; Predictive distributions; Tail risk
    JEL: E51 C51 E43
    Date: 2023–05–05
  8. By: Knake, Sebastian
    Abstract: Since the late 1960s, the rising volatility of financial markets in the US has troubled econometricians and bank managers alike. Both professions have found it increasingly difficult to forecast savings deposit flows. This article explores these challenges by focusing on two developments. First, it explores the internal adjustment process among econometric models of the savings deposit market. To achieve this aim, I use the so-called FMP (MPS) macro model used by the Federal Reserve Board since 1970 and the deposit forecast model of the Philadelphia Saving Fund Society (PSFS), the oldest and largest savings bank in the US. I find that economists failed to find timeless determinants for the market for savings deposits, partly because the determinants of expectation formation of households kept changing. Instead, economists relied on a large number of time-dependent dummy variables. Second, the article shows how the conditions of the market for savings deposits shaped the demand for macroeconomic forecast models. Here, I again use PSFS as a case study. I show that the demand for econometric models in the banking industry skyrocketed in the 1970s but abated somewhat in the 1980s. While the rising volatility led bank managers to seek sophisticated tools to predict deposit flows, the deregulation of the banking industry and the accompanying change in customer behavior devalued macro models as a reliable forecast technique for individual banks. Instead, it became crucial for banks to predict the future behavior of competing institutions.
    Keywords: Savings, Deposits, Interest Expectations, Portfolio Choice, Financial History, Econometric Modeling, Stagflation Period
    JEL: B23 N22
    Date: 2023
  9. By: Erten, Bilge (Northeastern University); Leight, Jessica (International Food Policy Research Institute); Zhu, Lianming (Osaka University)
    Abstract: How does foreign direct investment (FDI) liberalization shape structural transformation and demographic change in developing countries? We provide new evidence on this question using five waves of Chinese census data between 1990 and 2015, exploiting quasi-exogenous variation in FDI liberalization induced by multiple waves of regulatory relaxation. We find that counties more exposed to liberalization experience a relative shift out of agricultural employment into manufacturing and services for both men and women. Exposure to FDI liberalization also reduces the probability of marriage, and induces a decline in the birth rate and the share of women with children.
    Keywords: foreign direct investment, structural transformation, demographic change, China
    JEL: F23 F63 J13
    Date: 2023–04
  10. By: ITO Tadashi; TANAKA Ayumu
    Abstract: Many studies have attempted to use industry-level variations in the presence of foreign firms to estimate the impact of foreign firms on domestic firms. However, owing to the limitations of industry-level data, the channels through which foreign firms influence domestic firms are unclear. Our study used a large set of Japanese firm-to-firm transaction data to test whether domestic firms’ performance improves through firm-to-firm transactions with foreign-affiliated firms. Our empirical analyses using the state-of-the-art technique of causal inference, such as event study design and staggered difference-in-differences estimator, show no evidence of positive spillover effects of MNEs on domestic firms through business transactions.
    Date: 2023–03
  11. By: Beccari, Gabriele; Pisicoli, Beniamino; Vocalelli, Giorgio
    Abstract: We analyse whether firms targeted by a foreign investor improve their management quality and practices after the acquisition, focusing on Foreign Direct Investments (FDI) occurring in Italy between 2010 and 2020. To proxy management quality, we resort to granular data on ISO certificates held by firms and find that those acquired by foreign investors experience an mprovement in management standards, regardless of the country from which the FDI originates. This is not the case for firms involved in domestic M&As. Our empirical strategy controls for ex ante selection, and our findings show that the positive effects of FDI documented in the literature can be partly attributed to improved managerial practices implemented in target firms.
    Keywords: FDI; M&As; Management quality; Foreign investors; Productivity.
    JEL: D2 F1 F2 M1
    Date: 2023–04
  12. By: Katharina Bergant; Prachi Mishra; Raghuram Rajan
    Abstract: We find that financial conditions in the core have significant spillover effects on cross-border mergers and acquisitions (M&As). On average, a 1 percentage point easing of the IMF US Financial Conditions Index is associated with approximately a 10% higher volume of cross-border M&As. The spillovers are stronger for countries with more liabilities denominated in foreign currency (or in US dollars). We find that the spillovers are driven by changes in US financial conditions, rather than changes in Euro Area conditions. Deals that happen when financial conditions in the US are tighter (and therefore acquisitions fewer) add more value for the acquirers, as reflected in higher acquirer excess stock returns around the announcement.
    JEL: G1
    Date: 2023–05
  13. By: McShane, William
    Abstract: Competition in the U.S. appears to have declined. One contributing factor may have been heterogeneity in the availability of credit during the financial crisis. I examine the impact of product market peer credit constraints on long-run competitive outcomes and behavior among non-financial firms. I use measures of lender exposure to the financial crisis to create a plausibly exogenous instrument for product market credit availability. I find that credit constraints of product market peers positively predict growth in sales, market share, profitability, and markups. This is consistent with the notion that firms gained at the expense of their credit constrained peers. The relationship is robust to accounting for other sources of inter-firm spillovers, namely credit access of technology network and supply chain peers. Further, I find evidence of strategic investment, i.e. the idea that firms increase investment in response to peer credit constraints to commit to deter entry mobility. This behavior may explain why temporary heterogeneity in the availability of credit appears to have resulted in a persistent redistribution of output across firms.
    Keywords: financial crisis, instrumental variables, long-run effects, spillovers, strategic behavior
    JEL: G01 G21 G30 L11
    Date: 2023
  14. By: Ozge Akinci; Gianluca Benigno; Marco Del Negro; Ethan Nourbash; Albert Queraltó
    Abstract: In a recent research paper we argue that interest rates have very different consequences for current versus future financial stability. In the short run, lower real rates mean higher asset prices and hence higher net worth for financial institutions. In the long run, lower real rates lead intermediaries to shift their portfolios toward risky assets, making them more vulnerable over time. In this post, we use a model to highlight the challenging trade-offs faced by policymakers in setting interest rates.
    Keywords: financial stability; monetary policy; Dynamic Stochastic General Equilibrium (DSGE) models; rates; nonlinear responses; shocks; fire sale
    JEL: E2 E5 E4 G2
    Date: 2023–05–23
  15. By: Silvia Marchesi; Giovanna Marcolongo
    Abstract: This paper investigates the link between financial crises in developing countries and variation of bank deposits in offshore financial centers. Using both a two way fixed effects and a stacked difference-in-differences estimator, we find that after three years since the beginning of the crisis bank deposits in tax havens increase by about 20 percent. The effect does not depend on taxation and seems driven by countries with more fragile institutions. We add to the literature on the effects of tax havens: they not only facilitate tax evasion and corruption in "normal times", but also absorb resources during financial crises, when most needed.
    Keywords: Sovereign debt crisis, Financial Crisis, Offshore accounts.
    JEL: D73 F34 G15 H63 P16
    Date: 2023–04
  16. By: Pedro Gomis-Porqueras; Romina Ruprecht; Xuan Zhou
    Abstract: We construct a Financial Stress Index (FSI) for a small open economy, which aims to provide clear and timely signals of financial market strains. This can be used in developing appropriate responses to address these adverse events. To do so, we use the principal component framework and apply it to Australian monthly data on interest rates, spreads, exchange rates, house price growth and inflation expectations. Decomposing the index into foreign and domestic components, we find that the foreign factors can explain more than half (57.4%) of our Australian Financial Stress Index (AFSI). To determine the information content of our index, we run a series of Granger causality tests on several economic and financial observables. We also estimate whether including the AFSI can improve the prediction of the different economic and financial outcomes relative to a specification that uses only its own previous data. We find that including the AFSI improves the forecasts for future retail sales growth and bank credit growth. Finally, we show that financial stress can have non-linear effects on bank credit growth. In particular, an increase in financial stress affects credit growth more adversely if AFSI is high. This result further highlights the importance of an accurate and timely measure of financial stress in an economy for researchers and policy makers.
    Keywords: Financial stress index; Financial stability; Small open economies
    JEL: F30 G01 G15
    Date: 2023–05–05
  17. By: Zucker Marques, Marina; Mühlich, Laurissa; Fritz, Barbara
    Abstract: The Global Financial Safety Net (GFSN) - the institutions and arrangements that provide short-term crisis finance - has turned into a highly complex, uncoordinated system of global, multilateral, and bilateral instruments. The present paper elaborates on a composite index of the GFSN to analyse its preparedness for shielding countries from financial crises. This first-of-its-kind index comprises six components that measure the vulnerability and resilience of individual countries to financial crises derived from economic and political economy financial crisis literature. We apply this index to data from 192 UN member countries we collected in the GFSN tracker for the period of the COVID-19 pandemic in terms of their asses to and use of the GFSN. This index, and the use of novel forms of graphical displaying, allow us to identify a hierarchy in the access to short-term liquidity by the GFSN. At the bottom, we find low-income countries with sole access to IMF standard conditional crisis finance, while we find at the top countries with access to bilateral currency swaps, especially those provided by the US Federal Reserve. Our analysis also reveals that first, the temporary reformed unconditional access of IMF crisis finance during the pandemic has temporarily improved those countries' position in the GFSN hierarchy; second, bilateral swaps as crisis finance instruments reinforce the GFSN hierarchy. Since access to adequate emergency liquidity is decisive for a country's financial crisis prevention capacity and the ability to engage in social cohesion and climate policy, we suggest to flatten the hierarchy by keeping access to IMF unconditional finance open beyond the COVID-19 crisis, expanding regional financial arrangements, and by coordinating GFSN elements, including currency swap providing central banks.
    Keywords: Global financial safety net, financial crisis, short-term crisis finance, IMF, central bank policies, regional financial arrangements
    Date: 2023
  18. By: Huong Dieu Dang (University of Canterbury)
    Abstract: This study examines the effects of Hofstede’s long-term orientation (LTO) on the rating changes of financial institutions (FIs) in 50 countries. The impacts of LTO on rating downgrades are stronger for the sample of speculative grade-rated FIs and more pronounced for crises sample. The significance effect of LTO on downgrades is robust to various tests and is unlikely due to endogeneity. Switching from a short term- to a long term (LT)-oriented culture lowers the downgrade risk of an FI by 47%, a speculative-grade rated FI by 56%, and an FI of a country in crisis by 58%. LT-oriented societies promote responsible borrowing and a good payment culture. A strong preference for long-term business survival motivates banks in LToriented nations to maintain a more prudent bank credit to bank deposits ratio, particularly during crises. Incorporating LTO in banking regulations may encourage banks to adopt longterm perspectives and finance long-term sustainable projects.
    Keywords: Long-term orientation; National culture; Hofstede; World Value Survey; Rating downgrades
    JEL: G24
    Date: 2023–05–01
  19. By: Paola Boel; Christopher J. Waller
    Abstract: We investigate the welfare-increasing role of credit and banking at zero interest rates in a microfounded general equilibrium monetary model. Agents differ in their opportunity costs of holding money due to heterogeneous idiosyncratic time-preference shocks. Without banks, the constrained-efficient allocation is never attainable, since impatient agents always face a positive implicit rate in equilibrium. With banks, patient agents pin down the borrowing rate and in turn enable impatient agents to borrow at no cost when the inflation rate approaches the highest discount factor. Banks can therefore improve welfare at zero rates, provided that both types of agents are included in the financial system and that the borrowing limit is sufficiently lax. The result is robust to several extensions.
    Keywords: Banking; Money; Zero Interest Rates
    JEL: E40 E50
    Date: 2023–05–23
  20. By: Whited, Toni M. (University of Michigan and the NBER); Wu, Yufeng (University of Illinois); Xiao, Kairong (Columbia University)
    Abstract: We estimate a dynamic banking model to quantify the impact of a central bank digital currency (CBDC) on the banking system. Our counterfactuals show that a one-dollar introduction of CBDC replaces bank deposits by around 80 cents on the margin. Bank lending falls by one-fourth of the drop in deposits because banks partially replace lost deposits with wholesale funding. This substitution raises banks’ interest-rate risk exposure and lowers their resilience to negative equity shocks. If CBDC bears interest or is intermediated through banks, it captures a greater deposit market share, amplifying the impact on lending. The effect on lending is ampliï¬ ed for small banks, for which wholesale funding is more expensive.
    Keywords: central bank digital currency, banking competition, maturity mismatch, ï¬ nancial stability
    JEL: E51 E52 G21 G28
    Date: 2023–05
  21. By: Sebastian Infante; Kyungmin Kim; André F. Silva; Robert J. Tetlow
    Abstract: This paper provides an overview of the literature examining how the introduction of a CBDC would affect the banking sector, financial stability, and the implementation and transmission of monetary policy in a developed economy such as the United States. A CBDC has the potential to improve welfare by reducing financial frictions in deposit markets, by boosting financial inclusion, and by improving the transmission of monetary policy. However, a CBDC also entails noteworthy risks, including the possibility of bank disintermediation and associated contraction in bank credit, as well as potential adverse effects on financial stability. A CBDC also raise important questions regarding monetary policy implementation and the footprint of central banks in the financial system. Ultimately, the effects of a CBDC depend critically on its design features, particularly remuneration.
    Keywords: Financial stability; Monetary policy; Banking; Central bank digital currency; Central banking
    JEL: G20 E40 E50
    Date: 2022–11–17
  22. By: Jookyung Ree
    Abstract: This paper reflects on the first year of the eNaira—the first CBDC in Africa. Despite the laudable undisrupted operation for the first full year, the CBDC project has not yet moved beyond the initial wave of limited adoption. Network effects suggest the initial low adoption spell will require a coordinated policy drive to break it. The eNaira’s potential in financial inclusion requires a strategy to set the right relationship with mobile money, given the former’s potential to either complement or substitute the latter. Cost savings from integrating CBDC—as a bridge vehicle—in the remittance process may also be substantial.
    Keywords: Central Bank Digital Currency; financial inclusion; remittance; blockchain; mobile money
    Date: 2023–05–16
  23. By: Luca Fare; Marcus Dejardin; Eric Toulemonde (Development Finance and Public Policies, University of Namur)
    Abstract: Small businesses often face a high risk of bankruptcy and harsh financing conditions, which can hamper them to engage in innovation. This paper investigates whether a bankruptcy system that guarantees a good recovery rate for creditors in case of firms’ liquidation stimulates small businesses’ innovation investments through lower interest rates and therefore easier access to credit. With the help of a borrower-lender model we derive insights about the interactions between bankruptcy recovery rate, borrowing interest rates and firms’ investments in innovation. The model gives theoretical underpinnings for a subsequent empirical analysis. By using a cross-country sample of micro (1-9 employees)-, small (10-49 employees)-, and medium (50-249 employees)-sized enterprises (MSMEs), our study provides three main results. It shows that an increase in the bankruptcy recovery rate a) is positively associated to MSMEs’ investments in innovation (investment effect); b) reduces the share of MSMEs that are credit constrained because the cost of borrowing is too high (constraint effect); c) reduces the interest rates dispersion for high profitable MSMEs (dispersion effect). Overall, our findings suggest that improving creditors recovery rate can help promoting the innovative behaviour of small businesses through easier financing conditions.
    Date: 2023–05
  24. By: Emanuele Campiglio; Alessandro Spiganti; Anthony Wiskich
    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 induces more ambitious 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 whether experience is gained through clean production or research. 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: 2023–05
  25. By: Mr. Etibar Jafarov; Enrico Minnella
    Abstract: Extended periods of ultra-easy monetary policy in advanced economies have rekindled debates about the zombification of weak companies and its impact on resource allocation, economic growth, inflation, and financial stability. Using both firm-level and macroeconomic data, we find that recessions are a critical factor in the rapid increase in the number of zombie firms. Expansionary monetary policy can help reduce zombification when interest rates are at the zero lower bound (ZBL), but a too-accommodative monetary policy for extended periods is associated with a higher probability of zombification. Small and medium enterprises are more likely to become zombie firms. This raises concerns about the sustainability of too-easy monetary policy implementation, especially in countries where growth is lackluster. Our findings imply a tradeoff between conducting a countercyclical monetary policy, which also helps contain the increase in the number of zombie firms in cyclical downturns, and using an expansionary monetary policy for long periods, which may lead to a combination of low interest rates, low growth, and high financial vulnerability. Such a tradeoff is not a concern currently when most countries are tightening their monetary policy stance, but policymakers should be mindful of it during future recessions.
    Keywords: Too Low for Too Long; Zombie Firms; Financial Stability
    Date: 2023–05–19

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