nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2023‒11‒27
seventeen papers chosen by
Georg Man,

  1. The spillover effects of financial development and institutions on economic growth in emerging economies: new insights from spatial Durbin approach By Ahmad, Mahyudin; Hall, Stephen G.; Law, Siong Hook; Nayan, Sabri
  2. Credit as an instrument for growth: A monetary explanation of the Chinese growth story By Bofinger, Peter; Geißendörfer, Lisa; Haas, Thomas; Mayer, Fabian
  3. FDI spillovers, New Industry Development, and Economic Growth By Thanh Tam Nguyen-Huu; Ngoc‐sang Pham
  4. FDI spillovers and productivity in Vietnamese manufacturing industries - New insights from the unconditional quantile regression By Thanh Tam Nguyen-Huu
  5. How Equitable Wealth Outcomes Could Create a Resilient and Larger Economy By Ana Hernández Kent; Lowell R. Ricketts
  6. The world development report 2022: finance for an equitable recovery in the context of the international debt crisis By Wade, Robert Hunter
  7. What Does History Reveal about Reducing the National Debt Burden? By YiLi Chien; Ashley Stewart
  8. What growth strategies do citizens want? Evidence from a new survey By Baccaro, Lucio; Bremer, Björn; Neimanns, Erik
  9. Effect of Aid for Trade on Recipient-Countries' Participation in Global Value Chains By Gnangnon, Sèna Kimm
  10. Effect of Economic Uncertainty on Remittances Flows from Developed Countries By Gnangnon, Sèna Kimm
  11. Demographics and Real Interest Rates Across Countries and Over Time By Carlos Carvalho; Andrea Ferrero; Felipe Mazin; Fernanda Nechio
  12. China’s footprint in global financial markets By Lodge, David; Manu, Ana-Simona; Van Robays, Ine
  13. Linkages among the Foreign Exchange, Stock, and Bond Markets in Japan and the United States By Yi Jiang; Shohei Shimizu
  14. Impact of the Global Financial Crisis on Households in Kota Pekalongan By Asri Yusrina; Akhmadi
  15. Heterogeneous macroprudential policies and corporate financing decisions By Bakkar, Yassine; Machokoto, Michael
  16. Monitoring Banking System Connectedness with Big Data By Hale, Galina; Lopez, Jose A
  17. On the use of artificial intelligence in financial regulations and the impact on financial stability By Jon Danielsson; Andreas Uthemann

  1. By: Ahmad, Mahyudin; Hall, Stephen G.; Law, Siong Hook; Nayan, Sabri
    Abstract: Despite the extensive literature on the relationship between financial development (FD) and economic growth, previous studies have largely overlooked the potential spatial interdependence between countries. To address this gap, this paper employs spatial Durbin estimation that explicitly captures the spillover effects of FD and institutions on a panel dataset of 56 emerging countries over a 30-year period. The findings reveal a significant impact of FD on economic growth, although no evidence of its threshold effect. Institutions play a critical role in shaping the FD-growth relationship, with political institutions being the most influential in driving economic growth both within and across neighboring countries. On the other hand, improvement in economic institutions moderates the growth-effect of FD. Financial institutions drive the within-country effect of FD on growth, while the spillover effect primarily stems from financial markets in neighboring countries. The robustness of the findings is confirmed through a battery of tests. In conclusion, this empirical study offers valuable insights into the complex relationship between financial development, institutions, and economic growth in emerging countries. By considering spatial interdependencies and the role of institutions, policymakers can devise effective strategies to harness the positive effects of financial development and create an enabling environment for sustained and inclusive economic growth.
    Keywords: Economic growth, spillover effects, financial development, institutional quality, spatial Durbin model.
    JEL: C31 O16 O43
    Date: 2023–10
  2. By: Bofinger, Peter; Geißendörfer, Lisa; Haas, Thomas; Mayer, Fabian
    Abstract: This study describes the Chinese growth model over the past 40 years. We show that China's growth model, with its dominant role of the banking system and "the banker", is a perfect illustration of the necessity and power of Schumpeter's "monetary analysis". This approach has allowed us to elaborate theoretically and empirically the uniqueness of the Chinese model. In our empirical analysis, we use a new dataset of Chinese provincial data to analyze the impact of the financial system, especially banks, on Chinese economic development. We also empirically assess the role of the financial system in Chinese industrial policy and provide case studies of the effects of industrial policy in specific sectors. Finally, we also discuss macroeconomic dimensions of the Chinese growth process and lessons that can be drawn from the Chinese experience for other countries.
    Keywords: Bank credit, Bank-led Growth, China, Economic development, Economic growth, Finance, Finance-growth nexus, Industrial Policy, Strategic Emerging Industries
    JEL: E
    Date: 2023
  3. By: Thanh Tam Nguyen-Huu (Métis Lab EM Normandie - EM Normandie - École de Management de Normandie); Ngoc‐sang Pham
    Abstract: The paper investigates the optimal strategy of a small open economy receiving FDI in an optimal growth context. We prove that no domestic firm can enter the new industry when the multinational enterprise's productivity or the fixed entry cost is high. Nevertheless, the host country's investment stock converges to a higher steady state than an economy without FDI. A domestic firm enters the new industry if its productivity is high enough. Moreover, the domestic firm can dominate or even eliminate its foreign counterpart.
    Keywords: Optimal growth, FDI spillovers, TFP, Fixed cost
    Date: 2023–10–18
  4. By: Thanh Tam Nguyen-Huu (Métis Lab EM Normandie - EM Normandie - École de Management de Normandie)
    Abstract: This research investigates the effects of FDI spillovers on the productivity of domestic firms by relying on unconditional quantile regression. Using panel data of Vietnamese enterprises over the period 2000–2012, we find evidence of positive spillovers for firms at the lower tails and negative spillovers for those at the upper tails of the productivity distribution. Time and the firm's legal status are other factors determining the effect of FDI spillovers. Notably, only low productivity state-own enterprises benefit from positive horizontal spillovers, but in the long run rather than in the short run.
    Keywords: FDI spillovers, Total factor productivity, Unconditional quantile regression
    Date: 2023–07–11
  5. By: Ana Hernández Kent; Lowell R. Ricketts
    Abstract: The second post in the four-part blog series, “The State of Economic Equity, ” looks at the connection between wealth equity and economic innovation.
    Keywords: economic equity
    Date: 2023–02–28
  6. By: Wade, Robert Hunter
    Keywords: Wiley deal
    JEL: J1 F3 G3
    Date: 2023–09–29
  7. By: YiLi Chien; Ashley Stewart
    Abstract: A look at the U.S. national debt since World War II reveals that economic growth and fiscal austerity (i.e., spending cuts and raising taxes) are two of the ways to reduce the debt burden.
    Keywords: national debt; fiscal austerity
    Date: 2023–04–06
  8. By: Baccaro, Lucio; Bremer, Björn; Neimanns, Erik
    Abstract: While research on the economic characteristics of growth models across countries is now extensive, research on the politics of growth models is still in its infancy, even though governments routinely pursue different strategies to generate growth. In particular, we lack evidence on (1) whether citizens have coherent preferences towards growth strategies, (2) what growth strategies citizens prefer, and (3) what shapes their preferences. We address these questions through a new survey of public opinion in Germany, Italy, Sweden, and the United Kingdom, which exemplify different models. We find that preferences for growth strategies are consistent with other policy preferences and are meaningfully structured by class and retirement status, and to a lesser extent by sector of employment. At the same time, differences across class and sector are small, and a large majority of respondents across countries favor wage-led growth. This suggests there is a "representation gap, " since this particular growth strategy is in crisis everywhere.
    Abstract: Es gibt mittlerweile umfassende Forschung zu den ökonomischen Eigenschaften von Wachstumsmodellen in verschiedenen Ländern. Politische Aspekte von Wachstumsmodellen sind dagegen bislang kaum erforscht, obgleich Regierungen unterschiedliche Wachstumsstrategien verfolgen, um Wirtschaftswachstum zu erzielen. Forschungslücken bestehen insbesondere zu den Fragen, 1) ob Bürgerinnen und Bürger kohärente Präferenzen zu Wachstumsstrategien haben, 2) welche Wachstumsstrategien sie befürworten und 3) welche Faktoren ihre Präferenzen beeinflussen. Wir adressieren diese Frage mithilfe einer neuen Meinungsumfrage für Deutschland, Italien, Schweden und das Vereinigte Königreich, welche unterschiedliche Wachstumsmodelle verkörpern. Unsere Ergebnisse zeigen, dass Präferenzen zu Wachstumsstrategien konsistent mit Präferenzen für andere Politikbereiche sind und dass die soziale Klassenzugehörigkeit und, in geringerem Maße, der Wirtschaftssektor des Beschäftigungsverhältnisses einen prägenden Einfluss auf diese Präferenzen haben. Zugleich sind aber die Unterschiede in den Präferenzen über Klassen und Sektoren hinweg relativ gering und es zeigt sich, dass eine große Mehrheit der Befragten über Länder hinweg lohngetriebenes Wachstum befürwortet. Dieser Befund suggeriert eine Repräsentationslücke, da sich diese Wachstumsstrategie überall in einem Krisenzustand befindet.
    Keywords: comparative capitalism, economic growth, growth models, macroeconomic policies, public opinion, unequal representation, makroökonomische Politik, öffentliche Meinung, ungleiche Repräsentation, vergleichende Kapitalismusforschung, Wachstumsmodelle, Wirtschaftswachstum
    Date: 2023
  9. By: Gnangnon, Sèna Kimm
    Abstract: The present analysis has investigated, at the country-level, the effect of Aid for Trade (AfT) flows on recipient countries' participation in Global Value Chains (GVCs), measured through countries' participation in forward and backward GVCs as well as their position in GVCs. The analysis has covered 80 countries over the period from 2002 to 2018, and used the within fixed effects, the random effect Mundlak approach and the "Quantile via Moments" approach. It has established several findings. On average, AfT interventions promote backward GVC participation, but do not affect forward GVC participation. Total AfT flows (including AfT flows for economic infrastructure, AfT for productive capacities and AfT for trade policy and regulation) enhance backward GVC participation across all quantiles, and the magnitude of this positive is larger for countries in lower quantiles (including the lowest one) than for those in upper quantiles. These resource inflows do not affect forward GVC participation by countries situated in upper quantiles, but do increase forward GVC participation by countries located in lower quantiles. They do not affect the GVC position of countries in lower quantiles, but encourage more engagement in downstream activities than in upstream activities for countries located in the 75th and 90th quantiles. The effects of the three components of AfT flows on countries' forward GVC participation and GVC position are mixed, and vary across quantiles. Finally, the analysis has shown that the effect of AfT interventions on countries' participation in GVCs does depend on the overall trade costs faced by countries, including their tariff and nontariff costs.
    Keywords: Aid for Trade flows, Participation in Global Value Chains
    JEL: F15 F35
    Date: 2023
  10. By: Gnangnon, Sèna Kimm
    Abstract: This article has investigated the effect of economic uncertainty on the remittances sent by migrants residing in developed countries to their home countries. The analysis builds on the economic uncertainty index developed by Ahir et al. (2018, 2019, 2022) that reflects the uncertainty related to economic and political events, regarding both near-term and long term concerns. It has revealed that economic uncertainty has deleterious effects on remittances outflows from developed countries, especially when it reaches high levels. This finding indicates that developing countries will suffer from reduced remittances inflows if the current fragmentation of the world were to become protracted, and result in higher barriers to the movement of capital and people.
    Keywords: Economic Uncertainty, Remittances Outflows, Developed Countries
    JEL: E30 F24
    Date: 2023
  11. By: Carlos Carvalho; Andrea Ferrero; Felipe Mazin; Fernanda Nechio
    Abstract: We explore the implications of demographic trends for the evolution of real interest rates across countries and over time. To that end, we develop a tractable three-country general equilibrium model with imperfect capital mobility and country-specific demographic trends. We calibrate the model to study how low-frequency movements in a country's real interest rate depend on its own and other countries' demographic factors, given a certain degree of financial integration. The more financially integrated a country is, the higher the sensitivity of its real interest rate to global developments is, and the less its own real rate determinants matter. We then estimate panel error correction models relating real interest rates to many of its possible determinants-demographics included-imposing some restrictions motivated by lessons from our structure model. Results corroborate the importance of accounting for time-varying financial integration, and show global factors and life expectancy are relevant determinants of real interest rates.
    Keywords: life expectancy; population growth; demographics; real interest rates; neutral rate; capital flows; secular stagnation
    JEL: E52 E58 J11 A11
    Date: 2023–10–24
  12. By: Lodge, David; Manu, Ana-Simona; Van Robays, Ine
    Abstract: Using daily data since 2017, we disentangle China-specific structural shocks driving Chinese financial markets and examine spillovers across global markets. The novelty of this paper consists of simultaneously identifying China shocks with shocksemanating from the United States and shocks to global risk sentiment – two major forces driving global financial markets – to ensure that China spillover estimates do not reflect common factors. Our results show that shocks originating in China havematerial impacts on global equity markets, although spillovers are much smaller than those following shocks in the United States, or those triggered by shifts in global risk sentiment. By contrast, shocks from China account for a significant proportion of variation in global commodity prices, more on a par with those of the United States. Nevertheless, spillovers from China can be significantly amplified in an environment of heightened global volatility, or when the shocks are large. JEL Classification: E44, E52, G15
    Keywords: China shocks, commodities, global financial markets, spillovers
    Date: 2023–11
  13. By: Yi Jiang; Shohei Shimizu
    Abstract: While economic theory explains the linkages among the financial markets of different countries, empirical studies mainly verify the linkages through Granger causality, without considering latent variables or instantaneous effects. Their findings are inconsistent regarding the existence of causal linkages among financial markets, which might be attributed to differences in the focused markets, data periods, and methods applied. Our study adopts causal discovery methods including VAR-LiNGAM and LPCMCI with domain knowledge to explore the linkages among financial markets in Japan and the United States (US) for the post Covid-19 pandemic period under divergent monetary policy directions. The VAR-LiNGAM results reveal that the previous day's US market influences the following day's Japanese market for both stocks and bonds, and the bond markets of the previous day impact the following day's foreign exchange (FX) market directly and the following day's Japanese stock market indirectly. The LPCMCI results indicate the existence of potential latent confounders. Our results demonstrate that VAR-LiNGAM uniquely identifies the directed acyclic graph (DAG), and thus provides informative insight into the causal relationship when the assumptions are considered valid. Our study contributes to a better understanding of the linkages among financial markets in the analyzed data period by supporting the existence of linkages between Japan and the US for the same financial markets and among FX, stock, and bond markets, thus highlighting the importance of leveraging causal discovery methods in the financial domain.
    Date: 2023–10
  14. By: Asri Yusrina; Akhmadi
    Keywords: CBMS, global financial crisis, Kota Pekalongan, impact
  15. By: Bakkar, Yassine; Machokoto, Michael
    Abstract: Utilizing data from 31, 336 firms across 69 countries over the period 2011-2017, we find evidence suggesting macroprudential policies have a significant negative impact on corporate debt, particularly long-term debt. We further find that macroprudential policies have heterogeneous effects, with a greater impact observed among firms facing binding credit constraints and high market competition, as well as those operating in countries with less developed institutions. These findings underscore the importance of institutional factors in determining the effectiveness of macroprudential policies.
    Keywords: Capital structure, debt maturity, macroprudential policies
    JEL: G20 G30 G32
    Date: 2023
  16. By: Hale, Galina; Lopez, Jose A
    Abstract: The need to monitor aggregate financial stability was made clear during the global financial crisis of 2008-2009, and, of course, the need to monitor individual financial firms from a microprudential standpoint remains. However, linkages between financial firms cannot be observed or measured easily. In this paper, we propose a procedure that generates measures of connectedness between individual firms and for the system as a whole based on information observed only at the firm level; i.e., no explicit linkages are observed. We show how bank outcome variables of interest can be decomposed, including with mixed-frequency models, for how network analysis to measure connectedness across firms. We construct two such measures: one based on a decomposition of bank stock returns, the other based on a decomposition of their quarterly return on assets. Network analysis of these decompositions produces measures that could be of use in financial stability monitoring as well as the analysis of individual firms' linkages.
    Keywords: Economics, Banking, Finance and Investment, Applied Economics, Commerce, Management, Tourism and Services
    Date: 2023–10–29
  17. By: Jon Danielsson; Andreas Uthemann
    Abstract: Artificial intelligence (AI) is making rapid inroads in financial regulations. It will benefit micro regulations, concerned with issues like consumer protection and routine banking regulations, because of ample data, short time horizons, clear objectives, and repeated decisions that leave plenty of data for AI to train on. It is different with macro regulations focused on the stability of the entire financial system. Here, infrequent and mostly unique events frustrate AI learning. Distributed human decision making in times of extreme stress has strong advantages over centralised AI decisions, which, coupled with the catastrophic cost of mistakes, raises questions about AI used in macro regulations. However, AI will likely become widely used by stealth as it takes over increasingly high level advice and decisions, driven by significant cost efficiencies, robustness and accuracy compared to human regulators. We propose six criteria against which to judge the suitability of AI use by the private sector and financial regulation.
    Date: 2023–10

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