nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2023‒09‒18
twenty papers chosen by
Georg Man,

  1. A heterogeneous-firm model of trade and growth with country-specific credit constraints By Ryoji Ohdoi; Kazuo Mino; Yunfang Hu
  2. Capital Management and Wealth Inequality By James Best; Keshav Dogra
  3. Long Term Expectations and Aggregate Fluctuations By Pedro Bordalo; Nicola Gennaioli; Rafael La Porta; Matthew O'Brien; Andrei Shleifer
  4. The Macroeconomic Effects of Debt Relief Policies During Recessions By Soyoung Lee
  5. Aid for Trade flows, Patent Rights Protection and Total Factor Productivity By Gnangnon, Sèna Kimm
  6. Aiding education? The effect of international aid on local educational enrolment in Nigeria By Roos Haer; Gudrun Østby
  7. Ripples into waves: trade networks, economic activity, and asset prices By Chang, Jeffery (Jinfan); Du, Huancheng; Lou, Dong; Polk, Christopher
  8. Who Benefits From The Export-Import Bank Aid? By Efraim Benmelech; Joao Monteiro
  9. Predicting Financial Crises: The Role of Asset Prices By Tristan Hennig; Mr. Plamen K Iossifov; Mr. Richard Varghese
  10. anetworkapproachtointerbankcontagionriskinsouthafrica By Pierre Nkou Mananga; Shiqiang Lin; Hairui Zhang
  11. Strategic Money and Credit Ledgers By Markus K. Brunnermeier; Jonathan Payne
  12. Understanding the DeFi Network Through the Lens of a Production-Network Model By Jonathan Chiu; Thorsten V. Koeppl; Hanna Yu; Shengxing Zhang
  13. Lending by Servicing: Monetary Policy Transmission Through Shadow Banks By Isha Agarwal; Malin Hu; Raluca Roman; Keling Zheng
  14. The Crypto Cycle and US Monetary Policy By Ms. Natasha X Che; Alexander Copestake; Davide Furceri; Tammaro Terracciano
  15. A Bayesian approach for the determinants of bitcoin returns By Thanasis Stengos; Theodore Panagiotidis; Georgios Papapanagiotou
  16. Financial Development and the Current Account in Nigeria By Oyadeyi, Olajide; Akinbobola, Temidayo
  17. Fiscal Policy and the Government Balance Sheet in China By Mr. Waikei R Lam; Ms. Marialuz Moreno Badia
  18. Using Lotteries to Attract Deposits By Paul Gertler; Sean Higgins; Aisling Scott; Enrique Seira
  19. Politicians, Trust and Financial Literacy: When Do Politicians Care? By Donato Masciandaro
  20. Behavioral drivers of intentions to use alternatives to cash: An African survey By David Peón

  1. By: Ryoji Ohdoi (School of Economics, Kwansei Gakuin University); Kazuo Mino (Kyoto Institute of Economic Research, Kyoto University); Yunfang Hu (Graduate School of Economics, Kobe University)
    Abstract: This study constructs a two-country endogenous growth model with heterogeneous firms and asymmetric countries, where the asymmetry lies in the degree of financial frictions. The tradable intermediate goods sector consists of heterogeneous firms and requires specific goods for entry. These goods are produced by heterogeneous entrepreneurs facing credit constraints due to financial frictions. Using this framework, we derive the following results analytically. First, a permanent credit crunch in one country facilitates the exit of intermediate goods firms in that country; meanwhile, it decreases the profitability of exports of the other country’s intermediate goods firms, causing exporters to switch to selling their goods domestically. Second, under no international lending and borrowing, the credit crunch reduces the growth rates of both countries not only in the long run but also during the transition to a new balanced growth path. We also compare the long-run effects under such a financial autarky and financial integration.
    Keywords: Banks; Endogenous growth; Heterogeneous firms; Asymmetric countries; Financial frictions; Country-specific credit crunch
    JEL: F12 F43 O16 O41
    Date: 2023–08
  2. By: James Best; Keshav Dogra
    Abstract: Wealthier individuals have stronger incentives to seek higher returns. We investigate the effect that this has on long-run wealth inequality. Incorporating capital management into a standard Ramsey-Cass-Koopmans model generates substantial long-run inequality: the majority of the population works and holds no capital, while a small minority holds a large amount of capital and manages it full time. Counterintuitively, financial innovations or policies that reduce return differentials increase long-run wealth inequality. Egalitarian steady states may exist but are inefficient and unstable: a small concentration in capital ownership causes a transition to an unequal steady state. Capital management introduces a novel equity-efficiency tradeoff: scale economies make it efficient for a few individuals to manage capital full-time, but under laissez-faire this generates substantial inequality. A utilitarian planner would instead instruct a few individuals to manage capital on behalf of society and transfer most of their income to the workers.
    Keywords: wealth inequality; capital; returns; management; information; Financial innovation
    JEL: D31 D83 E21 E22 G51
    Date: 2023–09–01
  3. By: Pedro Bordalo; Nicola Gennaioli; Rafael La Porta; Matthew O'Brien; Andrei Shleifer
    Abstract: In line with Keynes’ intuition, volatility in the stock market and in real economic activity are linked by expectations of long term profits. We show that analysts’ optimism about the long term earnings growth of S&P 500 firms is associated with a near term boom in major US financial markets, real investment, and other business cycle indicators. The same optimism however predicts disappointing earnings growth and a contraction in financial markets and real activity one to two years later. Overreaction of measured long term profit expectations emerges as a promising mechanism for reconciling Shiller’s excess volatility puzzle with the business cycle.
    JEL: E0 E32 E44 E7 G01 G10
    Date: 2023–08
  4. By: Soyoung Lee
    Abstract: I study debt relief as a stimulus policy using a dynamic stochastic general equilibrium model that captures the rich heterogeneity in households’ balance sheets. In this environment, a large-scale mortgage principal reduction can amplify a recovery, support house prices and lower foreclosures. The nature of the intervention, in terms of its eligibility, liquidity and financing, shapes its macroeconomic impact. This impact rests on how resources are redistributed across households that vary in their marginal propensities to consume. The availability of bankruptcy on unsecured debt quantitatively changes the macroeconomic response to large-scale mortgage relief by reducing precautionary savings.
    Keywords: Business fluctuations and cycles; Credit and credit aggregates; Debt management; Housing
    JEL: E21 E32 E6
    Date: 2023–08
  5. By: Gnangnon, Sèna Kimm
    Abstract: This study has examined both the effect of Aid for Trade (AfT) flows on the total factor productivity (TFP) level, and the extent to which this effect depends on countries' strength of protection of patent rights. The analysis has used the fixed effects estimator the Method of Moments Quantile Regression approach over a panel dataset of 59 countries and the period from 2002 to 2019. It has established several findings. AfT flows are instrumental in improving productivity in recipient countries, with the largest effect arising from AfT flows for productive capacities. The positive productivity effect of total AfT flows is larger in countries with higher productivity levels. On average over the full sample, total AfT flows exert a larger positive effect on the TFP level in countries that have face higher trade costs, lower innovative output and weaker patent rights protection. Interestingly, increasing the real per capita research and development (R&D) expenditure and concurrently strengthening patent rights laws (to protect the returns on R&D expenditure) result in a larger positive effect of total AfT flows on productivity. In addition, countries with low productivity levels (i.e., those located in lower quantiles) and that increase R&D expenditure in the context of stronger patent rights laws, experience a positive and significant effect of total AfT flows (in particular AfT for productive capacities) on productivity. The magnitude of this positive effect is larger, the lower the quantile of the TFP distribution in which a country is located. These findings have important policy implications.
    Keywords: Aid for Trade flows, Intellectual Property Rights, R&D Expenditure, Total Factor Productivity
    JEL: F35 O34 O47
    Date: 2023
  6. By: Roos Haer; Gudrun Østby
    Abstract: Education is associated with a range of positive micro and macro effects. It is hence no surprise that donors have recently increased the amount of official development aid specifically focused on restoring and maintaining education in less-developed states. While much attention has been paid to the effect of aid on educational enrolment at the country level, there is a clear knowledge gap at the subnational level.
    Keywords: Aid, Education, Enrolment, Nigeria, Africa
    Date: 2023
  7. By: Chang, Jeffery (Jinfan); Du, Huancheng; Lou, Dong; Polk, Christopher
    Abstract: We exploit information in sovereign CDS spreads and the international trade network to provide causal evidence of the propagation of global economic shocks. We show that trade links are an important source of shock transmission using the natural experiments of the Japanese tsunami and the COVID-19 lockdown in China. We then confirm more general and gradual information flows along the trade network by showing extensive country-level credit/equity cross-sectional return predictability. News about country fundamentals flows primarily from importers to exporters, depends on both direct and indirect links in the trade network, and is magnified by the exporting country's financial vulnerability.
    Keywords: sovereign CDS; return predictability; trade networks; limited attention; information aggregation; 71;733;004; Paul Woolley Center
    JEL: G12 G15 F40
    Date: 2022–07–01
  8. By: Efraim Benmelech; Joao Monteiro
    Abstract: We study the effectiveness of government aid to exporters by exploring an exogenous shock that affected the ability of the Export-Import Bank of the United States (EXIM) to provide aid to U.S. exporters through loan guarantees to importers. We focus on Boeing, the largest individual recipient of aid. We find that Boeing sales declined only modestly – despite Boeing’s significant reliance on EXIM for export credit. Moreover, we find that this decline is driven by financially constrained airlines or by airlines operating in countries with underdeveloped financial systems. We show that airlines in developed countries were easily able to substitute EXIM guaranteed loans for private credit and thus could still purchase Boeing aircraft despite the EXIM shock. Our results are consistent with the view that government-sponsored export credit is mostly relevant for importers in countries with underdeveloped financial systems, which represent a relatively small share of total EXIM aid.
    JEL: F14 F34 G28 G31 L93
    Date: 2023–08
  9. By: Tristan Hennig; Mr. Plamen K Iossifov; Mr. Richard Varghese
    Abstract: We explore the early warning properties of a composite indicator which summarizes signals from a range of asset price growth and asset price volatility indicators to capture mispricing of risk in asset markets. Using a quarterly panel of 108 advanced and emerging economies over 1995-2017, we show that the combination of rapid asset price growth and low asset price volatility is a good predictor of future financial crises. Elevated levels of our indicator significantly increase the probability of entering a crisis within the next three years relative to normal times when the indicator is not elevated. The indicator outperforms credit-based early warning metrics, a result robust to prediction horizons, methodological choices, and income groups. Our results are consistent with the idea that measures based on asset prices can offer critical information about systemic risk levels to policymakers.
    Keywords: Early Warning Indicator; ROC; Financial Crises
    Date: 2023–08–04
  10. By: Pierre Nkou Mananga; Shiqiang Lin; Hairui Zhang
    Abstract: We investigate the resilience of the South African banking system using a dynamic agent-based model and the DebtRank algorithm. This approach enables us to identify each banks importance and vulnerability in the interbank network and is not limited to listed banks, as previous studies were. We find that larger banks are more systemically important, but a banks interbank-lending-to-equity multiple is significantly correlated with its vulnerability. Our research offers policymakers a direct and practical indicator for improved monitoring of financial stability.
    Date: 2023–09–06
  11. By: Markus K. Brunnermeier; Jonathan Payne
    Abstract: This paper studies strategic decision making by a private currency ledger operator, which faces competition from public money and/or other ledgers. A monopoly ledger operator can incentivize contract enforcement across the financial sector by threatening exclusion, but it can also impose markups through its pricing power. Currency competition limits rent extraction, but also makes coordinated contract enforcement more fragile. The emergent market structure bundles the provision of ledger and platform trading technologies. Regulation to ensure platform cooperation on contract enforcement and competition on markup setting is effective so long as agents can easily switch between platforms.
    JEL: E4 E42 E5 E50 E59 F39 G21 G23 L10 L13
    Date: 2023–08
  12. By: Jonathan Chiu (Bank of Canada); Thorsten V. Koeppl (Queen's University); Hanna Yu (Bank of Canada); Shengxing Zhang (Peking University HSBC Business School)
    Abstract: Decentralized Finance (DeFi) is composed of a variety of heterogeneous sectors that are interconnected through an input-output network of its tokens. We use a panel data set to empricially document the evolution of the DeFi network across its different sectors. We then employ a standard, theoretical production-network model to measure the value added and service outputs of different DeFi sectors which is fundamentally different from the commonly used metric of Total Value Locked (TVL). Our calibrated model is then used to study DeFi token prices and to predict the equilibrium effects of increasing network interconnectedness.
    Keywords: Blockchain, Crypto, Decentralized Finance, Production Network
    JEL: G2 L14
    Date: 2023–07
  13. By: Isha Agarwal; Malin Hu; Raluca Roman; Keling Zheng
    Abstract: We propose a new conceptual framework for monetary policy transmission through shadow banks in the mortgage market that highlights the role of mortgage servicing in generating non-deposit funds for lending. We document that mortgage servicing acts as a natural hedge against interest rate shocks and dampens the effect of monetary policy on shadow bank mortgage lending. Higher interest rates reduce prepayment risk, increasing the collateral value of mortgage servicing assets and cashflow from servicing income. This enables shadow banks with greater exposure to mortgage servicing to obtain more funding. The mortgage servicing channel is weaker for traditional banks due to their reliance on deposit funding and the capital charge on mortgage servicing assets. Our estimates imply that the rising share of shadow banks in mortgage servicing has weakened the pass-through of monetary policy to aggregate mortgage lending.
    JEL: E52 G21
    Date: 2023–08–02
  14. By: Ms. Natasha X Che; Alexander Copestake; Davide Furceri; Tammaro Terracciano
    Abstract: We examine fluctuations in crypto markets and their relationships to global equity markets and US monetary policy. We identify a single price component—which we label the “crypto factor”—that explains 80% of variation in crypto prices, and show that its increasing correlation with equity markets coincided with the entry of institutional investors into crypto markets. We also document that, as for equities, US Fed tightening reduces the crypto factor through the risk-taking channel—in contrast to claims that crypto assets provide a hedge against market risk. Finally, we show that a stylized heterogeneous-agent model with time-varying aggregate risk aversion can explain our empirical findings, and highlights possible spillovers from crypto to equity markets if the participation of institutional investors ever became large.
    Keywords: US Monetary Policy; Cryptoassets; Stock Markets.
    Date: 2023–08–04
  15. By: Thanasis Stengos (Department of Economics and Finance, University of Guelph, Guelph ON Canada); Theodore Panagiotidis (University of Macedonia); Georgios Papapanagiotou (University of Macedonia)
    Abstract: This paper examines the effect of thirty-one variables on bitcoin returns over the period 2015-2021. We use a Bayesian LASSO model that accounts for stochastic volatility and leverage effect. We examine the impact of economic, financial and technological variables as well as uncertainty and attention indicators on bitcoin returns. Furthermore, we consider two recently proposed indicators (Central Bank Digital Currency (CBDC)) for uncertainty and attention. Our findings suggest that sentiment and technological factors have the most profound effect on bitcoin returns. Regarding economic/financial variables, stock market returns and volatility indices have the greatest impact on bitcoin returns.
    Keywords: Bitcoin, Cryptocurrency, LASSO, Bayesian, CBDC.
    JEL: G12 G15 C11 D80
    Date: 2023
  16. By: Oyadeyi, Olajide; Akinbobola, Temidayo
    Abstract: This study explored the response of current account to different financial development indicators. Quarterly data from the period of 1981 to 2018 on current account, debt stock, stock market capitalization, stock market value traded, financial liberalization, total deposit money banks’ asset, total monetary asset, private sector credit and real GDP were analyzed using Lag Augmented VAR (LAVAR) procedure. Based on the findings, the study was able to prove that only the current account exerted significant influence on its future values and sustainability, while financial development indicators did not influence the current account for Nigeria. Consequently, efforts should be directed at all stakeholders by developing financial development strategies that would improve the importation of industry raw materials and equipment to improve the volume of domestic production and exportation, thereby improving Nigeria’s current account position and sustainability levels.
    Keywords: Current Account; Financial Development; Lag Augmented VAR
    JEL: F00 F13 F32 F42
    Date: 2022–03–31
  17. By: Mr. Waikei R Lam; Ms. Marialuz Moreno Badia
    Abstract: In this paper, we present the most comprehensive estimates of China’s government balance sheet to date. Based on these estimates, we show how major shifts in fiscal policy over the last two decades have shaped the health of the public sector prior to the Covid-19 pandemic. We find that, at US$12.5 trillion, China has the largest stock of financial assets in the world. However, its net financial worth as a percent of GDP—though still higher than the large majority of countries—has declined over the last decade. This trend can be traced back to the turn of the century when China undertook a major restructuring of its state-owned enterprises but left important shortcomings in the intergovernmental fiscal system unaddressed. Compounding these risks, reform momentum stalled in the aftermath of the global financial crisis leading to high leverage and falling profitability among state-owned enterprises.
    Keywords: Balance Sheet; China; Debt; Deficit; Local government; State-owned Enterprises; Infrastructure
    Date: 2023–08–04
  18. By: Paul Gertler; Sean Higgins; Aisling Scott; Enrique Seira
    Abstract: Despite the importance of deposit financing for lending, banks in developing countries struggle to attract deposits. In a randomized experiment across 110 bank branches throughout Mexico, a lottery incentive based on net monthly deposits caused a 40% increase in the number of accounts opened and a 21% increase in the number of deposits during the lottery months. Nearly all new accounts (96%) were opened by households previously unbanked at any bank. The temporary two-month incentive had a persistent 2-3 year impact on the flow of deposits and stock of savings, and increased the present value of branch profits by 6%.
    JEL: G29 G41 O16
    Date: 2023–08
  19. By: Donato Masciandaro
    Abstract: Politicians can be more or less active in pursuing financial-literacy policies. This paper explores the role of financial-literacy policy in modifying the financial-trust endowment of a given population taking the political cost-benefit analysis into account. As, in any period, each incumbent government can design and implement its own financial-literacy policy and as financial-literacy deficits are more likely in a period of financial innovation, we assume that constituencies more or less in favour of such policies are present in a given country. If this is the case, we can show that, in a democracy with political competition, the level of activism in implementing financial-literacy policies is positively associated with financial-instability risks, literacy benefits, and illiteracy costs. Moreover, preferences and constraints motivate the politician in charge. More specifically, a more longer time horizons, lower psychological attitudes towards the status quo, and a higher probability of re-election can increase financial-literacy efforts.
    Keywords: financial literacy, financial trust, fintech, financial crisis, loss aversion, political competition
    JEL: D72 G28 G53 H10 K00
    Date: 2023
  20. By: David Peón (Universidade da Coruna)
    Abstract: Seeking to identify frictions to the possible implementation of CBDCs, I explore potential behavioral drivers for people to use cash or alternative payment methods in retail transactions. I conducted an online survey targeting adults in sub-Saharan Africa, a continent characterized by lower levels of banking penetration, intensive use of cash, and popularity of mobile money accounts to overcome financial exclusion. I obtained robust evidence that the affect heuristic is the only relevant behavioral trait against the use of cash and of credit cards. This adds to criticisms of behavioral finance for frequently neglecting emotional drivers. Cognitive traits, such as mental accounting, fungibility bias, and habit do not mediate in the overall preference but in which contexts people prefer to use one payment method or another. I find no behavioral drivers against the use of electronic payments but robust evidence that higher per capita income reduces their preference. All results are robust to alternative econometric specifications: multinomial logistic, ordered logistic, and logit regressions. My research provides a clear message for policy making: authorities might better favor ensuring that a wide variety of payment alternatives are available for people to use, including cash, and let them choose.
    Date: 2023–08–20

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