nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2023‒09‒04
eighteen papers chosen by
Georg Man,

  1. Information Dynamics and Macro Fluctuations By Kyriakos T. Chousakos; Gary B. Gorton; Guillermo Ordoñez
  2. Drivers of Large Recessions and Monetary Policy Responses By Giovanni Melina; Stefania Villa
  3. "The Effect of Bank Recapitalization Policy on Credit Allocation, Investment, and Productivity: Evidence from a Banking Crisis in Japan" By Hiroyuki Kasahara; Yasuyuki Sawada; Michio Suzuki
  4. Measuring Financial Integration: More Data, More Countries, More Expectations By Menzie D. Chinn; Hiro Ito
  5. The Network Gravity of Global Banking By Minetti, Raoul; Romanini, Giacomo; Ziv, Oren
  6. FX intervention and domestic credit in a partially dollarized economy: Evidence using microdata from Peru. By Marcos Ceron; Rafael Nivin; Diego Yamunaque
  7. Analyzing the Impact of Foreign Capital Inflows on the Current Account Balance in Developing Economies: A Panel Data Approach By Ali, Amjad; Audi, Marc
  8. Current External Challenges to the Economic Expansion of Emerging Markets By Juan Carlos Moreno-Brid; Lorenzo Nalin; Edgar Perez-Medina
  9. Financial adjustment as a driver of growth model change: a balance-sheet approach to comparative political economy By Spielberger, Lukas; Voss, Dustin
  10. Aid, Reform, and Interest Groups By Heckelman, Jac C; Wilson, Bonnie
  11. The Belt and Road Initiative: Are China’s Investments Sensitive to the Quality of Governance in a Host Country? By Xinge Ruan; Nader Habibi
  12. Solving equilibrium problems in economies with financial markets, home production, and retention By Julio Deride; Roger J-B Wets
  13. Systemic Financial Crises and Income Inequality in OECD Countries By Puneet Arora; Alberto Chong; Carla Srebot
  14. How Do Financial Crises Redistribute Risk? By Kris J. Mitchener; Angela Vossmeyer; Kris James Mitchener
  15. Same same but different: credit risk provisioning under IFRS 9 By Behn, Markus; Couaillier, Cyril
  16. Local banking markets and barriers to entrepreneurship in minority and other areas: Does broadband availability help? By Prieger, James
  17. Mobile money innovations, income inequality and gender inclusion in sub-Saharan Africa By Simplice A. Asongu; Peter Agyemang-Mintah; Joseph Nnanna; Yolande E. Ngoungou
  18. Shifting Cryptocurrency Influence: A High-Resolution Network Analysis of Market Leaders By Arnav Hiray; Agam Shah; Sudheer Chava

  1. By: Kyriakos T. Chousakos; Gary B. Gorton; Guillermo Ordoñez
    Abstract: The amount of information produced about firms’ productivities and about the quality of collateral backing their loans varies over time. These information dynamics determine the evolution of credit, output and productivity, which feeds back into incentives to produce information. We characterize this intricate dynamic relation. A credit boom happens when information about collateral depreciates. A financial crisis happens when information about collateral is suddenly generated. Information about firms’ individual productivities over credit booms can prevent or tame the crisis, acting as an endogenous macroprudential force.
    JEL: E32 E44 G01
    Date: 2023–07
  2. By: Giovanni Melina; Stefania Villa
    Abstract: Shocks to capital utilization are introduced in a structural macroeconomic closed-economy model with financial frictions to capture disruptions on the ability of the capital stock to provide capital services used in production. Estimates for the Euro Area and the United States show that these shocks were among the most important drivers of the output contraction during the Global Financial Crisis and the COVID-19 Crisis, while financial shocks were more relevant during the Global Financial Crisis. Thanks to the timely and strong intervention of the European Central Bank and the U.S. Federal Reserve, monetary policy shocks exerted a sizable positive contribution to output and inflation during the COVID-19 Crisis.
    Keywords: Covid-19, Global Financial Crisis, Great Lockdown, monetary policy, capital utilization
    JEL: E40 E50 E60
    Date: 2023
  3. By: Hiroyuki Kasahara (University of British Columbia); Yasuyuki Sawada (Faculty of Economics, The University of Tokyo); Michio Suzuki (Tohoku University, Cabinet Office, Government of Japan)
    Abstract: This paper examines the ramification of government capital injections into financially distressed banks during the 1997 Japanese banking crisis. By leveraging a unique dataset merging firm-level financial statements and bank balance sheets, the study aims to examine whether the capital injections primarily benefited high-productivity firms or were misallocated to struggling "zombie" firms. The empirical results suggest that banks, post-injection, increased lending to both high-productivity non-zombie firms and low-productivity zombie firms. While the former is in line with conventional theories that prioritize high-productivity firms for investment and productivity enhancement, the latter suggests credit misallocation towards struggling firms mainly for debt servicing. Intriguingly, the study finds no evidence that these injections promoted investments among firms, irrespective of their productivity or financial health status. In particular, we provide suggestive evidence that zombie firms even reduced investments, especially in infrastructure, while high-productivity non-zombie firms did not exhibit a significant investment boost despite receiving more loans. However, these high-productivity firms displayed positive growth in labor productivity and total factor productivity, potentially driven by sales growth and increased advertisement expenses rather than employment and wage adjustments.
    Date: 2023–08
  4. By: Menzie D. Chinn; Hiro Ito
    Abstract: We assess market mediated financial integration over the last fifty years. We first systematically lay out several definitions of financial integration, and then review the evidence regarding whether covered interest parity, uncovered interest parity, and real interest parity hold across industrial and non-industrial countries. Finally we examine what the determinants of real interest differentials are.
    JEL: F30 F40
    Date: 2023–07
  5. By: Minetti, Raoul (Michigan State University, Department of Economics); Romanini, Giacomo (Bank of Italy); Ziv, Oren (Michigan State University, Department of Economics)
    Abstract: A substantial fraction of international banking is intermediated through banking hubs and complex multi-national routing. These flows are ignored or unaccounted for, both theoretically and empirically. We develop an N-country DSGE model of lending where banks choose the path of lending through a network of partner institutions in multiple countries. Banking hub countries arise endogenously as central nodes in the intermediation network. The model provides a framework to rationalize observable international statistics with theoretical models of banking gravity. It generates a set of bilateral locational flow of funds that conceptually matches aggregate (BIS LBS) statistics, as distinct from the ultimate demand and supply of lending. Using a series of calibrations for both node and edge shocks, we show that accounting for the network is crucial for understanding the propagation of shocks and the impact of banking consolidation on aggregate fluctuations. The analysis reveals that neglecting the multinational banking network can lead to biased conclusions about the aggregate effects of banking unions.
    Keywords: Heterogeneous Banks; Gravity; Intermediation Network; Contagion
    JEL: F40 G20
    Date: 2023–08–17
  6. By: Marcos Ceron (Central Reserve Bank of Peru); Rafael Nivin (Central Reserve Bank of Peru); Diego Yamunaque (Central Reserve Bank of Peru)
    Abstract: In this work we study the impact of FX interventions on Credit growth in Peru. Using Panel data at the firm-bank level from the Peruvian Credit Registry we find that purchases of dollars by the Central Bank are associated with reductions on the stock of credit held by Medium, Big and Corporate Firms in the Peruvian economy. We also found that the impact is stronger for firms with a higher level of debt dollarization. These results suggest that FX interventions can be seen as an additional tool for Financial stability, especially in times of large inflows of capital.
    Keywords: FX intervention; Credit registry; Emerging markets; Credit growth
    JEL: E58 F31 F33 G20
    Date: 2023–08–13
  7. By: Ali, Amjad; Audi, Marc
    Abstract: This research has explored the effects of foreign capital inflows on the current account deficit in developing countries from 1995 to 2020. The study considers various factors such as import demand, export demand, foreign direct investment, foreign debt, economic growth, foreign remittances, and foreign reserves as independent variables. The analysis utilizes the panel autoregressive distributed lag approach to examine both the long-run and short-run relationships between the dependent and independent variables. Moreover, the study employs the Panel Granger causality test to evaluate the causal connections among the selected variables. The results indicate that import demand, foreign debt, and remittance inflows positively affect the current account deficit in developing countries. Conversely, export demand, foreign direct investment, economic growth, and foreign reserves have a negative impact on the current account deficit. Consequently, it is recommended that developing countries prioritize the augmentation of stable and substantial foreign reserves as a strategy to alleviate the level of the current account deficit.
    Keywords: Capital inflow, current account deficit, economic growth, export demand, foreign reserves, import demand, foreign debt, foreign direct investment, foreign remittances
    JEL: F21 F24 F32 F43 O24
    Date: 2023–07
  8. By: Juan Carlos Moreno-Brid (Universidad Nacional Autonoma de México); Lorenzo Nalin (Universidad Nacional Autonoma de México); Edgar Perez-Medina (Universidad Nacional Autonoma de México)
    Abstract: We present a small analytical framework, built in the Balance of Payments Constrained Growth (BPCG) tradition, tailored to identify how specific financial and structural vulnerabilities of emerging economies (EMEs) restrict their expansion. This framework is applied to shed light on the impact of global shocks and of major macro policy changes in developed countries on the growth path of six economies. As we show, this impact is conditioned by the vulnerabilities and dynamics of their insertion on international trade and capital markets and their exposure to policy changes in the developed centers. Our work shows that the BPCG-approach is a relevant, simple tool to identify EMEs' challenges in the post-covid 19 era.
    Keywords: Balance of Payment Constraint Growth Model, Current account deficit, Emerging markets' vulnerabilities, Cross-border flows
    JEL: F32 F43
    Date: 2023–02–14
  9. By: Spielberger, Lukas; Voss, Dustin
    Abstract: Growth model theory has turned the focus of comparative political economy scholars on the demand drivers of economic growth. But while its proponents emphasize the variety and inherent instability of growth models, research so far has been more concerned with the emergence and coherence of stable growth models than in the process of change. We argue that growth model change can be understood as a process of financial rebalancing on the level of institutional sectors. When an overindebted sector is forced to deleverage, a politically contested process emerges over the path of adjustment. We derive various ways in which each sector can contribute to this process of financial adjustment, which we conceptualize as the activation of macroeconomic ‘compensation valves’. This process shapes the trajectory of economic performance during financial crisis and determines whether a new feasible growth model can emerge in its aftermath. We apply our analytical lens in a comparative case study of Germany and the Netherlands during the Great Recession. We conclude that future research on growth models should more explicitly problematize the ability of political economies to adapt to financial instability.
    Keywords: balance sheet analysis; financial crisis; Germany; growth models; instability; Netherlands; Balance sheet analysis; Instability; Growth models; Financial crisis
    JEL: E00 G00
    Date: 2022–08–03
  10. By: Heckelman, Jac C; Wilson, Bonnie
    Abstract: Foreign aid is often granted to encourage market-oriented reform. It is not clear that this approach to reform has been effective. We seek to understand this seeming failure of aid. We ask whether and how political markets for institutions have influenced the impact of aid allocations on reform, and we explore the extent to which the impact of aid on reform is conditional on the influence of a particular player in those markets - special interest groups. In a panel of 92 aid-receiving nations over four decade-long time periods, for several measure of reform, we find evidence that the aid-reform relation is conditional on the influence of interest groups. We find that only under relatively extreme and rare conditions has aid been positively associated with reform. Mostly, we find that aid has been associated with reform backsliding. The effects are economically meaningful in magnitude.
    Keywords: aid, reform, institutions, special interest groups
    JEL: O1 O19 P11
    Date: 2023–07
  11. By: Xinge Ruan (Brandeis University); Nader Habibi (Brandeis University)
    Abstract: This article uses statistical analysis to explore the correlation between the quality of governance in a host country and the size and nature of China’s investments in that country, based on the available data for 2005-2020. We focus on two types of Chinese economic engagements with each host country: direct investment by Chinese firms and the volume of service contracts awarded to Chinese firms for construction projects. Overall, our statistical analysis demonstrates that China’s direct investments and service contracts both show significant correlations with the governance characteristics of the host country. At the same time, we observe a large degree of diversity in the significance of specific governance indicators across regions and economic sectors. The Regulation Quality indicator, for example, has a strong positive correlation with total investment and total service contract, but the significance is lost when the sample is restricted to the Middle East or South Asia. The most intriguing finding of our research is that in some sectors, the correlation between governance indicators and China's direct investments and service contracts varies significantly. The Voice and Accountability indicator has a positive correlation with China's direct investments but a negative correlation with China's service contracts for the entire sample. This suggests that China is awarded more service contracts in less democratic countries of these regions. An alternative explanation is that Chinese firms prefer to invest directly in more democratic countries and operate as contractors in less democratic countries. Similarly, we find a positive correlation between the absence of corruption and China's service contracts, but no significant correlation with its direct investments.
    Date: 2023–05
  12. By: Julio Deride; Roger J-B Wets
    Abstract: We propose a new methodology to compute equilibria for general equilibrium problems on exchange economies with real financial markets, home-production, and retention. We demonstrate that equilibrium prices can be determined by solving a related maxinf-optimization problem. We incorporate the non-arbitrage condition for financial markets into the equilibrium formulation and establish the equivalence between solutions to both problems. This reduces the complexity of the original by eliminating the need to directly compute financial contract prices, allowing us to calculate equilibria even in cases of incomplete financial markets. We also introduce a Walrasian bifunction that captures the imbalances and show that maxinf-points of this function correspond to equilibrium points. Moreover, we demonstrate that every equilibrium point can be approximated by a limit of maxinf points for a family of perturbed problems, by relying on the notion of lopsided convergence. Finally, we propose an augmented Walrasian algorithm and present numerical examples to illustrate the effectiveness of this approach. Our methodology allows for efficient calculation of equilibria in a variety of exchange economies and has potential applications in finance and economics.
    Date: 2023–08
  13. By: Puneet Arora (Charles University); Alberto Chong (Department of Economics, Georgia State University and Department of Economics, Universidad del Pacifico); Carla Srebot (University of British Columbia)
    Abstract: We offer a theory and evidence that support the view that systemic financial crises impact income inequality negatively in richer countries, where institutions such as social safety nets work better than in developing countries. More generally, to our knowledge, our work is the first to provide empirical evidence that supports the view that systemic financial crises may have a causal impact on income inequality and that a driving mechanism may be vulnerable employment. In order to do this, we apply a difference-in-difference approach and provide evidence that the parallel trends assumption is complied with.
    Date: 2023–08
  14. By: Kris J. Mitchener; Angela Vossmeyer; Kris James Mitchener
    Abstract: We examine how financial crises redistribute risk, employing novel empirical methods and micro data from the largest financial crisis of the 20th century – the Great Depression. Using balance-sheet and systemic risk measures at the bank level, we build an econometric model with incidental truncation that jointly considers bank survival, the type of bank closure (consolidations, absorption, and failures), and changes to bank risk. Despite roughly 9, 000 bank closures, risk did not leave the financial system; instead, it increased. We show that risk was redistributed to banks that were healthier prior to the financial crisis. A key mechanism driving the redistribution of risk was bank acquisition. Each acquisition increases the balance-sheet and systemic risk of the acquiring bank by 25%. Our findings suggest that financial crises do not quickly purge risk from the system, and that merger policies commonly used to deal with troubled financial institutions during crises have important implications for systemic risk.
    Keywords: Bayesian inference, financial crises, sample selection, mergers, banking networks
    JEL: G21 C30 N12
    Date: 2023
  15. By: Behn, Markus; Couaillier, Cyril
    Abstract: We analyse the impact of the adoption of expected credit loss accounting (IFRS 9) on the timeliness and potential procyclicality of banks’ loan loss provisioning. We use granular loan-level data from the euro area’s credit register and investigate both firm-level credit events and macroeconomic shocks (2020 COVID-19 pandemic, 2022 energy price shock). We find that provisions under the new standard are higher before default and more responsive to shocks. However, the majority of provisioning still occurs at the time of default and the dynamics around default events are similar to pre-existing national standards. Additionally, banks with a larger capital headroom provision significantly more, particularly for loans using IFRS 9. This suggests a higher risk of underprovisioning for less capitalized banks. JEL Classification: G21, G28, G32
    Keywords: bank regulation, credit risk, financial stability, loan loss accounting
    Date: 2023–08
  16. By: Prieger, James
    Abstract: This empirical study investigates the linkages among entrepreneurship in the form of establishment entry, local banking markets, and broadband availability, focusing on minority areas in the US. Lack of access to banks and lack of competition in the market for small business loans can make it more difficult for an entrepreneur to overcome the liquidity constraint to starting a new business. Broadband internet access can facilitate startups directly by enhancing firm profitability and indirectly by stimulating competition in the loan market, lowering the cost of access to finance, and enabling access to financial capital from fintech lenders. The barriers to new business creation erected by local banking markets are hypothesized to be even higher in minority areas, given the greater difficulty minority entrepreneurs face in raising financial capital. The empirical results show that broadband availability, local bank density, and competition in small business loans all facilitate startups. Broadband lowers barriers for entrepreneurs as hypothesized through both the direct and indirect channels. Broadband availability attenuates the barriers from insufficient access to local banks and lack of competition in small business loans from banks. For some industries, higher bank density and greater loan competition facilitate startups more in minority areas than in mostly white areas. Given that minority areas have many fewer banks per capita and much less loan competition than mostly white counties, the results imply that minority areas face even higher barriers to entrepreneurship from insufficient local formal financial resources. The moderating effect of broadband on local financial constraints applies even more so to Black communities; thus while the barriers for Black entrepreneurs may be higher, access to broadband has a greater alleviating effect on those barriers. Business creation in Hispanic areas also faces obstacles from the local banking environment, but broadband does not appear to help reduce them, although it still has a positive direct effect on entry. Additional evidence shows that broadband helped small businesses in minority areas procure more bank loans. Broadband access can thus help entrepreneurs in general, Blacks in particular, and to a lesser extent Hispanics surmount the liquidity constraint to starting a business. The implications of the results are discussed with reference to current and proposed policy to promote broadband availability, usage, and digital equity.
    Keywords: entrepreneurship; startups; minority entrepreneurship; broadband internet access; fintech; FCC Form 477 data; entrepreneurs
    JEL: D22 L26 R11
    Date: 2023–01–02
  17. By: Simplice A. Asongu (Yaoundé, Cameroon); Peter Agyemang-Mintah (Zayed University, Abu Dhabi, UAE); Joseph Nnanna (The Development Bank of Nigeria, Abuja, Nigeria); Yolande E. Ngoungou (Yaoundé, Cameroon)
    Abstract: The study assesses the role of mobile money innovations on income inequality and gender inclusion in 42 Sub-Saharan African countries for the period 1980 to 2019 using interactive quantile regressions. The following findings are established. First, income inequality unconditionally reduces the involvement of women in business and politics. Second, mobile money innovations interact with income inequality to have a positive impact on women in business and politics. Third, net effects from the role of mobile money innovations in income inequality for gender inclusion are consistently negative. Fourth, given that the positive conditional or interactive effects and negative net effects are consistent across the conditional distribution of gender inclusion, thresholds at which mobile money innovations can completely dampen the negative effect of income inequality on gender inclusion are provided. Among others, policy makers should work towards improving conditions for mobile money innovations. They should also be aware that reducing both income inequality and enhancing mobile money innovations simultaneously leads to more inclusive outcomes in terms of gender inclusion.
    Keywords: Financial inclusion; inequality; mobile phones; sub-Saharan Africa; women
    JEL: G20 O40 I10 I20 I32
    Date: 2023–01
  18. By: Arnav Hiray; Agam Shah; Sudheer Chava
    Abstract: Over the last decade, the cryptocurrency market has experienced unprecedented growth, emerging as a prominent financial market. As this market rapidly evolves, it necessitates re-evaluating which cryptocurrencies command the market and steer the direction of blockchain technology. We implement a network-based cryptocurrency market analysis to investigate this changing landscape. We use novel hourly-resolution data and Kendall's Tau correlation to explore the interconnectedness of the cryptocurrency market. We observed critical differences in the hierarchy of cryptocurrencies determined by our method compared to rankings derived from daily data and Pearson's correlation. This divergence emphasizes the potential information loss stemming from daily data aggregation and highlights the limitations of Pearson's correlation. Our findings show that in the early stages of this growth, Bitcoin held a leading role. However, during the 2021 bull run, the landscape changed drastically. We see that while Ethereum has emerged as the overall leader, it was FTT and its associated exchange, FTX, that greatly led to the increase at the beginning of the bull run. We also find that highly-influential cryptocurrencies are increasingly gaining a commanding influence over the market as time progresses, despite the growing number of cryptocurrencies making up the market.
    Date: 2023–07

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