nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2023‒09‒11
24 papers chosen by
Georg Man,

  1. Financial Integration and Economic Growth in Europe By Guglielmo Maria Caporale; Anamaria Diana Sova; Robert Sova
  2. The impact of financial shocks on the forecast distribution of output and inflation By Mario Forni; Luca Gambetti; Nicolò Maffei-Faccioli; Luca Sala
  3. Growth-at-Risk is Investment-at-Risk By Aaron Amburgey; Michael W. McCracken
  4. Financial Condition Indices in an Incomplete Data Environment By Miguel Herculano; Punnoose Jacob
  5. Macro Dimensions of Financial Inclusion Index and its Status in Developing Countries By Shah, Shahid Manzoor; Ali, Amjad
  6. Hot money inflows and bank risk-taking: Germany from the 1920s to the Great Depression By Postel-Vinay, Natacha; Collet, Stephanie
  7. Crisis Risk and Risk Management By Stulz, Rene M.
  8. The Geography of Capital Allocation in the Euro Area By Beck, Roland; Coppola, Antonio; Lewis, Angus; Maggiori, Matteo; Schmitz, Martin; Schreger, Jesse
  9. End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock Returns By Michael Smolyansky
  10. Systematic Default and Return Predictability in the Stock and Bond Markets By Bao, Jack; Hou, Kewei; Zhang, Shaojun
  11. Do Actions Follow Words? How bank sentiment predicts credit growth. By Pablo Pastory y Camarasa; Martien Lamers;
  12. The Real Effects of Sentiment and Uncertainty By Birru, Justin; Young, Trevor
  13. Deposit market concentration and monetary transmission: evidence from the euro area By Stephen Kho
  14. The Investment Channel of Monetary Policy : Evidence from Norway By Jin Cao; Torje Hegna; Martin B. Holm; Ragnar Juelsrud; Tobias König; Mikkel Riiser
  15. Expected Macroeconomic Effects of Issuing a Retail CBDC By Constanza Martínez-Ventura; Julián A. Parra-Polania; Tatiana Mora-Arbeláez; Angélica Lizarazo-Cuéllar
  16. Simulating the Adoption of a Retail CBDC By Leon Rincon, Carlos; Moreno, Jose; Soramaki, Kimmo
  17. Understanding the profitability gap between euro area and US global systemically important banks By Martín Fuentes, Natalia; Di Vito, Luca; Leite, João Matos
  18. Why Are Bank Holdings of Liquid Assets So High? By Stulz, Rene M.; Taboada, Alvaro G.; van Dijk, Mathijs A.
  19. Accès au microcrédit et inégalités de revenus au Burkina Faso By Saïdou NIKIEMA; Pam ZAHONOGO; Kimseyinga SAVADOGO
  20. Financial and Social performance of Microfinance Institutions By Hugues Keje
  21. Factors influencing the deployment of local platform crowdfunding in Sub Saharan Africa: Evidence from West and Central Africa Countries By Pepin Ilonga Nkupo
  22. Online Appendix to "Climate Policy, Financial Frictions, and Transition Risk" By Stefano Carattini; Garth Heutel; Givi Melkadze
  23. Climate Defaults and Financial Adaptation By Toan Phan; Felipe Schwartzman
  24. Promoting renewable energy consumption in Sub-Saharan Africa: how capital flight crowds-out the favorable effect of foreign aid By Simplice A. Asongu; Joel Hinaunye Eita

  1. By: Guglielmo Maria Caporale; Anamaria Diana Sova; Robert Sova
    Abstract: This study examines the impact of financial integration on economic growth in the case of 31 European countries over the period from 2000 to 2021 using dynamic panel data models. The estimation results provide evidence of significant positive effects of financial integration on economic growth. They also suggest that the financial integration – economic growth relationship depends on country-specific characteristics such as the level of financial development and the quality of institutions. More precisely, financial integration appears to exert a greater positive influence on growth in the case of the European countries with a higher level of financial development and better institutions.
    Keywords: financial integration, economic growth, Europe, financial development, quality of institutions, dynamic panel models, GMM estimator
    JEL: C33 F36
    Date: 2023
  2. By: Mario Forni; Luca Gambetti; Nicolò Maffei-Faccioli; Luca Sala
    Abstract: Financial shocks represent a major driver of fluctuations in tail risk, defined as the 5th percentile of the forecast distributions of output and inflation. Since the variance and the asymmetry of the forecast distributions are largely driven by the left tail, financial shocks turn out to play a prominent role for distribution dynamics. Monetary policy shocks also play a role in shaping risk, although its effects are smaller than those of financial shocks. These findings are obtained using a novel econometric approach which combines quantile regressions and Structural VARs.
    Keywords: Tail Risk, Uncertainty, Skewness, Forecast Distribution, SVAR, Financial shocks, Monetary Policy Shocks, Quantile Regressions
    JEL: C32 E32
    Date: 2023–03
  3. By: Aaron Amburgey; Michael W. McCracken
    Abstract: We investigate the role financial conditions play in the composition of U.S. growth-at-risk. We document that, by a wide margin, growth-at-risk is investment-at-risk. That is, if financial conditions indicate U.S. real GDP growth will be in the lower tail of its conditional distribution, we know that the main contributor is a decline in investment. Consumption contributes under extreme financial stress. Government spending and net exports do not play a role.
    Keywords: growth-at-risk; real-time data; quantiles; expected shortfall
    JEL: C12 C32 C38 C52
    Date: 2023–08–21
  4. By: Miguel Herculano; Punnoose Jacob
    Abstract: We construct a Financial Conditions Index (FCI) for the United States using a dataset that features many missing observations. The novel combination of probabilistic principal component techniques and a Bayesian factor-augmented VAR model resolves the challenges posed by data points being unavailable within a high-frequency dataset. Even with up to 62% of the data missing, the new approach yields a less noisy FCI that tracks the movement of 22 underlying financial variables more accurately both in-sample and out-of-sample.
    Keywords: Financial Conditions Index, Mixed-Frequency, Bayesian Methods
    JEL: C11 C32 C52 C53
    Date: 2023–08
  5. By: Shah, Shahid Manzoor; Ali, Amjad
    Abstract: Promoting financial inclusion is the priority of every country’s policymaker and financial experts. So that, every individual as well as business can get equal and affordable financial services. Because financial inclusion deals with providing affordable as well as equal access to financial products and services to the masses of the country, especially to the financially deprived entrepreneur as well as businesses. The importance of financial inclusion is widely recognized but the literature lacks the efficient, comprehensive, and updated measurement of financial inclusion which can be used to judge the accurate level of financial inclusion. This study tries to fulfill this gap by constructing an updated and comprehensive index of financial inclusion for developing countries by using the updated data from 2005 to 2020. This updated data is collected from the world bank, the central banks of every country, and the finance divisions of every country. Furthermore, this study constructs a macro-level multidimensional index of financial inclusion by using socio-economic and financial dimensions. The value of the constructed index lies between 0 to 1. This study divides the score of financial inclusion into three categories 0 to 0.30 for low financial inclusion, 0.31 to 0.50 for medium financial inclusion, and 0.51 to 1 for high financial inclusion. The present index reveals that all developing countries have a medium and lower level of financial inclusion. Estonia is the only country that achieve higher financial inclusion in 2009-10. This proposed index gives the updated measurement of financial inclusion which is easy to compare among economies.
    Keywords: Financial Inclusion, Macro Dimension, Socio-Economic, Financial inclusion index
    JEL: G2 O1
    Date: 2023–01
  6. By: Postel-Vinay, Natacha; Collet, Stephanie
    Abstract: This paper explores the origins of German banks’ risk-taking in the years preceding the 1931 crisis. The 1920s were marked by a large and prolonged increase in capital flows into Germany, chiefly from the United States and the United Kingdom. This coincided, at the individual bank level, with a rise in leverage and a fall in liquidity. We examine possible connections between the two phenomena. Our analysis is based on a combination of historiographical work and statistical modelling based on a newly hand-collected bimonthly dataset on German reporting banks from 1925 to 1935. Bank by bank we examine the effects of foreign inflows on decisions related to leverage, lending, and liquidity. The Dawes Plan of 1924 and the relative absence of a too-big-to-fail (TBTF) environment allow us to mitigate endogeneity concerns. We suggest that while capital inflows did not seem to impact banks’ liquidity decisions, their impact on leverage was non-negligeable.
    Keywords: capital flows; credit; financial crisis; financial development; financial globalization; foreign debt; international lending; money supply; Wiley deal
    JEL: E51 F34 G21 N24 N14
    Date: 2023–07–26
  7. By: Stulz, Rene M. (Ohio State U)
    Abstract: This paper assesses the current state of knowledge about crisis risk and its implications for risk management. Better data that became available since the Global Financial Crisis (GFC) has improved our understanding of crisis risk. These data have been used to show that some types of crises become predictable when one accounts for interactions between risks. Specifically, a financial crisis is much more likely in the years following both high credit growth and high asset valuations. However, some other types of crises do not seem predictable. There is no evidence that the frequency of economic and financial crises is increasing. The existing data show that political crises make economic crises more likely, so that, as suggested by the concept of polycrisis, feedback between non-economic crises and economic crises can be important, but there is no comparable evidence for climate events. Strategies that increase firm operational and financial flexibility appear successful at reducing the adverse impact of crises on firms.
    JEL: G01 G21 G32
    Date: 2023–05
  8. By: Beck, Roland (European Central Bank); Coppola, Antonio (Stanford U); Lewis, Angus (Stanford U); Maggiori, Matteo (Stanford U); Schmitz, Martin (European Central Bank); Schreger, Jesse (Columbia U)
    Abstract: We reassess the pattern of Euro Area financial integration adjusting for the role of “on- shore offshore financial centers†(OOFCs) within the Euro Area. While the Euro Area records large levels of international investment both within and outside of the currency union, much of these flows are intermediated via the OOFCs of Luxembourg, Ireland, and the Netherlands. These countries have dual roles as both hubs of investment fund intermediation and centers of securities issuance by foreign firms. We look through both roles and restate the pattern of Euro Area investment positions by linking fund sector investments to the underlying holders and securities issuance to the ultimate parent firms. Our new estimates of Euro Area investment allow us to document a number of stylized facts. First, the Euro Area’s estimated gross external position is smaller than in official data. Second, the Euro Area is more biased towards euro-denominated assets and away from US dollar and other foreign currency assets than in official data. Third, the Euro Area is less financially integrated than it appears. Fourth, European financial integration occurs disproportionately through securities issued in OOFCs rather than via domestic capital markets. Fifth, there is a North-South bias in Euro Area financial integration whereby Northern European countries are relatively underweight securities issued by Southern European countries.
    JEL: F3 F4 G2 G3
    Date: 2023–05
  9. By: Michael Smolyansky
    Abstract: I show that the decline in interest rates and corporate tax rates over the past three decades accounts for the majority of the period’s exceptional stock market performance. Lower interest expenses and corporate tax rates mechanically explain over 40 percent of the real growth in corporate profits from 1989 to 2019. In addition, the decline in risk-free rates alone accounts for all of the expansion in price-to-earnings multiples. I argue, however, that the boost to profits and valuations from ever-declining interest and corporate tax rates is unlikely to continue, indicating significantly lower profit growth and stock returns in the future.
    Keywords: long-run prediction; stock returns; equity premium; corporate profits; interest rates; corporate taxes
    JEL: G10 G12 G17
    Date: 2023–06–26
  10. By: Bao, Jack (U of Delaware); Hou, Kewei (Ohio State U); Zhang, Shaojun (Ohio State U)
    Abstract: We construct a measure of systematic default defined as the probability that many firms default at the same time. We account for correlations in defaults between firms through exposures to common shocks. Systematic default spikes during recessions, is correlated with macroeconomic indicators, and predicts future realized defaults. More importantly, it predicts future equity and corporate bond index returns both in- and out-of-sample. Finally, we find that the cross-section of average stock returns is related to firm-level exposures to systematic default risk.
    JEL: E32 G12 G13 G17
    Date: 2023–05
  11. By: Pablo Pastory y Camarasa; Martien Lamers; (-)
    Abstract: This paper constructs a forward-looking bank managerial sentiment index by using earnings call transcripts of US, Canadian, and European banks from 2001 to 2021. First, we validate this index through regressions showing its predictive power for positive stock returns and earnings forecast revisions. Second, we analyze whether managerial sentiment predicts bank credit growth. We find that a one standard deviation increase in the index of future sentiment leads to a 1.85% rise in credit growth over the next year. The results remain robust to various controls and competing explanations, including managers catering to analysts’ expectations and macroeconomic expectations.
    JEL: G21 G30 G40 D83 M1
    Date: 2023–08
  12. By: Birru, Justin (Ohio State U); Young, Trevor (Tulane U)
    Abstract: The effects of sentiment should be strongest during times of heightened valuation uncertainty. As such, we document a significant amplifying role for market uncertainty in the relation between sentiment and aggregate investment. A one-standard-deviation increase in uncertainty more than doubles the effect of sentiment on investment. Moreover, allowing uncertainty-dependent sentiment effects substantially increases explanatory power (i.e., R2). Our results are robust to many sentiment, uncertainty, and investment measures. We also document similar effects for aggregate equity issuance. Consistent with theory, we find even stronger results in the cross-section of valuation uncertainty. The evidence suggests that the importance of sentiment for corporate decisions varies over time and depends crucially on the underlying level of market uncertainty.
    JEL: D81 D84 E22 G31 G35 G40 G41
    Date: 2023–06
  13. By: Stephen Kho
    Abstract: I study the transmission of monetary policy to deposit rates in the euro area with a focus on the role of banking sector concentration. Using a local projections framework with 2003-2022 country-level and bank-level data for thirteen euro area member states, I find that deposit rates respond symmetrically to unexpected changes in monetary policy. However, more concentrated domestic banking sectors do pass on unexpected monetary tightening (easing) more slowly (quickly) than less concentrated banking sectors, which contributes to a temporary divergence of deposit rates across the euro area. These results suggest that heterogeneity in the degree of banking sector concentration matters for the transmission of monetary policy, which in turn may affect banking sector profitability as well as the macro-economic response to monetary policy.
    Keywords: Monetary transmission; deposit rates; market concentration
    JEL: E43 E52 D40
    Date: 2023–08
  14. By: Jin Cao; Torje Hegna; Martin B. Holm; Ragnar Juelsrud; Tobias König; Mikkel Riiser
    Abstract: We investigate the transmission of monetary policy to investment using Norwegian administrative data. We have two main findings. First, financially constrained firms are more responsive to monetary policy, but the effect is modest; suggesting that firm heterogeneity plays a minor role in monetary transmission. Second, we disentangle the investment channel of monetary policy into direct effects from interest rate changes and indirect general equilibrium effects. We find that the investment channel of monetary policy is due almost exclusively to direct effects. The two results imply that a representative firm framework with investment adjustment frictions in most cases provides a sufficiently detailed description of the investment channel of monetary policy.
    Keywords: Monetary policy, Investment.
    JEL: E22 E52 D22 G31
    Date: 2023–05
  15. By: Constanza Martínez-Ventura; Julián A. Parra-Polania; Tatiana Mora-Arbeláez; Angélica Lizarazo-Cuéllar
    Abstract: This document reviews the potential macroeconomic effects of issuing a central bank digital currency (CBDC) for the use of individuals and businesses. A careful selection of the architecture, and the economic and technological design aspects of this digital form of central bank money that best suit the needs of Colombian economy is made to frame the analytical approach used to study these issues. The most salient results of the related literature are reviewed to establish the consequences of undertaking this initiative. For the set of selected assumptions, we find that the expected macroeconomic consequences are negligible. ******RESUMEN: Este documento revisa los potenciales efectos macroeconómicos de emitir una moneda digital de banco central (CBDC) para uso de las personas y negocios. Se realiza una selección cuidadosa de la arquitectura, y de los aspectos de diseño económico y tecnológico de esta forma de dinero digital que mejor se ajustarían a las necesidades de la economía colombiana, para enmarcar la aproximación analítica que se usa para estudiar estos temas. Se revisan los resultados más destacados de la literatura relacionada para establecer las consecuencias esperadas de adelantar esta iniciativa. Para el conjunto de supuestos seleccionados, encontramos que los efectos macroeconómicos esperados son muy pequeños.
    Keywords: CBDC, macroeconomic effects, digital money, financial intermediation, efectos macroeconómicos, dinero digital, intermediación financiera
    JEL: E42 E51 E44 E52 E41 G21
    Date: 2023–08
  16. By: Leon Rincon, Carlos (Tilburg University, School of Economics and Management); Moreno, Jose; Soramaki, Kimmo
    Date: 2023
  17. By: Martín Fuentes, Natalia; Di Vito, Luca; Leite, João Matos
    Abstract: This investigation starts with the observation that, over the last decade, profitability rates reported by euro area (EA) banks have remained, on average, persistently below those reported by peer banks in the United States (US). In particular, banks’ return on equity (ROE) has fluctuated around 5% in the EA, but around 10% in the US, indicating a profitability gap of around 5 percentage points. However, while comparisons are frequently made between EA and US banks in academic and political debate, they are not perfect benchmarks, nor should this paper be regarded as aiming for a like-for-like comparison. JEL Classification: G15, G21
    Keywords: Bank profitability, global systemically important (G-SIB) banks, return on equity
    Date: 2023–08
  18. By: Stulz, Rene M. (Ohio State U); Taboada, Alvaro G. (Mississippi State U); van Dijk, Mathijs A. (Erasmus U Rotterdam)
    Abstract: Aggregate bank liquid asset holdings (reserves and liquid securities) increased from 13% to 33% of assets from before the Global Financial Crisis (GFC) to 2020. If banks allocate their balance sheet by equalizing the marginal risk-adjusted expected return across asset classes, they hold more liquid assets when they have less advantageous lending opportunities. We show that, indeed, holdings of liquid assets are negatively related to lending opportunities. Our findings indicate that bank liquid asset holdings grew since the GFC because of weak lending opportunities, though regulatory changes help explain the higher liquid asset holdings of the largest banks before COVID.
    JEL: G21 G28
    Date: 2023–05
  19. By: Saïdou NIKIEMA (UTS - Université Thomas Sankara); Pam ZAHONOGO (UTS - Université Thomas Sankara); Kimseyinga SAVADOGO (UTS - Université Thomas Sankara)
    Date: 2023–07–27
  20. By: Hugues Keje (FED - Faculté d'Economie et Développement. Université Catholique du Congo - Université catholique du Congo)
    Abstract: L'atteinte d'un impact social auprès des populations marginalisées, finalité première des institutions de microfinance, exige à ces dernières de concilier leurs performances financières et sociales afin d'assurer la pérennisation de leurs activités. Au moyen de la base des données de Mix Market, cette étude s'est attelé d'évaluer dans le temps l'efficience des IMF, partant d'un échantillon de 150 institutions reparties à travers cinq régions du monde et à l'aide de la méthode d'enveloppement des données (DEA). Il s'observe des corrélations positives entre les différentes approches selon le modèle CCR contrairement au modèle BCC qui présente d'une part, une opposition entre les approches Dépôt et Crédit par rapport à l'approche sociale et d'autre part, une faible corrélation positive entre l'approche financière et l'approche sociale. Les IMF sont très agressives dans la mobilisation de l'épargne et présentent assez des restrictions dans l'octroi des crédits. Les Imf sont plus efficientes au niveau financier que social selon les approches d'efficience technique (86, 4% contre 34, 9%) et d'échelles (91% contre 51%). L'apport du présent travail par rapport aux études antérieures sur le sujet est l'intégration des influences de la gestion de risque et de la conjoncture économique dans la mesure des scores d'efficience de ces institutions.
    Keywords: Microfinance, Performance, DEA
    Date: 2022
  21. By: Pepin Ilonga Nkupo (University of Mons)
    Abstract: The purpose of this study is to show why African countries, in West and Central Africa (WCA) particularly, are not able to exploit the potential of crowdfunding and maintain the activities of local platforms. I use the hypothetico-deductive methodology, and faced with panel data, this study uses logistic regression models (fixed effect, random effect, and mixed effect), covering the period 2010–2019 for 20 WCA countries (West and Central Africa). To my knowledge, this study is among the first to explore the factors upstream of the deployment of local crowdfunding platforms, based on basic infrastructure, technological and communication innovation, education, the legal framework, and financial system. This research contributes to the current debate on the development of crowdfunding in sub-Saharan Africa as well as to the future models to be adopted so that this activity is sustainable at the local level. The study points out that the infrastructure of information and communication technologies, based on the penetration of the Internet and mobile telephony, significantly influences the deployment of the national platform. Nevertheless, the basic infrastructure such as electricity and urbanization variables, a legal framework based on the business creation score, education, and the weakness of the financial development system constitute an obstacle to claiming development in long-term and sustainable local crowdfunding activities. Following these striking results, the study highlights a series of levers on which legislators in WCA countries can act to meet the crowdfunding challenges of tomorrow. By proposing three research levels, this study should promote and support the development of crowdfunding from a pedagogical point of view by emphasizing entrepreneurship and emerging technologies in education at the level of professional or university training, from the infrastructure, access to physical and digital infrastructure by emphasizing the importance of regional partnerships, creating partnerships with traditional African banks, to prevent risks, build trust, and ensure the security of investments, decision makers must establish the law on alternative finance activities (crowdfunding, cryptocurrency).
    Date: 2023–08–11
  22. By: Stefano Carattini (Georgia State University); Garth Heutel (Georgia State University); Givi Melkadze (Georgia State University)
    Abstract: Online appendix for the Review of Economic Dynamics article
    Date: 2023
  23. By: Toan Phan; Felipe Schwartzman
    Abstract: We analyze the relationship between climate-related disasters and sovereign debt crises using a model with capital accumulation, sovereign default, and disaster risk. We find that disaster risk and default risk together lead to slow post-disaster recovery and heightened borrowing costs. Calibrating the model to Mexico, we find that the increase in cyclone risk due to climate change leads to a welfare loss equivalent to a permanent 1% consumption drop. However, financial adaptation via catastrophe bonds and disaster insurance can reduce these losses by about 25%. Our study highlights the importance of financial frictions in analyzing climate change impacts.
    Keywords: climate change; disasters; sovereign default; emerging markets; growth
    JEL: Q54 F41 F44 H63 H87
    Date: 2023–03
  24. By: Simplice A. Asongu (Johannesburg, South Africa); Joel Hinaunye Eita (Johannesburg, South Africa)
    Abstract: The study assesses the effect of capital flight in the nexus between foreign aid and renewable energy consumption in 20 countries in Sub-Saharan Africa using data for the period 1996-2018. The empirical technique employed is interactive quantile regressions and the following findings are established. Foreign aid increases renewable energy consumption while capital flight dampens the favorable effect of foreign aid on renewable energy consumption. The underlying significance and corresponding mitigating effect are exclusively relevant to the bottom (i.e., 10th) quantile of the conditional distribution of renewable energy consumption. The findings are robust to simultaneity and the unobserved heterogeneity. Policy implications are discussed.
    Keywords: Foreign aid; capital flight; renewable energy; sub-Saharan Africa
    JEL: H10 Q20 Q30 O11 O55
    Date: 2023–01

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