nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2023‒07‒31
twenty-two papers chosen by
Georg Man

  1. China's Macroeconomic Development: The Role of Gradualist Reforms By Kaiji Chen; Tao Zha
  2. Do Aid for Trade flows affect Technology Licensing in Recipient Countries? By Gnangnon, Sèna Kimm
  3. The effectiveness of development financing. A practitioner’s perspective... B248 By Olivier Lafourcade
  4. Financial Shocks in an Uncertain Economy By Chiara Scotti
  5. Modelling and Forecasting Macroeconomic Risk with Time Varying Skewness Stochastic Volatility Models By Andrea Renzetti
  6. Time-Varying Risk Aversion and International Stock Returns By Massimo Guidolin; Erwin Hansen; Gabriel Cabrera
  7. Does uncertainty matter for the fiscal consolidation and investment nexus? By Ioannis Bournakis; Nelson R. Ramírez-Rondán
  8. Iceland: Financial System Stability Assessment By International Monetary Fund
  9. International Lending Channel, Bank Heterogeneity and Capital Inflows (Mis)Allocation By Lucas Argentieri Mariani; Silvia Marchesi
  10. Exchange rate exposure and firm dynamics By Salomao, Juliana; Varela, Liliana
  11. Destination Trade Credit and Exports: Evidence from Cross Country Panel Data By Changyuan Luo; Shuai Zeng; Laixun Zhao
  12. The Financial Channel of the Exchange Rate and Global Trade By Sai Ma; Tim Schmidt-Eisenlohr
  13. Inflation, Monetary Policy and the Sacrifice Ratio:The Case of Southeast Asia By Leef H. Dierks
  14. Investigating the inflation-output-nexus for the euro area: Old questions and new results By Gerdesmeier, Dieter; Reimers, Hans-Eggert; Roffia, Barbara
  15. Decomposing cryptocurrency dynamics into recurring and noisy components By Marcin W\k{a}torek; Maria Skupie\'n; Jaros{\l}aw Kwapie\'n; Stanis{\l}aw Dro\.zd\.z
  16. Monetary Policy Transmission Through Online Banks By Isil Erel; Jack Liebersohn; Constantine Yannelis; Samuel Earnest
  17. Monetary Policy Transmission under Financial Repression By Kaiji Chen; Yiqing Xiao; Tao Zha
  18. Financial heterogeneity and monetary union By Simon Gilchrist; Raphael Schoenle; Jae Sim; Egon Zakrajsek
  19. Macrofinancial Dynamics in a Monetary Union By Daniel Monteiro
  20. Innovation convergence By Bryan Hardy; Can Sever
  21. R&D tax credits and the acquisition of startups By McShane, William; Sevilir, Merih
  22. Mobile money innovations and health performance in sub-Saharan Africa By Simplice A. Asongu; Yolande E. Ngoungou; Joseph Nnanna

  1. By: Kaiji Chen; Tao Zha
    Abstract: This paper reviews recent literature on China's macroeconomic development, emphasizing the critical role of the gradualist approach over the past four decades. Beyond China's structural transformation, we explore various aspects such as high saving rates, the housing boom, an expanding current account surplus, and rising inequality. We propose a unifying framework that encapsulates key development stages, contrasting gradualism with a laissez-faire counterfactual. Our analysis illustrates how China's gradual policy reforms, amidst highly imperfect financial markets, have effectively helped spur GDP growth throughout its macroeconomic evolution. We highlight the tradeoffs between accelerating GDP growth and safeguarding China's long-term financial stability.
    JEL: E02 E2 E65 F43
    Date: 2023–06
  2. By: Gnangnon, Sèna Kimm
    Abstract: There is an abundant literature on the economic (including trade) effects of Aid for Trade (AfT) flows. However, little attention has been devoted to the effect of AfT flows on demand for technology. The present article aims to fill this void in the literature by investigating the effect of AfT flows on technology licensing in developing countries. The analysis has used an unbalanced panel dataset of 77 countries over the period from 2002 to 2019, and mainly the two-step system generalized method of moments estimator. It has established that AfT flows foster technology licensing in countries that experience lower trade costs. In addition, the analysis has revealed that adverse environmental and external (economic and financial) shocks significantly hamper innovation, including the demand for technology licensing, and that AfT flows promote technology licensing in countries that experience lower magnitudes of such shocks. Finally, AfT flows foster technology licensing in countries that diversify their export products.
    Keywords: Aid for Trade, Technology licensing, Trade costs
    JEL: F10 F35 L24
    Date: 2023
  3. By: Olivier Lafourcade (I&P - Investisseurs et Partenaires)
    Abstract: Reminder. The objective of the Chair in International Architecture of Development Finance (IADF) is to "reflect independently about what the global development finance system should become in light of the current international situation and the lessons learned from the experience of the past 60 years." Therefore, the IADF has initiated a series of studies on some of the important themes concerning the prospects for adjusting the organization and functioning of the international institutional apparatus. As part of the preparations for the June Summit on the theme of financing vulnerable countries, the IADF Chair has been led to adapt, accelerate and amplify its programme so as to make contributions on several themes that are crucial to the Summit' orientation.
    Date: 2023–05–16
  4. By: Chiara Scotti
    Abstract: The past 15 years have been eventful. The Global Financial Crisis (GFC) reminded us of the importance of a stable financial system to a well-functioning economy, one with low and stable inflation and maximum employment. Given the recent banking stress, we ponder this issue again. The pandemic was a huge shock surrounded by much uncertainty, making precise forecasts within traditional models difficult. And more recently, there has been continuous talk of a soft landing and recession risks. In this paper, I focus on some of the lessons we have learned over the years: (i) uncertainty and tail risk have cyclical variation; (ii) financial shocks can have a significant effect on macroeconomic outcomes; (iii) the impact of shocks is stronger in periods of high volatility. These lessons have important implications for policymakers in today’s environment.
    Keywords: uncertainty; tail risk; stochastic volatility; monetary policy; financial stability
    JEL: C32 E44
    Date: 2023–07–07
  5. By: Andrea Renzetti
    Abstract: In this paper I propose a parametric framework for modelling and forecasting macroeconomic tail risk based on stochastic volatility models with Skew-Normal and Skew-t shocks featuring stochastic skewness. The paper develops posterior simulation samplers for Bayesian estimation of both univariate and VAR models of this type. In an application, I use the models to predict downside risk to GDP growth and I show that this approach represents a competitive alternative to quantile regression. Finally, estimating a medium scale VAR on US data I show that time varying skewness is a relevant feature of macroeconomic and financial shocks.
    Date: 2023–06
  6. By: Massimo Guidolin; Erwin Hansen; Gabriel Cabrera
    Abstract: We estimate an aggregate time-varying risk aversion function using option, stock return and macroeconomic data for a sample of 8 countries. We document that, in most of the countries, the degree of risk aversion is countercyclical. Moreover, we show that the estimated risk aversion function forecasts monthly stock index returns up to 12 months ahead. This effect is statistically significant in panel regressions, and it survives the inclusion of additional control variables. Finally, we show that the estimated time-varying risk aversion function provides useful information to an investor who aims at timing the market. An investment strategy that uses the estimated time-varying risk aversion measure to solve a mean-variance asset allocation problem, delivers significant returns.
    Keywords: Implied risk aversion, forecast stock return, market timing, mean-variance asset allocation.
    JEL: G10 G11 G15
    Date: 2023
  7. By: Ioannis Bournakis; Nelson R. Ramírez-Rondán
    Abstract: The paper searches for non-linearities in the relationship between fiscal consolidation and investment. To understand this nexus, we consider the broader state of the economy as this is represented by the degree of uncertainty. Based on a sample of 27 OECD countries over the period 1996-2019, we identify low and high uncertainty regimes within which the nature of the relationship between fiscal policy and investment differs substantially. In the low uncertainty regime, fiscal tightening has an irrelevant effect on investment; whereas, in the high uncertainty regime, this impact is negative and is three times larger than in the low uncertainty regime. Our findings maintain a robust pattern of this relationship through a series of sensitivity tests.
    Keywords: Fiscal policy, real sector, threshold model, panel data
    Date: 2023–07
  8. By: International Monetary Fund
    Abstract: Iceland has made solid progress since the 2008 crisis and the last FSAP update in restructuring banks and implementing important financial sector reforms. It has transposed many EU Directives and Regulations into national law, improving the regulatory, supervisory, and crisis management frameworks. Despite global headwinds, Iceland is exiting the pandemic with strong economic growth and highly capitalized banks. Rising inflation has prompted appropriate policy rate hikes, and macroprudential policies related to real estate exposures have been tightened. Payment systems are dependent on international connectivity of debit and credit card providers.
    Date: 2023–06–23
  9. By: Lucas Argentieri Mariani; Silvia Marchesi
    Abstract: This paper explores the role of banks’ heterogeneity in international lending and its impacts on capital inflows allocation across firms by exploiting the inclusion of South Africa into the Citi Group’s World Government Bond Index (WGBI). Using bank-level data, we provide evidence that banks holding sovereign bonds before the inclusion increase credit supply to non-financial firms after the shock. Moreover, less capitalized banks drive these effects. Using firm-level data in South Africa, we then show that credit is allocated to less financially constrained and less productive firms. Consistent with zombie-firms behavior, we find no evidence of a significant improvement in real outcomes after the increase of credit supply to those firms. Our paper adds to the literature by analyzing the interplay between banks’ heterogeneity, capital inflows shocks and capital misallocation.
    Keywords: Capital inflows, Sovereign Debt, International Lending Channel, Misallocation
    JEL: F21 F36 G21
    Date: 2023–06
  10. By: Salomao, Juliana; Varela, Liliana
    Abstract: This article develops a heterogeneous firm-dynamics model to jointly study firms’ currency debt composition and investment choices. In our model, foreign currency borrowing arises from a dynamic trade-off between exposure to currency risk and growth. The model endogenously generates selection of productive firms into foreign currency borrowing. Among them, firms with high marginal product of capital use foreign loans more intensively. We assess econometrically the model’s predicted pattern of foreign currency borrowing using firm-level census data from the deregulation of these loans in Hungary, calibrate the model, and quantify the aggregate impact of this financing. Our counterfactual exercises show that understanding the characteristics of firms borrowing in foreign currency is critical to assess the aggregate consequences of this financing.
    Keywords: firm dynamics; foreign currency debt; currency mismatch; uncovered interest rate parity
    JEL: F3 G3
    Date: 2022–01–01
  11. By: Changyuan Luo (Institute of World Economy, Fudan University, CHINA); Shuai Zeng (School of Economics, Fudan University, CHINA); Laixun Zhao (Research Institute for Economics and Business Administration, Kobe University, JAPAN)
    Abstract: We examine the impact of destination trade credit (DTC) on exports, using cross-country panel data for 2000-2018 and focusing on financing by foreign trade partners. We find DTC promotes a country's exports disproportionately more in liquidity-dependent industries, a consistent result after addressing endogeneity and various robustness tests. DTC mainly promotes trade by increasing export quantity, while lowering export prices and export varieties. Further, the effect is greater if the level of financial development of the source country is lower, but smaller if the product complexity of industries becomes higher. During the 2008 global financial crisis, DTC also contributes to export expansion, but the effect is relatively small.
    Keywords: Informal finance; Destination trade credit; Exports; Cash in advance; Deferred payment
    JEL: F10 G20 G30
    Date: 2023–06
  12. By: Sai Ma; Tim Schmidt-Eisenlohr
    Abstract: This paper provides evidence that the U.S. dollar affects countries’ exports through the financial channel of the exchange rate (Bruno and Shin (2015)). Using global data on trade between countries whose currency is not the U.S. dollar, it documents a positive relationship between the dollar and import prices. Importantly, this effect is stronger when the dollar share of the exporter’s foreign borrowing is larger. Results strengthen substantially when instrumenting the dollar by U.S. domestic housing activity. Then, a dollar appreciation increases import prices and decreases import quantities, with effects being proportional to the source country’s foreign dollar borrowing share.
    Keywords: dollar, dominant currency, financial channel, international trade
    JEL: F14 F31 G15
    Date: 2023
  13. By: Leef H. Dierks (Lübeck University of Applied Sciences, Germany)
    Abstract: Motivated by the 2022 uptick in headline inflation and the marked shift towards more restrictive monetary policies globally, this paper examines the sacrifice ratio, i.e., the percentage cost of actual production lost to every one percentage point decrease in (trend) inflation, for selected Southeast Asian economies. Results indicate that upon adopting a contractive monetary policy, GDP growth dropped by up to 0.5%, confirming that monetary authorities’ disinflationary policies typically trigger declines in both output and employment. However, as even minor adjustments to the way of determining the sacrifice ratio lead to varying results, caution ought to be applied when deriving potential (monetary) policy recommendations.
    Keywords: Monetary Policy, Interest Rates, Inflation, Sacrifice Ratio, (Trend) Output
    JEL: E31 E52 E58 E65 E71
    Date: 2023–07
  14. By: Gerdesmeier, Dieter; Reimers, Hans-Eggert; Roffia, Barbara
    Abstract: The relationship between inflation and real GDP growth is one of the most widely researched topics in macroeconomics. At the same time, it is certainly not exaggerated to claim that this nexus also stands at the heart of monetary policy, given the fact that low inflation in combination with high and sustained output growth should be the central objective of any sound economic policy. The latter notion becomes even more obvious, when taking account of the fact that many central banks all over the world have selected target levels for inflation and communicated them to the public. Against this background, it is of utmost importance for central banks to know more about the nature and form of the relationship between inflation and real GDP. This study tries to shed more light on the concrete shape of this relationship for the euro area and, more specifically, on the issue of possible regime shifts therein. The analysis provides strong evidence for non-linear effects in the euro area. As a by-product, the methods used allow for a quantification of the point of switch across the different regimes and it is found that this breakpoint closely matches the ECB's previous definitions of price stability and its new inflation target of 2%. While these results look encouraging, further research in this area seems warranted.
    JEL: E31 E52 E58
    Date: 2023
  15. By: Marcin W\k{a}torek; Maria Skupie\'n; Jaros{\l}aw Kwapie\'n; Stanis{\l}aw Dro\.zd\.z
    Abstract: This paper investigates the temporal patterns of activity in the cryptocurrency market with a focus on bitcoin, ether, dogecoin, and winklink from January 2020 to December 2022. Market activity measures - logarithmic returns, volume, and transaction number, sampled every 10 seconds, were divided into intraday and intraweek periods and then further decomposed into recurring and noise components via correlation matrix formalism. The key findings include the distinctive market behavior from traditional stock markets due to the nonexistence of trade opening and closing. This was manifest in three enhanced-activity phases aligning with Asian, European, and US trading sessions. An intriguing pattern of activity surge in 15-minute intervals, particularly at full hours, was also noticed, implying the potential role of algorithmic trading. Most notably, recurring bursts of activity in bitcoin and ether were identified to coincide with the release times of significant US macroeconomic reports such as Nonfarm payrolls, Consumer Price Index data, and Federal Reserve statements. The most correlated daily patterns of activity occurred in 2022, possibly reflecting the documented correlations with US stock indices in the same period. Factors that are external to the inner market dynamics are found to be responsible for the repeatable components of the market dynamics, while the internal factors appear to be substantially random, which manifests itself in a good agreement between the empirical eigenvalue distributions in their bulk and the random matrix theory predictions expressed by the Marchenko-Pastur distribution. The findings reported support the growing integration of cryptocurrencies into the global financial markets.
    Date: 2023–06
  16. By: Isil Erel; Jack Liebersohn; Constantine Yannelis; Samuel Earnest
    Abstract: Financial technology has reshaped commercial banking. It has the potential to radically alter the transmission of monetary policy by lowering search costs and expanding bank markets. This paper studies the reaction of online banks to changes in federal fund rates. We find that these banks increase rates that they offer on deposits significantly more than traditional banks do. A 100 basis points increase in the federal fund rate leads to a 30 basis points larger increase in rates of online banks. Consistent with the rate movements, online bank deposits experience inflows, while traditional banks experience outflows during monetary tightening in 2022. The findings are consistent across banking markets of different competitiveness and demographics. Our findings shed new light on the role of online banks in interest rate pass-through and deposit channel of monetary policy.
    JEL: E52 E58 G21 G23 G28
    Date: 2023–06
  17. By: Kaiji Chen; Yiqing Xiao; Tao Zha
    Abstract: According to the conventional bank lending channel of monetary policy, wholesale funding in economies with well-developed financial markets moves negatively with retail deposits in response to changes in the monetary policy rate, thereby weakening the transmission of monetary policy. We present a theoretical model to demonstrate that in economies with financial repression, (i) retail deposits and wholesale funding comove positively in response to changes in the policy rate and (ii) wholesale funding strengthens, rather than weakens, the transmission of monetary policy to bank loans. We support these findings by bank-level evidence with deposit rate ceilings.
    JEL: E02 E5 G11 G12 G28
    Date: 2023–06
  18. By: Simon Gilchrist; Raphael Schoenle; Jae Sim; Egon Zakrajsek
    Abstract: During the 2010–12 eurozone crisis, deviations of price and wage dynamics from those implied by canonical Phillips curves were systematically related to differences in financial strains across countries. Most notably, markups in financially "weak" (periphery) countries rose, while those in financially "strong" (core) countries declined. In a monetary union model, where financial frictions interact with the firms' pricing decisions because of customer-market considerations, firms in the periphery maintain cashflows in response to an adverse financial shock by raising markups in both domestic and export markets, while firms in the core reduce markups, undercutting their financially constrained competitors to gain market share. In this framework, a unilateral fiscal-devaluation-style policy by the periphery stabilizes the local economy by improving the condition of firm balance sheets and by boosting household demand-it does not, however, reverse the real exchange rate appreciation in the periphery.
    Keywords: eurozone, financial crisis, monetary union, customer markets, inflation dynamics, markups, fiscal devaluation
    JEL: E31 E32 F44 F45
    Date: 2023–07
  19. By: Daniel Monteiro
    Abstract: We develop a dynamic stochastic general equilibrium model of a monetary union and employ it to study in an integrated manner different macrofinancial disturbances and related policy options. The model is calibrated to the euro area, comprises two regions subject to real, nominal and financial rigidities, and features microfounded regional banking sectors and portfolio selection mechanisms allowing for empirically-consistent properties. Among the questions to which we devote our analysis are the transmission of conventional and unconventional monetary policy, the effects of private- and government-sector default risk, the implications of different macroprudential policies, the endogenous emergence of country risk premia in a context of crossborder financial flows, and the stabilising properties of joint sovereign debt issuance.
    JEL: E32 E44 E52 F36 F45 G28 H63
    Date: 2023–06
  20. By: Bryan Hardy; Can Sever
    Abstract: This paper sheds light on convergence of innovation (patenting) using data from two-digit manufacturing industries in 32 countries over the period of 1976-2006. It shows that patenting rates tend to converge over time (patenting growth is faster when initial patents are lower), including within countries (across industries) and within industries (across countries). Notably, the quality (citations and citations per patent) and efficiency (patents per worker) of innovation also exhibit convergence. Convergence is widespread across all countries and industries in our sample, and in all time periods. Country-level data confirms patent convergence continues through 2020. Patent convergence is stronger where financial development, international financial integration, and institutional quality are higher, and under the presence of financial policies supportive of financial liberalization. These factors contribute to both within country (across industries) and within industry (across countries) convergence. The results highlight the importance of financial and institutional environment for the growth of patenting, and ultimately for economic growth and productivity.
    Keywords: innovation, patents, citations, convergence, financial development, financial openness, institutional quality
    JEL: O4 O3 E2 E44 F3
    Date: 2023–07
  21. By: McShane, William; Sevilir, Merih
    Abstract: We propose a novel mechanism through which established firms contribute to the startup ecosystem: the allocation of R&D tax credits to startups via the M&A channel. We show that when established firms become eligible for R&D tax credits, they increase their R&D and M&A activity. In particular, they acquire more venture capital (VC)-backed startups, but not non-VC-backed firms. Moreover, the impact of R&D tax credits on firms' R&D is increasing with their acquisition of VC-backed startups. The results suggest that established firms respond to R&D tax credits by acquiring startups rather than solely focusing on increasing their R&D intensity in-house. We also highlight evidence that startups do not appear to benefit from R&D tax credits directly, perhaps because they typically lack the taxable income necessary to directly benefit from the tax credits. In this context, established firms can play an intermediary role by acquiring startups and reallocating R&D tax credits, effectively relaxing the financial constraints faced by startups.
    Keywords: indirect effects, innovation, mergers and acquisitions (M&A), research and development (R&D), startups, tax credits
    JEL: G00 G34 H24 M13 O31
    Date: 2023
  22. By: Simplice A. Asongu (Yaounde, Cameroon); Yolande E. Ngoungou (Yaoundé, Cameroon); Joseph Nnanna (The Development Bank of Nigeria, Abuja, Nigeria)
    Abstract: This study assesses nexuses between mobile money innovations and health performance in terms of total life expectancy in 43 countries in Sub-Saharan Africa employing data for the period 2004-2018. Four mobile money innovation dynamics are proxied with registered mobile money agents and active mobile money agents. The empirical evidence is based on quantile regressions. The findings overwhelmingly show that mobile money innovations are relevant in improving health performance or total life expectancy exclusively in bottom quantiles of the conditional distribution of total life expectancy. In other words, countries with below-median levels of total life expectancy are more susceptible to benefit from mobile money innovations compared to countries with above-median levels of total life expectancy. It follows that common or general policy measures on the linkage between mobile money innovations and health performance are unlikely to succeed unless attendant policies are contingent on initial levels of health performance and hence, tailored differently across countries with various initial levels of health performance. More policy implications are discussed.
    Keywords: Mobile phones; financial inclusion; health; sub-Saharan Africa
    JEL: O40 G20 I10 I32 I20
    Date: 2023–01

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