nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2023‒08‒14
nineteen papers chosen by
Georg Man

  1. Credit Allocation and Macroeconomic Fluctuations By Karsten Müller; Emil Verner
  2. Transformation structurelle des pays à revenu faible et intermédiaire en Afrique Sub-saharienne : quels rôles des flux des capitaux internationaux ? By Mbondo, Georges Dieudonné; Bouwawe, Duclo
  3. Bank Stability versus Financial Development: A Generous Deposit Insurer’s Dilemma By Kaelo Mpho Ntwaepelo
  4. A New Index to Measure U.S. Financial Conditions By Andrea Ajello; Michele Cavallo; Giovanni Favara; William B. Peterman; John W. Schindler; Nitish R. Sinha
  5. Unobserved components model(s): output gaps and financial cycles By Guillochon, Justine; Le Roux, Julien
  6. The state-dependent impact of changes in bank capital requirements By Lang, Jan Hannes; Menno, Dominik
  7. Investigating Excess Reserve Accumulation and Credit Crunch in U.S. Commercial Banks Focusing on the Financial Crisis By Priyo, Asad Karim Khan
  8. Aggregate Implications of Deviations from Modigliani-Miller: A Sufficient Statistics Approach By Robert J. Kurtzman; David Zeke
  9. The impact of macroeconomic activity and yield valuation on mergers and acquisitions in Europe By Röhrer, Fabio E.G.; Proano, Christian R.; Mateane, Lebogang
  10. An Estimated DSGE Model for Integrated Policy Analysis By Kaili Chen; Marcin Kolasa; Jesper Lindé; Hou Wang; Pawel Zabczyk; Ms. Jianping Zhou
  11. Trilemma revisited with dollar dominance in trade and finance By Vanessa Olakemi Dovonou
  12. Drivers of cross-border bank claims: The role of foreign-owned banks in emerging countries By Sophie Brana; Dalila Chenaf-Nicet; Delphine Lahet
  13. The Effects of Cryptocurrency Wealth on Household Consumption and Investment By Darren Aiello; Scott R. Baker; Tetyana Balyuk; Marco Di Maggio; Mark J. Johnson; Jason D. Kotter
  14. Top wealth and its historical origins: An analysis of Germany's largest privately held fortunes in 2019 By Tisch, Daria; Ischinsky, Emma
  15. Monetary Policy across the Wealth Distribution By Franconi, Alessandro; Rella, Giacomo
  16. The Largest Insurance Expansion in History: Saving One Million Lives Per Year in China By Jonathan Gruber; Mengyun Lin; Junjian Yi
  17. Aid and fragile states By Anke Hoeffler; Patricia Justino
  18. Political Economy shaped by Financialization By Saori Katada
  19. "From Aspirations for Climate Action to the Reality of Climate Disasters": Can Migrants Play Key Role in Disaster Response? By Farid Makhlouf; Refk Selmi; Kamal Kasmaoui

  1. By: Karsten Müller; Emil Verner
    Abstract: We study the relationship between credit expansions, macroeconomic fluctuations, and financial crises using a novel database on the sectoral distribution of private credit for 117 countries since 1940. We document that, during credit booms, credit flows disproportionately to the non-tradable sector. Credit expansions to the non-tradable sector, in turn, systematically predict subsequent growth slowdowns and financial crises. In contrast, credit expansions to the tradable sector are associated with sustained output and productivity growth without a higher risk of a financial crisis. To understand these patterns, we show that firms in the non-tradable sector tend to be smaller, more reliant on loans secured by real estate, and more likely to default during crises. Our findings are consistent with models in which credit booms to the non-tradable sector are driven by easy financing conditions and amplified by collateral feedbacks, contributing to increased financial fragility and a boom-bust cycle.
    JEL: E0 F30 G01 G02
    Date: 2023–06
  2. By: Mbondo, Georges Dieudonné; Bouwawe, Duclo
    Abstract: The industrial emergence of African countries has been a central concern for many decades. Knowing that the volume of international capital flows to Sub-Saharan African countries has been steadily increasing, this study has analysed the effect of this international capital on structural transformation. We consider a sample of 30 African countries between 1995 and 2018, focusing on industrialization as a driver of structural transformation in the context of economic development. Using a dynamic panel model by the method of generalized moments in system, the results show that the effect of international capital on structural transformation depends on the type of external financial flows. The results show that official development assistance is positively correlated with the dynamics of industrialisation, whereas the stock of FDI and the volume of remittances from international migrants are negatively correlated. However, the interaction between FDI and human capital is positively and significantly correlated with growth in the manufacturing sector. FDI is therefore a channel for the dissemination of international knowledge, and human capital in all its dimensions serves as an absorptive capacity for transforming this knowledge from abroad into competitive use - the basis for successful structural transformation.
    Keywords: international capital, structural transformation, industrialization, sectoral interaction
    JEL: F21 F24 F35 L16
    Date: 2023–03–29
  3. By: Kaelo Mpho Ntwaepelo
    Abstract: This study uses Brazil as a laboratory to evaluate the effect of increasing the deposit insurance coverage limit, on bank stability and financial development. It uses a unique dataset that accounts for the multidimensional nature of financial development by capturing accessibility, depth and efficiency in financial markets and institutions. The empirical analysis utilises the synthetic control method to address the ambiguity concerns of choosing a comparison unit. In addition to estimating the effect of the policy interventions, the method creates an algorithm to identify a weighted combination of countries that have similar characteristics to Brazil. The countries are used as control units to set up a simulation that is reflective of the hypothetical absence of the policy intervention. The results suggest that increasing the coverage limit induces a trade-off between bank stability and financial development. More specifically, a generous deposit insurance supports financial development at the cost of bank stability, during the non-crisis period. However, when there is an economic crisis, the stabilising effect of deposit insurance dominates the moral hazard effect.
    Keywords: deposit insurance, financial development, bank stability, synthetic control method
    JEL: G21 G28 O1
    Date: 2023–07–19
  4. By: Andrea Ajello; Michele Cavallo; Giovanni Favara; William B. Peterman; John W. Schindler; Nitish R. Sinha
    Abstract: This note proposes a new index that can be used to gauge broad financial conditions and assess how these conditions are related to future economic growth. The index is broadly consistent with how the FRB/US model generally relates key financial variables to economic activity.
    Date: 2023–06–30
  5. By: Guillochon, Justine; Le Roux, Julien
    Abstract: The Global Financial Crisis established that policymakers should consider the stage of the financial cycle to better evaluate the cyclical position of the economy when designing monetary policy decisions. If financial variables are omitted from the estimations of the output gap, a common and unobserved indicator of the business cycle, important financial or external imbalances that may lead to future recessions may not be captured. This paper presents a suite of estimates of output gaps incorporating financial variables. The estimates are based both on small unobserved components models and a large unobserved components model that follows a production function approach. The results show that exploiting the information content of financial variables, which co-move strongly with the output cycle, can sometimes improve output gap estimates. However, these improvements are of a limited magnitude and very sensitive to the choice of the chosen financial variables. JEL Classification: C32, E32, E44, E47, E52
    Keywords: financial cycle, monetary policy, Output gap, potential output, unobserved com-ponents model
    Date: 2023–07
  6. By: Lang, Jan Hannes; Menno, Dominik
    Abstract: Based on a non-linear equilibrium model of the banking sector with an occasionally-binding equity issuance constraint, we show that the economic impact of changes in bank capital requirements depends on the state of the macro-financial environment. In ”normal” states where banks do not face problems to retain enough profits to satisfy higher capital requirements, the impact on bank loan supply works through a ”pricing channel” which is small: around 0.1% less loans for a 1pp increase in capital requirements. In ”bad” states where banks are not able to come up with sufficient equity to satisfy capital requirements, the impact on loan supply works through a ”quantity channel”, which acts like a financial accelerator and can be very large: up to 10% more loans for a capital requirement release of 1pp. Compared to existing DSGE models with a banking sector, which usually feature a constant lending response of around 1%, our state-dependent impact is an order of magnitude lower in ”normal” states and an order of magnitude higher in ”bad” states. Our results provide a theoretical justification for building up a positive countercyclical capital buffer in ”normal” macro-financial environments. JEL Classification: D21, E44, E51, G21, G28
    Keywords: Bank capital requirements, dynamic stochastic equilibrium model, financial accelerator, global solution methods, loan supply
    Date: 2023–07
  7. By: Priyo, Asad Karim Khan
    Abstract: This paper using bank-specific data for the period 1999-2009 investigates the excess reserve accumulation and credit crunch in the US commercial banking industry during the financial crisis of 2007-2008. During the sample period, the lending and reserve behaviors of large banks significantly differ from those of small banks. A large amount of excess reserve builds up in the large banks during the crisis whereas excess reserve of small banks remains stable at low levels. Large banks experience severe credit crunch during the crisis which the small banks are able to avert. Employing a two-stage model of the banking industry that treats large and small banks separately, I demonstrate that among other factors, differences in idiosyncratic uncertainties in the form of volatility of deposits and short-term funding and disparities in investments in risky trading securities can generate similar patterns observed in data. I also address the ongoing debate between two schools of thought, one of which attributes the buildup of excess reserves and reduction in interbank lending to liquidity hoarding due to precautionary motive, while the other ascribes these to an increase in counterparty risk. I demonstrate that counterparty risk plays a greater role over the short run whereas the impact of liquidity hoarding is more prominent over the long run.
    Keywords: excess reserves; bank loans; deposit volatility; trading securities; liquidity hoarding; counterparty risk
    JEL: G01 G21 G29
    Date: 2023–07–07
  8. By: Robert J. Kurtzman; David Zeke
    Abstract: A few sufficient statistics can identify the aggregate effects of distortions to firm investment in a class of general equilibrium models that can accommodate rich general equilibrium effects including endogenous firm entry. This result does not depend on the microfoundation of the distortion; one can generate inferences about aggregate effects that apply for multiple microfoundations or in cases where a fully specified model is difficult to solve. To demonstrate the relevance of themethodology, we use it to quantify the aggregate consequences of costly external equity financing and a manager-shareholder friction, relying on estimates from the corporate finance literature to identify the sufficient statistics. The results elucidate differences between partial and general equilibrium findings and demonstrate how labor supply elasticities, complementarities in production, and firm entry interact with the different firm-level distortions.
    Keywords: Heterogeneous firms; General equilibrium; Firm entry; Agency costs; Costly external finance; Sufficient statistics
    JEL: E22 E23 G39
    Date: 2023–07–06
  9. By: Röhrer, Fabio E.G.; Proano, Christian R.; Mateane, Lebogang
    Abstract: We examine the macroeconomic determinants of mergers and acquisitions (M&A) using panel data over 2006:Q1 - 2022:Q2 for 21 European Union (EU) countries. Across di§erent model specifications we find that bond yields and past real GDP growth are robust quantitatively and statistically significant determinants of M&A even after controlling for inflation and short-term global financial uncertainty. Additionally, we investigate the effect of the earnings before interest, taxes, depreciation and amortization multiple as an additional explanatory variable. A crucial novelty of our study is that bond yields reduce M&A activity because other investors are shifting their portfolios out of bonds and into riskier assets such as equities. We denote this as a "perverse valuation effect" making M&A more expensive. This interpretation and channel is unique to our study.
    Keywords: Mergers and Acquisitions, Financial markets, Macroeconomy, European Union
    JEL: E00 E02 G15 G34
    Date: 2023
  10. By: Kaili Chen; Marcin Kolasa; Jesper Lindé; Hou Wang; Pawel Zabczyk; Ms. Jianping Zhou
    Abstract: We estimate a New Keynesian small open economy model which allows for foreign exchange (FX) market frictions and a potential role for FX interventions for a large set of emerging market economies (EMEs) and some inflation targeting (IT) advanced economy (AE) countries serving as a control group. Next, we use the estimated model to examine the empirical support for the view that interest rate policy may not be sufficient to stabilize output and inflation following capital outflow shocks, and the extent to which FX interventions (FXI) can improve policy tradeoffs. Our results reveal significant structural differences between AEs and EMEs—in particular FX market depth—leading to different transmission of capital outflow shocks which justifies occasional use of FXI in some EMEs in certain situations. Our analysis also highlights the critical importance of accounting for the endogeneity of FXI behavior when assessing FX market depth and policy tradeoffs associated with volatile capital flows in past episodes.
    Keywords: Integrated Policy Framework; Emerging Markets; Monetary Policy; Foreign Exchange Intervention; Endogenous Risks; Incomplete Financial Markets; Bayesian Estimation
    Date: 2023–06–30
  11. By: Vanessa Olakemi Dovonou (University of Orleans)
    Abstract: This paper explores the impact of the US dollar dominance on monetary and exchange rate policies in 51 advanced and developing countries from 1999 to 2021. We introduce a global exposure index to measure countries’ dependence on the US dollar. Our study reveals that the dominant currency framework creates a global monetary cycle driven by the US dollar, exposing non-U.S. economies to the U.S. monetary policy. However, we show that countries can reduce their exposure to the U.S. monetary policy by accumulating reserves and intervening in foreign exchange.
    Keywords: Dominant currency, Trade invoicing, foreign currency-denominated, Trilemma.
    JEL: F
    Date: 2023
  12. By: Sophie Brana (University of Bordeaux); Dalila Chenaf-Nicet (University of Bordeaux); Delphine Lahet (University of Bordeaux)
    Abstract: Studies of the determinants of cross-border bank claims are based on the economic situations of the lending and borrowing countries – the traditional push/pull macroeconomic factors – but fail to take into account the situation of the international banks that are at the origin of these flows and the presence of their subsidiaries in emerging countries. They also fail to explain the huge decrease in cross-border bank flows after the 2008 global financial crisis. In this paper, we analyze the determinants of cross-border bank claims on a panel of 28 emerging countries for three cases and transitional countries (claims on all sectors, claims on the nonbank sector, and interbank loans) and explicitly integrate banking determinants. Thus, we account for the financial situation of international lender banks and the existence of foreign locations in emerging countries as a potential pull stabilizing factor. We show that the presence of foreign banks in emerging countries is clearly a factor of attraction for cross-border bank claims. It remains when we explicitly take into account the 2008 crisis but to a lower extent and in favor of interbank loans. This may be proof of support from the international parent banks to their affiliates. Last, the financial situation of international banks, notably their liquidity and ability to respect prudential rules, also plays a role in their financing strategies in emerging countries.
    Keywords: cross-border bank claims; subsidiaries; global banks; emerging countries; Lasso method
    JEL: G
    Date: 2023
  13. By: Darren Aiello; Scott R. Baker; Tetyana Balyuk; Marco Di Maggio; Mark J. Johnson; Jason D. Kotter
    Abstract: This paper uses transaction-level data across millions of accounts to identify cryptocurrency investors and evaluate how fluctuations in individual crypto wealth affect household consumption, equity investment, and local real estate markets. We estimate an MPC out of unrealized crypto gains that is more than double the MPC out of unrealized equity gains but smaller than the MPC from exogenous cash flow shocks. This MPC is mostly driven by increases in cash/check spending and mortgages. Moreover, households sell crypto to increase both discretionary as well as housing spending. As a result, crypto wealth causes house price appreciation—counties with higher crypto wealth see higher growth in home values following high crypto returns. Our results indicate that cryptocurrencies have substantial spillover effects on the real economy through consumption and investment into other asset classes.
    JEL: G23 G50 G51 R31
    Date: 2023–07
  14. By: Tisch, Daria; Ischinsky, Emma
    Abstract: Rising wealth inequality is both a topic in recent policy discussion and in the social sciences. Despite the general interest in wealth concentration, we know only little about the largest privately held fortunes. To help fill this gap we analyze the historical origins of Germany's 1, 032 largest fortunes in 2019. In particular, we identify the share of entrenched fortunes - fortunes which date back to the beginning of the twentieth century - and ask to what extent they differ from more recently established ones. Furthermore, we examine in an exploratory way if entrenched fortunes are connected to fortunes with more recent origins through family lines. We use a journalistic rich list published by the manager magazin in 2019, which we link with both rich lists from 1912/1914 and Wikidata. We find that about eight percent of today's fortunes can be traced back to fortunes held by the same families in 1913. Regression analyses show that entrenched fortunes rank on average higher on the rich list than the remaining ones. Descriptive network analyses indicate that some of today's largest fortunes are intertwined through marital lines, hinting at social closure at the top. Our findings indicate that the accumulation and perpetuation of fortunes over many generations is an important feature of top wealth in Germany.
    Keywords: elite, family, inheritance, network analysis, super-rich, wealth perpetuation, Elite, Erbschaft, Familie, Netzwerkanalyse, Reichtum, Vermögen
    Date: 2023
  15. By: Franconi, Alessandro; Rella, Giacomo
    Abstract: Using vector autoregression and the Distributional Financial Accounts of the United States, we show that monetary policy has unequal effects across the wealth distribution. The direction and persistence of these effects depend on the policy instrument and the wealth group. Interest rate cuts initially reduce wealth inequality but increase it in the medium run. Asset purchases, instead, increase wealth inequality but only temporarily. Housing is the main channel through which monetary policy affects wealth at the bottom. The effects of monetary policy on capital gains are larger at the top due to heterogeneous portfolios. (Stone Center on Socio-Economic Inequality Working Paper)
    Date: 2023–07–06
  16. By: Jonathan Gruber; Mengyun Lin; Junjian Yi
    Abstract: The New Cooperative Medical Scheme (NCMS) rolled out in China from 2003-2008 provided insurance to 800 million rural Chinese. We combine aggregate mortality data with individual survey data, and identify the impact of the NCMS from program rollout and heterogeneity across areas in their rural share. We find that there was a significant decline in aggregate mortality, with the program saving more than one million lives per year at its peak, and explaining 78% of the entire increase in life expectancy in China over this period. We confirm these mortality effects using micro-data on mortality, other health outcomes, and utilization.
    JEL: H4 I13
    Date: 2023–07
  17. By: Anke Hoeffler; Patricia Justino
    Abstract: Aid is still an important feature of the development landscape. Fragile states, in particular, have the greatest development needs but due to their poor governance they are the least likely countries to use aid effectively to meet their development challenges. In this paper, we explore which fragile states receive most aid flows, which donors are particularly active in fragile states, and which type of projects are the focus of these aid flows to fragile states.
    Keywords: Aid, Development, Fragility, Conflict, Post-conflict, Fragile states
    Date: 2023
  18. By: Saori Katada (USC - University of Southern California)
    Abstract: Financialization has, in the last several decades, touched many aspects of political economy, intensified politics of distribution and redefined power struggles around the world. Nonetheless, the style and types of financialization and its manifestation in both domestic politics and foreign policy vary greatly among different economies depending on financialization and the important role of financialized wealth both to sustain corporations and savers (especially in rapidly aging population like Japan for the pensioners). Despite its comparatively low level of financialization among the OECD members, the phenomenon have had visible influence in shaping the Japanese government's role both in its monetary policy through the Bank of Japan (BOJ) and for its external geoeconomic strategy of infrastructure investment financing in competition with China's Belt-and-Road Initiative (BRI) since 2013. I argue in this report that due to the rising level of financialization, the Japanese government has faced increased pressure to adjust its policies to accommodate the demands of market-based financial interest, on the one hand, and to direct the country's financial power for its foreign policy goals, on the other hand. The developmental legacy of Japan's institutions, however, continues to influence the government's financial strategy.
    Keywords: Financialization, monetary policy, infrastructure investment, Japan, OECD, derisking
    Date: 2023–05
  19. By: Farid Makhlouf (ESC PAU - Ecole Supérieure de Commerce, Pau Business School); Refk Selmi (ESC PAU - Ecole Supérieure de Commerce, Pau Business School); Kamal Kasmaoui (ESC PAU - Ecole Supérieure de Commerce, Pau Business School)
    Abstract: Climate change and extreme weather events have led to a surge in natural hazards in Pakistan that have escalated into humanitarian disasters. Prior studies have largely documented the significant role of remittances in dealing with unforeseen natural disasters. This paper investigates the reaction of Pakistani migrants to natural disasters via remittances from 1972 to 2023. Using a flexible event-study methodology suited to examining the changes in remittances beyond expectation during a specific period of time, the paper compares the responses of remittances in different host countries namely Gulf Cooperation Council (GCC), Europe and North America Countries. Our findings reveal that the response is significant two (one) months after the events for GCC (Europe and North America), and tends to dissipate five months from the disaster occurrence (except for GCC). The intensity and the persistence of remittances'responsiveness (abnormal returns and volatility) depends on the nature of disasters, host countries'features and the economic conditions of migrants limiting their ability to send additional financial resources at home.Overall, migrant remittances may act as immediate and direct aid to households harmfully affected by disasters, substituting for the delayed arrival of official aid.
    Keywords: Remittances, Natural Disaster, Pakistan, Event study methodology, Abnormal returns, Volatility
    Date: 2023–06–22

This nep-fdg issue is ©2023 by Georg Man. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.