nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2023‒08‒28
twenty-one papers chosen by
Georg Man,

  1. Financial reforms and income inequality: evidence from developing countries By Kwamivi Gomado
  2. IMF conditionality and structural reforms: Evidence from developing countries By Ablam Estel Apeti; Kwamivi Gomado
  3. It takes a panel to predict the future: What the stock market says about future economic growth in Canada By Greg Adams; Jean-Sébastien Fontaine
  4. Housing, Household Debt, and the Business Cycle: An Application to China and Korea By Amir Sufi
  5. Quantifying financial stability trade-offs for monetary policy: a quantile VAR approach By Chavleishvili, Sulkhan; Kremer, Manfred; Lund-Thomsen, Frederik
  6. Bank credit, inflation, and default risks over an infinite horizon By Goodhart, Charles A.E.; Tsomocos, Dimitrios P.; Wang, Xuan
  7. Household Savings in Selected Southern European Countries Evidence from Cross-Country Micro-Level Data By Mr. Kamil Dybczak; Shiqing Hua; Mariusz Jarmuzek; Ruifeng Zhang; Yipei Zhang
  8. Spend or Invest? Analyzing MPC Heterogeneity Across Three Stimulus Programs By Jan Toczynski
  10. The Interplay among Savings Accounts and Network-Based Financial Arrangements: Evidence from a Field Experiment By Comola, Margherita; Prina, Silvia
  11. Behavioral drivers of cashless payments in Africa By Batiz-Lazo, Bernardo; Maixe-Altes, J Carles; Peon, David
  12. Origins of Latin American inequality By Eslava, Francisco; Valencia Caicedo, Felipe
  13. Monetary policy shocks and firms’ bank loan expectations By Ferrando, Annalisa; Grazzini, Caterina Forti
  14. On the Origins of the Federal Reserve System and Its Structure By Owen F. Humpage
  15. BoC–BoE Sovereign Default Database: What’s new in 2023? By David Beers; Obiageri Ndukwe; Karim McDaniels; Alex Charron
  16. Good vs. Bad Volatility: The Dichotomy and Drivers of Connectedness in Major Cryptocurrencies By Jan Sila; Evzen Kocenda; Ladislav Kristoufek; Jiri Kukacka
  17. Temporal and Geographical Analysis of Real Economic Activities in the Bitcoin Blockchain By Rafael Ramos Tubino; Remy Cazabet; Natkamon Tovanich; Celine Robardet
  18. Innovation, industry equilibrium, and discount rates By Bustamante, Maria Cecilia; Zucchi, Francesca
  19. Research and/or Development? Financial Frictions and Innovation Investment By Filippo Mezzanotti; Timothy Simcoe
  20. Backfired Deregulation of Foreign Ownership Restrictions under Fiscal Competition for Foreign Direct Investment By OKOSHI Hirofumi; Kyikyi Thar
  21. Green Stocks and the 2023 Banking Crisis By Francesco D'Ercole; Alexander F. Wagner

  1. By: Kwamivi Gomado
    Abstract: The current context of the COVID-19 pandemic has exposed the most vulnerable socio-economic groups to greater financial risk and thus could lead to exacerbating income inequality. The crisis creates an opportunity to demand further structural and systemic reforms for redistributive justice. Our paper explores the distributional consequences of financial liberalization reforms implemented over the past four decades in 64 emerging and low-income countries.
    Keywords: Reforms, Financial liberalization, Income inequality, Business cycles
    Date: 2023
  2. By: Ablam Estel Apeti; Kwamivi Gomado
    Abstract: The global economy, dominated by the consequences of a disastrous health crisis and international tensions, needs policy support to regain its growth dynamic. To regain an inclusive and sustainable growth dynamic, structural policies of governments are needed to allow a reallocation of resources and to stimulate productivity. International cooperation seems to be necessary, and the International Monetary Fund's (IMF) contribution could play an important role in promoting reforms.
    Keywords: Reforms, IMF, Developing countries, Entropy balancing weights, Structural change
    Date: 2023
  3. By: Greg Adams; Jean-Sébastien Fontaine
    Abstract: Throughout 2022, the Canadian economy faced persistently high inflation. The Bank of Canada responded forcefully by increasing the target rate by 425 basis points between March 2022 and January 2023. These increases led investors to expect slower economic growth in Canada, and these expectations are evident in the drop in earnings forecasts for companies whose stocks are traded on the TSX. This provided policy-makers with an early sign that higher interest rates would be effective and slow economic growth because these forecasts fell more for companies that are more sensitive to interest rates.
    Keywords: Asset pricing; Financial markets; Monetary policy transmission
    JEL: E47 E52
    Date: 2023–07
  4. By: Amir Sufi
    Abstract: China and South Korea both experienced substantial increases in household debt through 2021, and now both countries face a weakening economy. This essay gleans lessons from the “credit-driven household demand channel” (e.g., Mian and Sufi 2018) to explore how the two economies will fare in the years ahead. On the positive side, neither country is at risk of a severe financial crisis, and both countries have a strong current account position. On the negative side, consumer spending in both countries could be quite weak in the years ahead. For China, the biggest risk is that distortions in the production sector aimed at boosting the property market were a major driver of growth during the boom, and it is unclear how growth can continue to be sustained with the property market stumbling.
    JEL: E30 G01
    Date: 2023–07
  5. By: Chavleishvili, Sulkhan; Kremer, Manfred; Lund-Thomsen, Frederik
    Abstract: We propose a novel empirical approach to inform monetary policymakers about the potential effects of policy action when facing trade-offs between financial and macroeconomic stability. We estimate a quantile vector autoregression (QVAR) for the euro area covering the real economy, monetary policy and measures of ex ante and ex post systemic risk representing financial stability. Policy implications are derived from scenario analyses where the associated costs and benefits are functions of the projected paths of the potentially asymmetric distributions of inflation and economic growth, allowing us to take a risk management perspective. One exercise considers the intertemporal financial stability trade-off in the context of the global financial crisis, where we find ex post evidence in favour of monetary policy leaning against the financial cycle. Another exercise considers the short-term financial stability trade-off when deciding the appropriate speed of monetary policy tightening to combat inflationary pressures in a fragile financial environment. JEL Classification: C32, E37, E44, E52, G01
    Keywords: growth-at-risk, Policy trade-offs, quantile regression, systemic risk
    Date: 2023–07
  6. By: Goodhart, Charles A.E.; Tsomocos, Dimitrios P.; Wang, Xuan
    Abstract: The financial intermediation wedge of the banking sector used to co-move positively with the federal funds rate, but the post-GFC era saw a disconnect between them. We develop a flexible price dynamic general equilibrium with banks’ liquidity creation to offer an explanation. In a corridor system, the financial wedge and policy rate are shown to co-move, and the pass-through of monetary policy onto both inflation and output obtains. However, the post-GFC floor system obviates the need for the financial wedge to cover the cost of obtaining reserves, so the wedge and the policy rate indeed disconnect in equilibrium; furthermore, we show that the disconnect obstructs monetary expansions from generating inflation. In this environment, tightening bank capital requirement leads to disinflationary pressure. Money-financed fiscal expansions that subsidise non-bank sectors’ borrowing costs improve output and reduce default risks but increase inflation. The model uses banks’ liquidity creation via credit extension to provide a rationale for both the pre-pandemic disinflation and the post-pandemic inflation. The results hold both on the dynamic paths and in the steady state, and the role of money enlarges the Taylor rule determinacy region.
    Keywords: corporate default; financial intermediation wedge; inside money deposits; liquidity creation; long-run non-neutrality; money-financing; reserve management
    JEL: F3 G3 J1
    Date: 2023–08–01
  7. By: Mr. Kamil Dybczak; Shiqing Hua; Mariusz Jarmuzek; Ruifeng Zhang; Yipei Zhang
    Abstract: The paper looks into the puzzle of low household savings in three Southern European (SE3) countries – Cyprus, Greece, and Portugal. Building on the household saving drivers literature, we employ cross-country micro-level data and investigate the key saving patterns, examining their heterogeneity across households in SE3 countries relative to the EA average. The results confirm the prominent role of income, along with interest rate, inflation, fiscal balance, and debt in shaping household savings in SE3 countries. Quantile regressions employed to analyze saving behavior across the distribution of households suggest that households with lower savings tend to see their savings dip (or dissavings rise) more-than-proportionately with shocks to income, interest rate, inflation, and government balance. Our policy simulations across the distribution of households suggest that targeted rather than universal policy intervention could improve household savings, especially of the most vulnerable ones.
    Keywords: Household savings; distributional analysis; policy simulations
    Date: 2023–07–21
  8. By: Jan Toczynski (University of Zurich; and Swiss Finance Institute)
    Abstract: I employ data gathered by an account aggregator app covering the universe of user transactions to study the effects of three waves of stimulus checks on U.S. households’ investments, consumption, and savings. I analyze within-person variation in consumption sensitivity showing that higher liquidity and debt levels lead to smaller consumption responses. Using relative timing of stimulus and tax refunds, I illustrate the role of liquidity. Lastly, I estimate marginal propensities to invest and show a strong effect on market participation. There is a significant gender gap in the use of funds for investment.
    Keywords: Consumption, Marginal Propensity to Consume, Stimulus, Retail Investments, Cryptocurrency
    JEL: D12 D14 D15 E21
    Date: 2023–06
  9. By: Al Said Ahmat (REGARDS - Recherches en Économie Gestion AgroRessources Durabilité Santé- EA 6292 - URCA - Université de Reims Champagne-Ardenne - MSH-URCA - Maison des Sciences Humaines de Champagne-Ardenne - URCA - Université de Reims Champagne-Ardenne)
    Abstract: L'article traite la manière dont les plateformes mobiles banking participent à la transformation de l'économie informelle dans les pays pauvres. L'objectif est de comprendre comment ces plateformes incitent les entrepreneurs informels à s'affilier aux dispositifs transactionnels afin de devenir des entreprises réelles et ainsi créer de la valeur pour leurs entreprises et pour l'économie du pays en général. A partir du cas de l'économie informelle au Tchad, nous montrons comment les petites entreprises se transforment via l'utilisation du mobile banking.
    Keywords: Économie informelle, plateforme mobile banking, entreprise locale., Économie informelle plateforme mobile banking entreprise locale, entreprise locale
    Date: 2023–06–28
  10. By: Comola, Margherita (Paris School of Economics); Prina, Silvia (Northeastern University)
    Abstract: This paper studies how formal financial access affects network-based financial arrangements. We use a field experiment that granted access to a savings account to a random subset of households in 19 Nepalese villages. Exploiting a unique panel dataset that follows all bilateral informal financial transactions before and after the intervention, we show that households that were offered access to an account increased their loans and total transfers to others, independent of the treatment status of the receiver. The increase seemed to be driven by treatment households with more assets and greater financial inclusion at baseline.
    Keywords: financial access, savings, networks, financial arrangements
    JEL: C93 D14 G21 O16 O17
    Date: 2023–07
  11. By: Batiz-Lazo, Bernardo; Maixe-Altes, J Carles; Peon, David
    Abstract: We explore the potential of different behavioral drivers for people to use cash when presented with digital payment alternatives in retail transactions. Behavioral finance traits in our study include the otherwise neglected emotional drivers. We conducted an online survey targeting university educated adults in sub-Saharan African countries, a continent characterized by lower levels of banking penetration, intensive use of cash, and increased popularity of mobile money accounts to reduce financial exclusion. We obtain robust evidence that the affect heuristic is the only relevant behavioral trait determining the use of cash and of payments with credit cards, while there is no evidence of behavioral drivers influencing the overall decision to use of electronic payments. However, in specific payment contexts cognitive traits, such as mental accounting, fungibility bias, and habit, do mediate in determining the choice of payment method. We found robust evidence that a higher value of our personal income proxy is associated with a reduction in the intention to use electronic payments. All results are robust to alternative econometric specifications: multinomial logistic, ordered logistic, and logit regressions. Our research provides a clear policy message, namely for authorities to promote a variety of payment alternatives, including cash, and ensure they are available in retail transactions.
    Keywords: FinTech, Cash, Digital Payments, Behavioral Finance (Affect Heuristic), Africa (Ghana, Kenya, Nigeria, South Africa).
    JEL: E4 E5 G1 G2 L8 O3
    Date: 2023–07
  12. By: Eslava, Francisco; Valencia Caicedo, Felipe
    Abstract: How deep are the roots of Latin America’s economic inequalities? In this chapter we survey both the history and the literature about the region’s extreme economic disparities, focusing on the most recent academic contributions. We begin by documenting the broad patterns of national and sub-national differences in income and inequality, building on the seminal contributions of Engerman and Sokoloff (2000; 2002, 2005) and aiming to capture different dimensions of inequality. We then proceed thematically, providing empirical evidence and summarizing the key recent studies on colonial institutions, slavery, land reform, education and the role of elites. Finally, we conduct a “replication” exercise with some seminal papers in the literature, extending their economic results to include different measures of inequality as outcomes.
    Keywords: inequality; Latin America; history; colonization; persistence; slavery; land reform; education; elites
    JEL: J1 N0
    Date: 2023–07–01
  13. By: Ferrando, Annalisa; Grazzini, Caterina Forti
    Abstract: We provide new evidence on how ECB’s monetary policy decisions affect firms’ bank loan expectations in the euro area. We use firm-level data derived from the ECB Survey on the Access to Finance of Enterprises for the period 2009 to 2022 and identify the impact of monetary policy by comparing the responses of firms interviewed shortly before and after monetary policy shocks. Our results are as follows. First, we find that firms’ bank loan expectations react to monetary policy, with a contractionary shock leading to a downward revision of expectations. Second, we show that firms’ response depends on the size and the sign of the shock, with only large and contractionary shocks having a significant negative effect on expectations. Third, we observe that the different components of central bank communication (i.e. the pure monetary policy shock and the central bank information shock) have different impacts on firms’ beliefs. Fourth, we find that conventional and unconventional QE shocks have opposite effects on expectations, with the impact of QE policies mainly being driven by the central bank information component of the related announcements. Finally, we document that the response to monetary policy differs along firms’ structural characteristics. JEL Classification: C83, D22, D84, E58
    Keywords: firms’ expectations, monetary policy, survey data
    Date: 2023–08
  14. By: Owen F. Humpage
    Abstract: The creation of the Federal Reserve System ultimately stemmed from fundamental changes in the banking industry that heightened the risks associated with shifts in the public’s liquidity preferences and that created an atmosphere of distrust between the small, traditional, country banks and the large, transforming, Wall Street banks. The severity of the Panic of 1907 became the proximate factor in the Federal Reserve’s formation. The panic, which the New York Clearing House’s slow, discriminative, and insufficient response characterized, gave credence to concerns of growing financial risks and invigorated calls for reform. The Federal Reserve’s unique structure reflects compromises reached in attempts to dampen the risks in the banking industry while easing the distrust and fears of dominance among its various stakeholders.
    Keywords: Inelastic/Elastic Currency; New York Clearing House; Reserve pyramiding; Panic of 1907; Aldrich Plan; Federal Reserve Act; Reserve Bank Organization Committee
    JEL: E58 N20
    Date: 2023–08–02
  15. By: David Beers; Obiageri Ndukwe; Karim McDaniels; Alex Charron
    Abstract: The BoC–BoE database of sovereign debt defaults, published and updated annually by the Bank of Canada and the Bank of England, provides comprehensive estimates of stocks of government obligations in default. The 2023 edition includes a new section about the characteristics of sovereign defaults and provides new visuals showing regional debt in default.
    Keywords: Debt management; Development economics; Financial stability; International financial markets
    JEL: F F34 G G15
    Date: 2023–07
  16. By: Jan Sila (Charles University, Faculty of Social Sciences, Institute of Economic Studies, Prague, Czechia & Czech Academy of Sciences, Institute of Information Theory and Automation, Prague, Czechia); Evzen Kocenda (Charles University, Faculty of Social Sciences, Institute of Economic Studies, Prague, Czechia & Czech Academy of Sciences, Institute of Information Theory and Automation, Prague, Czechia); Ladislav Kristoufek (Charles University, Faculty of Social Sciences, Institute of Economic Studies, Prague, Czechia & Czech Academy of Sciences, Institute of Information Theory and Automation, Prague, Czechia); Jiri Kukacka (Charles University, Faculty of Social Sciences, Institute of Economic Studies, Prague, Czechia & Czech Academy of Sciences, Institute of Information Theory and Automation, Prague, Czechia)
    Abstract: Cryptocurrencies exhibit unique statistical and dynamic properties compared to those of traditional financial assets, making the study of their volatility crucial for portfolio managers and traders. We investigate the volatility connectedness dynamics of a representative set of eight major crypto assets. Methodologically, we decompose the measured volatility into positive and negative components and employ the time-varying parameters vector autoregression (TVP-VAR) framework to show distinct dynamics associated with market booms and downturns. The results suggest that crypto connectedness reflects important events and exhibits more variable and cyclical dynamics than those of traditional financial markets. Periods of extremely high or low connectedness are clearly linked to specific events in the crypto market and macroeconomic or monetary history. Furthermore, existing asymmetry from good and bad volatility indicates that information about market downturns spills over substantially faster than news about comparable market surges. Overall, the connectedness dynamics are predominantly driven by fundamental crypto factors, while the asymmetry measure also depends on macro factors such as the VIX index and the expected inflation.
    Keywords: Volatility, Dynamic connectedness, Asymmetric effects, Cryptocurrency
    JEL: C58 G10 C36
    Date: 2023–07
  17. By: Rafael Ramos Tubino; Remy Cazabet; Natkamon Tovanich; Celine Robardet
    Abstract: We study the real economic activity in the Bitcoin blockchain that involves transactions from/to retail users rather than between organizations such as marketplaces, exchanges, or other services. We first introduce a heuristic method to classify Bitcoin players into three main categories: Frequent Receivers (FR), Neighbors of FR, and Others. We show that most real transactions involve Frequent Receivers, representing a small fraction of the total value exchanged according to the blockchain, but a significant fraction of all payments, raising concerns about the centralization of the Bitcoin ecosystem. We also conduct a weekly pattern analysis of activity, providing insights into the geographical location of Bitcoin users and allowing us to quantify the bias of a well-known dataset for actor identification.
    Date: 2023–07
  18. By: Bustamante, Maria Cecilia; Zucchi, Francesca
    Abstract: We develop a model to examine how discount rates affect the nature and composition of innovation within an industry. Challenging conventional wisdom, we show that higher discount rates do not discourage firm innovation when accounting for the industry equilibrium. Higher discount rates deter fresh entry—effectively acting as entry barriers—but encourage innovation through the intensive margin, which can lead to a higher industry innovation rate on net. Simultaneously, high discount rates foster explorative over exploitative innovation. The model rationalizes observed patterns of innovation cyclicality, and predicts that lower entry in downturns hedges innovating incumbents against higher discount rates. JEL Classification: G31, G12, O31
    Keywords: creative destruction, risk premia, time-varying discount rates, Vertical and horizontal innovation
    Date: 2023–08
  19. By: Filippo Mezzanotti; Timothy Simcoe
    Abstract: U.S. firms have reduced their investment in scientific research (“R”) compared to product development (“D”), raising questions about the returns to each type of investment, and about the reasons for this shift. We use Census data that disaggregates “R” from “D” to study how US firms adjust their innovation investments in response to an external increase in funding cost. Companies with greater demand for refinancing during the 2008 financial crisis, made larger cuts to R&D investment. This reduction in R&D is achieved almost entirely by reducing investment in research. Development remains essentially unchanged. If other firms patenting similar technologies must refinance, however, then Development investment declines. We interpret the latter result as evidence of technological competition: firms are reluctant to cut Development expenditures when that could place them at a disadvantage compared to potential rivals.
    Keywords: Research and Development, Financial Crisis, Technology Competition.
    JEL: O32 O31 G30 L20
    Date: 2023–08
  20. By: OKOSHI Hirofumi; Kyikyi Thar
    Abstract: Parallel to tax/subsidy competition for foreign direct investment (FDI), we have recently observed the relaxation of FDI restrictions, especially in developing countries, and mixed outcomes of inward FDI. This study examines how foreign-ownership regulation affects a multinational enterprise's (MNE's) location choice under fiscal competition. Consistent with the literature, our model shows that the larger country tends to host the MNE without FDI regulation due to the market-size advantage. With FDI regulation, however, irrespective of the market-size gap, the smaller country can attract the MNE under certain circumstances. Interestingly, our result indicates that looser FDI regulation in the larger country can induce the MNE to choose the smaller country as the production location because this reduces the local (potential) partner firm's profits and directs the local firm to decline the joint venture offer.
    Date: 2023–08
  21. By: Francesco D'Ercole (LUM University); Alexander F. Wagner (University of Zurich ; Swiss Finance Institute; CEPR; and ECGI)
    Abstract: In prior financial and economic crises such as the Global Financial Crisis and COVID-19, environmentally responsible stocks performed well or at least neutrally. Were they also resilient as another banking crisis began unfolding with the collapse of Silicon Valley Bank (SVB) and Signature Bank? Or did they suffer because of the important role that these and other regional banks play for the clean tech sector? We find that stocks with more opportunities in the transition to a low-carbon economy performed worse in the 2023 crisis. Investors favored firms with low debt. Overall, the market appears to anticipate that the (regional) banking sector stress will curtail climate tech development.
    Keywords: Bank failure, Clean tech, ESG, Event study, Financial crisis, Silicon Valley Bank
    JEL: G12 G30 Q57
    Date: 2023–07

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