nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2023‒12‒04
twenty-one papers chosen by
Georg Man,

  1. (Endogenous) Growth Slowdowns By Miguel Leon-Ledesma; Katsuyuki Shibayama
  2. State-Dependent Effects of Loan-to-Value Shocks By Vivek Sharma
  3. A comment on "The Effects of Banking Competition on Growth and Financial Stability" By Calef, Andrea; Chzhen, Sya In; Mandas, Marco; Motoki, Fabio
  4. Trade Uncertainty and U.S. Bank Lending By Ricardo Correa; Julian di Giovanni; Linda S. Goldberg; Camelia Minoiu
  5. Financing Modes and Lender Monitoring By Arturo Anton; Kaniska Dam; Rajdeep Sengupta
  6. Effects of bank capital requirements on lending by banks and non-bank financial institutions By Bednarek, Peter; Briukhova, Olga; Ongena, Steven; von Westernhagen, Natalja
  7. Analyzing the Effects of Openness and Political Variables on FDI in Indonesia By Niramaya Laksmitaningtyas; Wisnu Setiadi Nugroho
  8. The Influence of Land Registration on Regional Income per Capita in Indonesia By Aiman Akbar; Heni Wahyuni
  9. Optimal taxation and the Domar-Musgrave effect By Brendan K. Beare; Alexis Akira Toda
  10. Less debt, more schooling? Evidence from cross-country micro data By Marin Ferry; Marine de Talancé; Miguel Niño-Zarazúa
  11. Language and Private Debt Renegotiation By Christophe J. Godlewski
  12. Bubble Economics By Tomohiro Hirano; Alexis Akira Toda
  13. The Effect of the Countercyclical Capital Buffer on the Stability of the Housing Market By Julia Braun
  14. Composition of Real Estate Values: Analyzing Time-Varying Credit and Market Data Using Neural Networks By Hendrik Jenett
  15. Profitability, valuation and resilience of global banks - a tight link By John Caparusso; Leonardo Ulf Lewrick; Nikola Tarashev
  16. Size and Survival of Entrants to Retail Banking By David A. Benson; Vitaly M. Bord; Aaron Garner; Charles Taragin
  17. Strategic Behavior between a Bank and A Microfinance Institution: The Role of Psychological Distance and Education Level By François Fall; Thanh Tam Nguyen-Huu
  18. Externalities and market failures of cryptocurrencies By Hokkanen, Topi
  19. What we know on Central Bank Digital Currencies (so far) By Shalva Mkhatrishvili; Wim Boonstra
  20. Deposit insurance pricing and monetary policy transmission By Steve BILLON; Natalia ANDRIES
  21. Power Relations and Monetary Ideas: The Case of the Gold-Exchange Standard in India By Ghislain Deleplace

  1. By: Miguel Leon-Ledesma; Katsuyuki Shibayama
    Abstract: We develop a model where temporary non-technology shocks can lead to permanent changes in the rate of growth of total factor productivity (TFP). The key ingredient of the model is a matching processes between basic researchers, product developers, and the stock of knowledge of the economy. In this context, search externalities generate vicious and virtuous cycles in R&D. The model has a unique equilibrium path but multiple balanced growth paths (BGPs) with different growth rates. After a deep or long-lived shock, the economy can transit between these BGPs, generating 'super-hysteresis' in TFP. We calibrate the model in the context of the Japanese growth slowdown and show that, quantitatively, it can explain well the TFP growth decline after the financial crisis in the 1990s. The simultaneous occurrence of demographic shocks and a persistent but temporary financial crisis gave rise to a 'wretched coincidence' resulting in the growth slowdown.
    Keywords: Growth slowdowns; permanent effects of recessions; research and development; super-hysteresis
    JEL: O40 O49 E32
    Date: 2023–11
  2. By: Vivek Sharma
    Abstract: This paper presents a Two-Agent New Keynesian (TANK) model with collateral- constrained borrowers and a time-varying shock to loan-to-value (LTV) ratios. A temporary tightening in lending standards in this model leads to a sizable drop in macroeconomic aggregates and significant macroeconomic fluctuations. The analysis shows that effects of shocks to LTV ratios are highly non-linear and state-dependent in the sense that amplification of shocks depends crucially on steady-state LTV ratios. Shocks when LTV ratios are already high lead to effects which are substantially stronger than when the steady-state LTV ratios are comparatively lower. The results in this paper also show that permanent LTV shocks lead to permanent decline in housing prices – a 10 percentage point decline in steady-state LTV ratio from 0.95 results in more than 0.3% decline in housing prices. A novel finding in this paper is that a permanent tightening in lending standards leads to a permanent decline in wages. Additionally, other shocks such as TFP shocks, housing demand shocks and labor supply shocks also show clear state dependence and have highly persistent effects.
    Keywords: Loan-to-Value (LTV) Shocks, Housing Price, Macroeconomic Fluctuations
    JEL: E32 E44
    Date: 2023–11
  3. By: Calef, Andrea; Chzhen, Sya In; Mandas, Marco; Motoki, Fabio
    Abstract: Carlson et al. (2022) examine the causal impact of banking competition by investigating a unique circumstance in the National Banking Era of the nineteenth century in the US, where a discontinuity in bank capital requirements occurred. On the one hand, their findings suggest that banks operating in markets with fewer barriers to entry tend to increase their lending activities, promoting real economic growth. On the other hand, banks in less restricted markets also exhibit a higher propensity for risk-taking, posing risks to financial stability. First, we fully reproduce the paper's outcomes apart from a minor discrepancy in the estimate of Table 9 attributed to issues in the provided codes. Second, we test the robustness of the results by (i) changing the ranges used to select the sample of cities included in the analysis, (ii) adopting different options to address outliers' potential issues and (iii) introducing additional control variables. We observe that the estimation results remain mostly consistent when subjecting them to various robustness checks. However, it is worth highlighting that the results can be partially influenced by the criteria used to select the sample of cities and the inclusion of control variables.
    Date: 2023
  4. By: Ricardo Correa; Julian di Giovanni; Linda S. Goldberg; Camelia Minoiu
    Abstract: This paper uses U.S. loan-level credit register data and the 2018–2019 Trade War to test for the effects of international trade uncertainty on domestic credit supply. We exploit cross-sectional heterogeneity in banks’ ex-ante exposure to trade uncertainty and find that an increase in trade uncertainty is associated with a contraction in bank lending to all firms irrespective of the uncertainty that the firms face. This baseline result holds for lending at the intensive and extensive margins. We document two channels underlying the estimated credit supply effect: a wait-and-see channel by which exposed banks assess their borrowers as riskier and reduce the maturity of their loans, and a financial frictions channel by which exposed banks facing relatively higher balance sheet constraints contract lending more. The decline in credit supply has real effects: firms that borrow from more exposed banks experience lower debt growth and investment rates. These effects are stronger for firms that are more reliant on bank finance.
    Keywords: trade uncertainty; bank loans; trade finance; global value chains; trade war
    JEL: F34 F42 G21
    Date: 2023–11–01
  5. By: Arturo Anton; Kaniska Dam; Rajdeep Sengupta
    Abstract: Shadow banks are widely believed to be a creation of financial regulation and regulatory arbitrage. We show that bank and nonbank modes of financing can emerge endogenously in a simple borrower-lender framework absent regulatory arbitrage or policy interventions. The coexistence of banks and shadow banks in the absence of regulatory intervention speaks to the importance of shadow banks as alternative modes of financial intermediation. We explore the scope of regulation in determining the size and location of shadow banking, as opposed to how regulation can be designed to curtail shadow bank activities.
    Keywords: banking and finance; monetary policy; shadow banks; regulatory arbitrage; financial regulations
    JEL: D82 G21 G28 G32 L25
    Date: 2023–11–07
  6. By: Bednarek, Peter; Briukhova, Olga; Ongena, Steven; von Westernhagen, Natalja
    Abstract: What is the impact of a sudden and sizeable increase in bank capital requirements on the lending activity by directly affected banks and by non-affected non-bank financial institutions (NBFIs)? To answer this question, we apply a difference-in-differences methodology around the capital exercise by the European Banking Authority (EBA) in 2011 with German credit register data. We find that insurance companies, financial enterprises, and factoring companies - but not leasing companies - and Non-EBA banks expand their corporate lending relative to EBA banks. In particular, NBFIs use the opportunity to expand their credit activities, in riskier and more competitive borrower segments, but NBFIs do not seem to rely on increased bank funding to finance this expansion.
    Keywords: non-bank financial intermediation, bank capital requirements, EBA capital exercise
    JEL: E50 G21 G23 G28 C33
    Date: 2023
  7. By: Niramaya Laksmitaningtyas (Central Bank of Indonesia, Bangka Belitung Province Representatative Office); Wisnu Setiadi Nugroho (Department of Economics, Faculty of Economics and Business, Universitas Gadjah Mada)
    Abstract: To recognize the importance of investment flows as one of the components of development, ASEAN member countries have created the ASEAN Economic Community (AEC) 2015 blueprint as guidelines for setting up a free and open investment regime in ASEAN. The enactment of AEC makes the issue of foreign direct investment (FDI) in Indonesia more attractive. However, an increase in FDI is followed by uneven absorption of FDI in various regions of Indonesia. The implementation of regional autonomy, which gives more authority to governors, allegedly influence investors’ decision to invest. This study aims to determine whether the disclosure of openness and the presidential election have an influence on FDI inflows across 30 provinces of Indonesia. This study employs panel data regression with a fixed effect model. The findings suggest that the level of openness and political variables contribute to the absorption rate of FDI inflows in the regions.
    Keywords: Foreign Direct Investment, Openness, Political Variables
    JEL: C5 O1 R5
    Date: 2023–03
  8. By: Aiman Akbar (Master of Economics of Development Study Program, Faculty of Economics and Business, Universitas Gadjah Mada); Heni Wahyuni (Department of Economics, Faculty of Economics and Business, Universitas Gadjah Mada)
    Abstract: This study was conducted to analyze and measure the impact of land registration on economic growth in provinces in Indonesia. The study suggests that there is a possibility of unobserved heterogeneity that may influence the outcome variable, namely geographical conditions, which include land area in each province and the number of land areas that have not been certified. Further information regarding these two factors still needs to be sought. Using panel data from 34 provinces in Indonesia for ten years (2010-2019) and a fixed effect panel method to overcome the unobserved heterogeneity bias, this study found that a 1 percent increase of land registration increases a province’s gross domestic product per capita by a significant 0.12 percent, after controlling for other factors. These findings align with previous studies that suggest that land registration influences society's welfare through increased access to financial credit.
    Keywords: land registration, per capita gross domestic product, panel data method, fixed effect model, unobserved heterogeneity
    JEL: O13 Q24 C1
    Date: 2023–03
  9. By: Brendan K. Beare; Alexis Akira Toda
    Abstract: This article concerns the optimal choice of flat taxes on labor and capital income, and on consumption, in a tractable economic model. Agents manage a portfolio of bonds and physical capital while subject to idiosyncratic investment risk and random mortality. We identify the tax rates which maximize welfare in stationary equilibrium while preserving tax revenue, finding that a very large increase in welfare can be achieved by only taxing capital income and consumption. The optimal rate of capital income taxation is zero if the natural borrowing constraint is strictly binding on entrepreneurs, but may otherwise be positive and potentially large. The Domar-Musgrave effect, whereby capital income taxation with full offset provisions encourages risky investment through loss sharing, explains cases where it is optimal to tax capital income. In further analysis we study the dynamic response to the substitution of consumption taxation for labor income taxation. We find that consumption immediately drops before rising rapidly to the new stationary equilibrium, which is higher on average than initial consumption for workers but lower for entrepreneurs.
    Keywords: consumption tax; income tax; optimal taxation
    Date: 2023–11
  10. By: Marin Ferry (ERUDITE - Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12 - Université Gustave Eiffel, LEDA-DIAL - Développement, Institutions et Modialisation - LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique); Marine de Talancé (ERUDITE - Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12 - Université Gustave Eiffel, LEDA-DIAL - Développement, Institutions et Modialisation - LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique); Miguel Niño-Zarazúa
    Abstract: Soaring levels of public debt in low-income countries are fuelling concerns about their ability to achieve the Sustainable Development Goals, such as free access to primary education. In the late 1990s and 2000s, international financial institutions introduced a series of debt relief initiatives aimed to restore debt sustainability among highly indebted countries. This study examines the impact of these initiatives on primary school attendance. We exploit the temporal variation in the implementation of these policies, in combination with individual-level data from 177 Demographic and Health Surveys covering more than 1.5 million school-age children from 44 low-income countries to implement difference-in-differences and spatial difference-in-discontinuity estimators. Results suggest that debt relief initiatives, by freeing up additional public resources, have significantly contributed to increasing primary school attendance in heavily indebted countries. Impact heterogeneity analysis also shows that debt relief has been effective at reducing wealth-based, intergenerational, religious, ethnic and spatial inequalities in education. Our results provide robust evidence to assert that debt relief, in combination with other financing sources, can contribute to improving educational outcomes in highly indebted poor countries.
    Keywords: Debt relief, Education, Financing for development
    Date: 2022–03
  11. By: Christophe J. Godlewski (LARGE - Laboratoire de Recherche en Gestion et Economie - UNISTRA - Université de Strasbourg)
    Date: 2023–10–20
  12. By: Tomohiro Hirano (Royal Holloway, University of London; Centre for Macroeconomics (CFM); Canon Institute for Global Studies); Alexis Akira Toda (University of California San Diego)
    Abstract: This article provides a self-contained overview of the theory of rational asset price bubbles. We cover topics from basic definitions, properties, and classical results to frontier research, with an emphasis on bubbles attached to real assets such as stocks, housing, and land. The main message is that bubbles attached to real assets are fundamentally nonstationary phenomena related to unbalanced growth. We present a bare-bones model and draw three new insights: (i) the emergence of asset price bubbles is a necessity, instead of a possibility; (ii) asset pricing implications are markedly different between balanced growth of stationary nature and unbalanced growth of nonstationary nature; and (iii) asset price bubbles occur within larger historical trends involving shifts in industrial structure driven by technological innovation, including the transition from the Malthusian economy to the modern economy.
    Keywords: bubbles attached to real assets, necessity versus possibility, nonstationarity, technological progress, unbalanced growth
    JEL: D53 E44 G12 O16
    Date: 2023–11
  13. By: Julia Braun
    Abstract: After the great turmoil of the latest financial crisis, the criticism of the regulatory frameworks became increasingly stronger. The rules that banks needed to comply with are presumed to be procyclical and unable to prevent and mitigate the extent of strong financial and economic cycles. As a result, Basel III introduced a set of macroprudential tools to overcome these regulatory shortfalls. One tool that strives to counteract the issue of procyclicality is the countercyclical capital buffer (CCyB). This paper introduces a heterogeneous agent-based model that investigates the implication of the new regulatory measure. We develop a housing and a financial market where economic agents trade residential property that is financed by financial institutions. To examine the macroeconomic performance of the CCyB, we evaluate the dynamics of key stability indicators of the housing and the financial market under four different market conditions: in an undisturbed market and in times of three different structural shocks. Computational experiments reveal that the CCyB is effective in stabilizing the housing and the financial market in all market settings. But the extent of the stabilizing effect varies according to market conditions. In the shock scenarios, the CCyB performs better in dampening market fluctuations and increasing banking soundness. Although the new macroprudential tool helps to mitigate economic fluctuations and to stabilize market conditions in the aftermath of a crisis, it is not able to prevent any of the crises tested.
    Keywords: Agent-Based Model; Basel III; Countercyclical capital buffer; Housing market stability
    JEL: R3
    Date: 2023–01–01
  14. By: Hendrik Jenett
    Abstract: This study analyses the time-varying composition of real estate values by using an artificial neural network approach to identify whether and how certain indicators’ impacts on property values fluctuate over time. Therefore, cross-sectional property and macroeconomic data from the United States is applied, spanning a period from 1999 to 2021. In times of normal economic activity, property values are made up of two-thirds of physical attributes and one-third of the macroeconomic environment. During crises periods and times of high uncertainty, like the Global Financial Crisis, the share of the economies impact increases by roughly 5%, meaning that sudden economic changes have a higher impact on property values during crises periods versus normal times. However, these changes in the composition of real estate values varies even from one crisis to another, which confirms the dynamic relationship between the US macroeconomy and the housing market. Moreover, this study provides evidence that neural networks are capable of detecting non-linearities in property values especially during times of financial volatility.
    Keywords: Artificial Neural Network; Explainable Artificial Intelligence; Macroeconomy; Valuation
    JEL: R3
    Date: 2023–01–01
  15. By: John Caparusso; Leonardo Ulf Lewrick; Nikola Tarashev
    Abstract: We derive a tight link between the profitability, valuation and resilience of global systemically important banks (G-SIBs). We measure profitability using return on equity (ROE), valuation with the price-to-book ratio and resilience through the capital headroom above regulatory requirements ("management buffer"). We find that price-to-book ratios increase in analysts' ROE forecasts and in banks' management buffers. We also document that low-valued G-SIBs maintain management buffers by reducing risk-weighted assets and cater to investors by paying out their entire profits. However, the resilience of low-valued G-SIBs could prove precarious as they frequently incur substantial losses that trigger significant negative stock-market reactions.
    Keywords: financial stability, price-to-book ratio, banking regulation
    JEL: G21 G28 C25
    Date: 2023–11
  16. By: David A. Benson; Vitaly M. Bord; Aaron Garner; Charles Taragin
    Abstract: The establishment of new banks and branches is especially important in the banking sector. Many consumers still use physical bank branches to access banking services (Annenberg et al, 2018; Jiang, Yu, and Zhang, 2023).
    Date: 2023–09–01
  17. By: François Fall; Thanh Tam Nguyen-Huu (Métis Lab EM Normandie - EM Normandie - École de Management de Normandie)
    Abstract: In Hotelling's fundamental model (1929), the geographical distance and high transportation costs grant firms present in a market a certain power over local buyers in their neighborhoods. Starting from his model, this study shows that in the competition between a bank and a microfinance institution (MFI), geographical distance and transportation costs alone are no longer sufficient for attributing market power to the firms present. In fact, the introduction of psychological distanceand education level in the model alter the Hotelling's results. Psychological proximity (trust) and the educational level of the client play determinant roles in dividing the credit market between a bank and an MFI.
    Keywords: C72, D43, spatial competition bank microfinance market power G21 O17 C72 D43, spatial competition, bank, microfinance, market power G21, O17
    Date: 2022–09
  18. By: Hokkanen, Topi
    Abstract: This paper discusses the externalities and market failures in cryptocurrency markets. In particular, I highlight the significant environmental externalities created by Proof-of-Work (PoW) cryptocurrencies, the most prominent of which is Bitcoin. The main goals of this paper are to quantify these externalities, illustrate the mechanisms by which they arise, and finally discuss feasible mechanisms to regulate them. Latest estimates show that Bitcoin mining consumes roughly the same amount of electricity as Argentina or Sweden, with commensurate carbon dioxide emissions. The two main factors driving these externalities are Bitcoin's electricity-intensive consensus protocol and Bitcoin prices, which directly influence mining incentives. Efficient supply-side regulation of these externalities is hamstrung by the internationally mobile nature of Bitcoin miners, creating a risk of carbon leakage and regulatory arbitrage in the absence of a global carbon tax. Moreover, the cryptocurrency market and exchanges themselves are to a high degree unregulated and opaque. This exacerbates the situation since cryptocurrency prices are directly linked to mining incentives. Instead of regulating the miners i.e. the supply side of the market, as the literature has broadly suggested, I recommend focusing on regulating the demand side, the exchanges and marketplaces, as a reasonable first step in the comprehensive regulation of cryptocurrencies. Cross-border coordination is likely to be a crucial aspect in mitigating the environmental externalities of cryptocurrencies.
    Keywords: forecasting, investment, Tobin's Q, discrete wavelets, bitcoin, cryptocurrency, externalities, crypto mining
    JEL: D62 E42 H23 Q54 Q58
    Date: 2023
  19. By: Shalva Mkhatrishvili (Head of Macroeconomics and Statistics Department, National Bank of Georgia); Wim Boonstra (Special Economic Advisor at Rabobank, Endowed Professor at Vrije Universiteit Amsterdam)
    Abstract: A central bank digital currency (CBDC) is a topic that is only going to gain importance as a couple of nations have recently went line with a retail CBDC system, dozens of them are piloting it and there are even more who actively research the topic. In the process, many studies have already identified several important potential benefits of a CBDC as well as potential risks and costs. As is already well understood, a CBDC introduction can have a profound impact on all three monetary policy, financial stability and payment systems. This paper, trying to be a go-to starting point for those just exposed to the topic, thoroughly reviews all the benefits and risks/costs associated with a CBDC in the current literature as well as underlines key areas of this topic that need more research. In addition, we try to lay some ground for systematizing three-dimensional linkages between benefits, costs/risks and design choices by (i) discussing probable design choices needed for each item in the list of benefits and costs/risks to-be-mitigated and (ii) overviewing what other benefits and cost/risk-mitigation aims these design choices may be in conflict with.
    Keywords: Central bank digital currencies, monetary policy, financial stability, payment systems
    JEL: E42 E50 G20
    Date: 2022–09
  20. By: Steve BILLON (LaRGE Research Center, Université de Strasbourg); Natalia ANDRIES (ERUDITE, Université Paris-Est)
    Abstract: This paper provides a theoretical model that examines the effect of deposit insurance pricing on monetary policy transmission. An increase in the key policy rate benefits bank deposits when the deposit insurance premium is lower than the fair value. This leads firms to withdraw from the capital market and boosts their demand for bank lending. Thus, a lower than the fair value deposit insurance premium strengthens the monetary policy transmission on bond returns and bank interest rates. In contrast, a fair valuation of risks ensures the neutrality of the deposit insurance on the interest rate pass-through.
    Keywords: Deposit insurance, Monetary policy transmission, Bank imperfect competition
    JEL: E52 G21 G22
    Date: 2023
  21. By: Ghislain Deleplace (LED - Laboratoire d'Economie Dionysien - UP8 - Université Paris 8 Vincennes-Saint-Denis)
    Abstract: For de Cecco power relations are central in the working of the pre-WWI international gold standard. He gives an illustration of that in the chapter of Money and Empire devoted to the relationship between Britain and India, where the gold-exchange standard is presented as a way for Britain to get hold of India's trade surplus with the rest of the world in order to balance her own international accounts. On the contrary, Keynes praised the Indian gold-exchange standard as a system which not only allowed stabilising India's relations with the outside world but also pointed the way to a better-regulated monetary system for any country, in the line of Ricardo's Ingot Plan nearly one century older. The same notion may thus be seen alternatively as a powerful tool of domination or as a good practical idea. The paper describes how Lindsay adapted Ricardo's scheme to India and contrasts de Cecco's and Keynes's interpretations of the Indian gold-exchange standard, before suggesting that monetary ideas can prevail in their own right when they are theoretically well-founded and practically feasible, independently of the power relations they may reflect.
    Keywords: Gold exchange Standard, India, De Cecco, Keynes John M, Lindsay, Ricardo David
    Date: 2023

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