nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2024‒01‒08
29 papers chosen by
Georg Man,

  1. Foreign Capital and Economic Growth: Evidence from Bangladesh By Ummya Salma; Md. Fazlul Huq Khan; Md. Masum Billah
  2. Nexus between Financial Inclusion and Economic Activity: A Study about Traditional and Non-Traditional Financial Service Indicators Determining Financial Outreach By Gerth, Florian
  3. The Impact of COVID-19 on the Relationship between Foreign Direct Investment and Sustainable Development By Waliu O. Shittu; Gazi M. Hassan; Frank G. Scrimgeour
  4. Threshold effect of banking on income inequalities in developing countries: the importance of mobile money By Boniface Ngah EPO; Jules Médard NANA DJOMO; Mark Wiykiynyuy TANGWA; Éric Dieudonné OBAMA OBAMA
  5. The financial origins of regional inequality By Anne Beck; Sebastian Doerr
  6. The Future of Official Aid Flows By Charles Kenny; Zack Gehan
  7. Collateral Shocks: A Dominant Source of U.S. Business Cycles? By Mamoon Kader; Hashmat Khan
  8. Macroeconomic Announcement Premium By Hengjie Ai; Ravi Bansal; Hongye Guo
  9. Neoclassical Growth in an Interdependent World By Benny Kleinman; Ernest Liu; Stephen J. Redding; Motohiro Yogo
  10. Dollar Trinity and the Global Financial Cycle By Georgios Georgiadis; Gernot J. Müller; Ben Schumann
  11. Global Risk and the Dollar By Georgios Georgiadis; Gernot J. Müller; Ben Schumann
  12. A comment on Xu (2022). Reshaping Global Trade: The Immediate and Long-Term Effects of Bank Failures By Bérard, Guillaume; Freitas, Dimitria; Verma, Priyam
  13. Hysteresis From Monetary Policy Mistakes: How Bad Could It Be? By Dávila-Ospina, Andrés O.
  14. Firm heterogeneity, capital misallocation and optimal monetary policy By Beatriz González; Galo Nuño Barrau; Dominik Thaler; Silvia Albrizio
  15. The Impact of Monetary Policy on Private Investment in Morocco: An Analysis Using a VECM Model By Khadija Essalhi; Salah Eddine
  16. Credit Condition, Inflation and Unemployment By Chao Gu; Janet Hua Jiang; Liang Wang
  17. Is Deflation Cause For Panic? Evidence from the National Banking Era* By Casey Pender
  18. Does Financial or Trade Integration Cause Instability? Evidence from Emerging and ASEAN Economies By Rakesh Padhan; K.P. Prabheesh
  19. Risky news and credit market sentiment By Paul Labonne; Leif Anders Thorsrud
  20. A monthly financial conditions index for New Zealand By Miguel C. Herculano
  21. Financial Systemic Risk behind Artificial Intelligence:Evidence from China By Jingyi Tian; Jun Nagayasu
  22. Bank Resolution, Deposit Insurance, and Fragility By Alkis Georgiadis-Harris; Maxi Guennewig
  23. Competing narratives in the Swedish 1929 deposit loss-debate By Wendschlag, Mikael
  24. Sovereign Debt Tolerance with Potentially Permanent Costs of Default By Marcos Chamon; Francisco Roldán
  25. Pasinetti, Debt Sustainability and (Green) Structural Change at the Time of Global Finance: An Emerging and Developing Countries’ Perspective By Botta, Alberto; Spinola, Danilo; Yajima, Giuliano; Porcile, Gabriel
  26. Income Inequality and External Wealth of Nations By Montes Rojas Gabriel; Carrera Jorge; Panigo Demián; Solla Mariquena; Toledo Fernando
  27. The rise and fall of median wealth in the U.S.: A birth-cohort story By Jäger, Philipp; Schacht, Philip
  28. Capital Markets, Temporary Migration and Entrepreneurship: Evidence from Bangladesh By Laurent Bossavie; Joseph-Simon Görlach; Çağlar Özden; He Wang
  29. Patterns of Cross-Border Venture Capital Flows in Europe By Pierfederico Asdrubali

  1. By: Ummya Salma; Md. Fazlul Huq Khan; Md. Masum Billah
    Abstract: This study aims to examine the relationship between Foreign Direct Investment (FDI), personal remittances received, and official development assistance (ODA) in the economic growth of Bangladesh. The study utilizes time series data on Bangladesh from 1976 to 2021. Additionally, this research contributes to the existing literature by introducing the Foreign Capital Depthless Index (FCDI) and exploring its impact on Bangladesh's economic growth. The results of the Vector Error Correction Model (VECM) suggest that the economic growth of Bangladesh depends on FDI, remittances, and aid in the long run. However, these variables do not exhibit a causal relationship with GDP in the short run. The relationship between FCDI and economic growth is positive in the long run. Nevertheless, the presence of these three variables has a more significant impact on the economic growth of Bangladesh
    Date: 2023–12
  2. By: Gerth, Florian
    Abstract: This paper empirically analyzes the link between financial inclusion (SDG 8.10) and economic activity. Instead of following the past literature and approximating financial inclusion by variables only capturing traditional financial services, it takes into account non-traditional financial services including mobile money and non-branch retail agent outlets. With the help of the Normalized Inverse of the Euclidian Distance and a one-way fixed effects panel model, this pa-per documents empirically robust results about the positive link between financial inclusion and the level economic activity. In addition, a break between poverty and financial inclusion is established by regressing the calculated index of financial inclusion on demographic, socio-economic and variables concerning the health and depth of the financial sector. The implications of this finding are two folds. First, it highlights the improvements of low, lower-middle and upper-middle income countries in terms of outreach to financial services in the last decade. Second, it shows that the level of education and the soundness and depth of the local financial sector are important in reaching higher levels of financial inclusion. Overall, our results emphasize the importance of targeted policies to increase the accessibility, availability and usage of the financial sector in attaining sustainable and long-lasting economic prosperity.
    Keywords: financial inclusion; non-traditional financial services; economic development; Financial Access Survey (FAS)
    JEL: C23 E13 E44 G20 O16
    Date: 2023
  3. By: Waliu O. Shittu (University of Waikato); Gazi M. Hassan (University of Waikato); Frank G. Scrimgeour (University of Waikato)
    Abstract: This study measures the role of COVID-19 on the nexus between FDI and sustainable development in SSA. The empirical analysis relies on a panel data from 38 SSA countries, covering 2000 – 2022. The findings suggest that during this period, FDI minimally effected economic growth and development. Specifically, FDI does not have a significant impact on sustainable development in the linear estimates, and a negative effect in the non-linear estimates. When the effect of FDI is further analysed on economic growth, the environment, and human development, the estimates remain consistent. While COVID-19 reduces the levels of economic growth, the environment, human development, and sustainable development, the moderating effect shows that FDI reduces the negative effect of COVID-19 on economic growth and sustainable development. Finally, it is observed that rule of law promotes sustainable development; financial development does not exert a significant connection with sustainable development, and negatively affects economic growth and human development, yet the interaction effects of economic growth and financial development on sustainable development is statistically insignificant. Appropriate policies are discussed.
    Keywords: foreign direct investment;sustainable development;corona virus;instrumental variables regression
    JEL: C26 F21 Q01
    Date: 2023–12–18
  4. By: Boniface Ngah EPO (University of Yaoundé II, Cameroon); Jules Médard NANA DJOMO (University of Yaoundé II, Cameroon); Mark Wiykiynyuy TANGWA (University of Yaoundé II, Cameroon); Éric Dieudonné OBAMA OBAMA (University of Yaoundé II, Cameroon)
    Abstract: This study investigates the role that of mobile money on the effect of banking on income inequalities on a panel of 105 developing countries over a period from 1990-2019. We use the system GMMs estimator to examine this relationship for income inequality before as well as after taxes and transfers. Results show that increased in banking contributes to the upsurge in income inequalities in developing countries. Likewise, an increase in bank borrowing also contributes to an increase in income inequality in developing countries. These results were robust to spatial analysis for Sub-Saharan Africa and Latin America and the Caribbean. Policy enactment wise, developing countries should ameliorate mobile money services and access points to significantly reduce inequality.
    Keywords: Mobile banking; developing countries; poverty; inequality
    JEL: G20 O40 I10 I20 I32
    Date: 2023–01
  5. By: Anne Beck; Sebastian Doerr
    Abstract: An increasing number of policies addresses spatial inequality, which is believed to lie at the heart of economic and social cleavages, including entrenched poverty, deaths of despair, and political polarization. Yet little is known about the origins of the gap between prospering urban and "left-behind" rural areas that has emerged since the 1980s. We provide new evidence on the role of banking deregulation in explaining this rural-urban divergence in incomes. In particular, we show that the income gap widened following the removal of geographic restrictions on banking. While deregulation promoted an overall increase in incomes, the increase was significantly larger in urban counties. We show that this is due to increased competition in the banking industry in cities post deregulation. Competition benefited financially constrained small and young firms, thereby boosting employment and incomes in urban areas. Our findings inform the debate on regional inequality and the design of place-based policies.
    Keywords: banking deregulation, credit supply, income inequality, regional inequality
    JEL: G21 R10
    Date: 2023–11
  6. By: Charles Kenny (Center for Global Development); Zack Gehan (Center for Global Development)
    Abstract: In absolute dollar amounts official development assistance (ODA) reached an all-time high in 2021. But as a percentage of recipient country GDP, aid (and broader public investment) flows have been declining for some time. This paper looks at the scale of ODA and official financial flows (including multilateral flows) in comparison to donor and recipient GDP, and suggests some scenarios for the range of flows going forward, as well as examining the potential share of resources taken by climate finance. It concludes that there is a non-trivial chance that ODA for non-humanitarian and climate finance falls in absolute terms over the coming years and that aid becomes increasingly focused on richer countries. In terms of increasing aid available, the most promising strategy for bilateral ODA flows may be to increase the generosity of traditional donors but for broader finance for international development, and particularly multilateral finance, increasing the range of donors may have a larger payoff. This will be necessary, because demand for multilateral finance is likely to rise.
    Date: 2023–11–02
  7. By: Mamoon Kader (Department of Economics, Carleton University); Hashmat Khan (Department of Economics, Carleton University)
    Abstract: Are collateral shocks the dominant source of U.S. business cycles? We show that the evidence is not strong enough to conclude that they are. Collateral shocks, as described in Becard and Gauthier (2022), which tighten bank lending standards for both households and firms, account for only 7% of the cyclical variation in output, and 1% of consumption, over the period from 1985:Q1 to 2009:Q3. During this time, lending standards for both households and firms were most closely aligned in the data. Additionally, we observe a significant dampening in the comovement between consumption and output. Through counterfactual exercises, we isolate the role of estimated collateral shocks and model parameters to explain our findings. Our result suggests that identifying a quantitatively significant financial shock, which drives the U.S. business cycle and also accounts for consumption dynamics, remains a challenging task.
    Keywords: collateral shocks, bank lending standards, outputs, consumption
    JEL: E21 E23 E24 E32 E44
    Date: 2023–12–22
  8. By: Hengjie Ai; Ravi Bansal; Hongye Guo
    Abstract: The paper reviews the evidence on the macroeconomic announcement premium and its implications on equilibrium asset pricing models. Empirically, a large fraction of the equity market risk premium is realized on a small number of trading days with significant macroeconomic announcements. We review the literature that demonstrates that the existence of the macroeconomic announcement premium implies that investors' preferences must satisfy generalized risk sensitivity. We show how this conclusion generalizes to environments with heterogeneous investors and demonstrate how incorporating generalized risk sensitivity affects economic analysis in dynamic setups with uncertainty.
    JEL: A0 E0 E37 E40
    Date: 2023–11
  9. By: Benny Kleinman; Ernest Liu; Stephen J. Redding; Motohiro Yogo
    Abstract: We generalize the closed-economy neoclassical growth model (CNGM) to allow for costly goods trade and capital flows with imperfect substitutability between countries. We develop a tractable, multi-country, quantitative model that matches key features of the observed data (e.g., gravity equations for trade and capital holdings) and is well suited for analyzing counterfactual policies that affect both goods and capital market integration (e.g., U.S.-China decoupling). We show that goods and capital market integration interact in non-trivial ways to shape impulse responses to counterfactual changes in productivity and goods and capital market frictions and the speed of convergence to steady-state.
    JEL: F10 F21 F60
    Date: 2023–12
  10. By: Georgios Georgiadis; Gernot J. Müller; Ben Schumann
    Abstract: We develop a two-country business-cycle model of the US and the rest of the world with dollar dominance in trade invoicing, in cross-border credit, and in safe assets. The interplay between these elements—dollar trinity—rationalizes salient features of the Global Financial Cycle in the data: When its tide subsides, the dollar appreciates, financial conditions tighten, the world business cycle slows down, and emerging-market central banks face a trade-off between mitigating the recession and dampening price pressures. We find the dollar is no sideshow in this, but central for the transmission of the Global Financial Cycle to the world economy.
    Keywords: Dollar dominance, dominant currency paradigm, Bayesian proxy structural VAR model, convenience yield
    JEL: F31 F42 F44
    Date: 2023
  11. By: Georgios Georgiadis; Gernot J. Müller; Ben Schumann
    Abstract: The dollar is a safe-haven currency and appreciates when global risk goes up. We investigate the dollar’s role for the transmission of global risk to the world economy within a Bayesian proxy structural vectorautoregressive model. We identify global risk shocks using high-frequency asset-price surprises around narratively selected events. Global risk shocks appreciate the dollar, induce tighter global financial conditions and a synchronized contraction of global economic activity. We benchmark these effects against counterfactuals in which the dollar does not appreciate. In the absence of dollar appreciation, the contractionary impact of a global risk shock is much weaker, both in the rest of the world and the US. For the rest of the world, contractionary financial channels thus dominate expansionary expenditure switching when global risk rises and the dollar appreciates.
    Keywords: Dollar exchange rate, global risk shocks, international transmission, Bayesian proxy structural VAR
    JEL: F31 F42 F44
    Date: 2023
  12. By: Bérard, Guillaume; Freitas, Dimitria; Verma, Priyam
    Abstract: Xu (2022) estimates the causal impact of bank failures on the level of trades with a staggered difference-in-differences design and an IV strategy with Bartik instrument, using the 1866 banking crisis as a quasi-natural experiment. Findings, based on historical data on the trades and loans between London banks and banks around the world, show that countries exposed to bank failures in London immediately exported significantly less and did not recover their lost growth relative to unexposed places. Moreover, the effect lasted for decades. First, we reproduce the paper's main findings by running the original code and uncover three issues, one of which that slightly affects the main estimates reported in the study. Second, we test the robustness of the results to (1) removing weights from the regressions, (2) using a spatial HAC correction for the standard errors, and (3) implementing a method for possibly heterogeneous treatment effects with a staggered difference-indifferences design. Overall, we conclude that the main findings are valid and robust.
    Keywords: Replication, Robustness, Trade, Bank failures, Historical data, Difference-in-differences
    JEL: F14 G01 G21 N20
    Date: 2023
  13. By: Dávila-Ospina, Andrés O. (Universidad de los Andes)
    Abstract: What would happen if the central bank makes a mistake facing a crisis? This paper argues that it would leave scars in the long-run trend of production. If monetary policy is not expansionary-enough during crises, an inefficient rise of the interest rate intensifies the scarring effects of recessions. The hysteresis effect comes from higher innovation costs that induce a drop in productivity growth, an indiscriminate firms’ exit process, and a rise in unemployment. This article presents a theoretical model that rationalizes these mechanisms. The theory suggests that, in the longrun, even though growth recovers to its pre-shock rate and the economy converges to full firms’ survival and full employment, the long-term output level is persistently lower than the level it would have reached in the absence of errors.
    Keywords: Hysteresis; Monetary Policy; Endogenous Growth; Productivity; Firms’ Exit; Unemployment.
    JEL: E52 E58 O11 O40 O41 O42 O47
    Date: 2023–12–13
  14. By: Beatriz González; Galo Nuño Barrau; Dominik Thaler; Silvia Albrizio
    Abstract: This paper analyzes the link between monetary policy and capital misallocation in a New Keynesian model with heterogeneous firms and financial frictions. In the model, firms with a high return to capital increase their investment more strongly in response to a monetary policy expansion, thus reducing misallocation. This feature creates a new time-inconsistent incentive for the central bank to engineer an unexpected monetary expansion to temporarily reduce misallocation. However, price stability is the optimal timeless response to demand, financial or TFP shocks. Finally, we present firm-level evidence supporting the theoretical mechanism.
    Keywords: monetary policy, firm heterogeneity, financial frictions, capital misallocation
    JEL: E12 E22 E43 E52 L11
    Date: 2023–11
  15. By: Khadija Essalhi (Doctorante à la faculté des sciences juridiques, économiques et sociales, Cadi Ayyad, Marrakech); Salah Eddine (Enseignant chercheur à la Faculté des sciences juridiques économiques et sociales, Cadi Ayyad, Marrakech.)
    Abstract: The aim of this article is to analyze the relationship between monetary policy and private investment in Morocco. It explains how private sector investors react to changes in monetary policy decisions. Our study aims to understand the effect of monetary policy action on private investment in Morocco over the period 1995-2020, using the VECM method. The results indicate that in the long term, the policy rate and the money supply have a negative and significant impact on private investment, while the exchange rate and credit granted to the private sector have a positive and significant impact on private investment.
    Abstract: Résumé L'objectif de cet article est d'analyser la relation entre la politique monétaire et les investissements privés au Maroc. Il explique comment les investisseurs du secteur privé réagissent aux modifications des décisions de la politique monétaire. Notre étude vise à comprendre l'effet de l'action de la politique monétaire sur les investissements privés au Maroc durant la période 1995-2020 en utilisant la méthode VECM. Les résultats indiquent que dans le long terme, le taux directeur et la masse monétaire ont un impact négatif et significatif sur les investissements privés, tandis que le taux de change et les crédits accordés au secteur privé ont un impact positif et significatif sur les investissements privés. Mots clés : Investissement privé, taux directeur, Politique monétaire Abstract The aim of this article is to analyze the relationship between monetary policy and private investment in Morocco. It explains how private sector investors react to changes in monetary policy decisions. Our study aims to understand the effect of monetary policy action on private investment in Morocco over the period 1995-2020, using the VECM method. The results indicate that in the long term, the policy rate and the money supply have a negative and significant impact on private investment, while the exchange rate and credit granted to the private sector have a positive and significant impact on private investment. Keywords: Private investment, Policy rate, Monetary policy
    Keywords: Private investment, Policy rate, Monetary policy, Investissement privé, taux directeur, Politique monétaire, African Scientific Journal, Investissement privé, taux directeur, Politique monétaire
    Date: 2023–11–12
  16. By: Chao Gu (University of Missouri); Janet Hua Jiang (Bank of Canada); Liang Wang (University of Hawaii)
    Abstract: We study the effects of the firm's credit condition on labor market performance and the relationship between expected inflation and unemployment in a new monetarist model. Better credit condition improves labor market outcomes as fi rms save on their cash financing cost, improve pro tability, and create more vacancies. Inflation affects unemployment through two opposing channels. First, inflation increases the firm's fi nancing cost, which discourages job creation and increases unemployment. Second, inflation lowers wages through bargaining because unemployed workers more heavily rely on cash transactions and suffer more from inflation compared to employed workers. This encourages job creation. The overall effect of inflation on employment depends on the firm's credit condition. We calibrate the model to match U.S. data. The calibrated model suggests a downward-sloping Phillips curve with flexible wages. Finally, we fi nd that improvement in firm credit conditions is consistent with the flattening of the Phillips curve.
    Keywords: toxic assets, market freezes, negative returns, liquidity
    JEL: E24 E31 E44 E51
    Date: 2023–12–16
  17. By: Casey Pender (Department of Economics, Carleton University)
    Abstract: This paper reexamines the traditional view that all unanticipated deflation can lead to bank panics. I identify two distinct deflationary shocks by employing a sign-restricted VAR on U.S. National Banking era with monthly data for prices, real output, and bank panics. While a negative aggregate demand shock increases the likelihood of a bank panic by 3.4%-8.4%, a positive aggregate supply shock has no significant effect. My results, therefore, align with recent theoretical work arguing that deflation's impact on banking panics also hinges on real output dynamics. Hence, not all deflation is cause for panic.
    Keywords: Bank Panics, Deflation, U.S. Monetary History, Sign Restrictions
    JEL: E31 E32 E44 E50 N11 N21
    Date: 2023–08–16
  18. By: Rakesh Padhan (Department of Management Studies, Indian Institute of Technology Roorkee, Uttarakhand, India.); K.P. Prabheesh (Department of Liberal Arts, Indian Institute of Technology Hyderabad, India.)
    Abstract: This study empirically examines the nexus amongst financial integration, trade integration, and instability in various emerging and Association of Southeast Asian Nations (ASEAN) economies. Using newly constructed financial integration indices and the Toda-Yamamoto causality test, it is found that (i) tremendous changes occurred in the levels of financial and trade integration in these economies during the COVID-19 pandemic; (ii) in most cases, financial integration caused exchange rate volatility, inflation volatility, and interest rate volatility, while trade integration caused credit volatility, exchange rate volatility, and growth volatility; and (iii) not all types of integration caused instability, and portfolio integration caused exchange rate instability in most cases.
    Keywords: Financial Integration; Trade Integration; Instability; Toda-Yamamoto Causality Test
    JEL: F20 F21 F41 F65
    Date: 2023–11–29
  19. By: Paul Labonne; Leif Anders Thorsrud
    Abstract: The nonlinear nexus between financial conditions indicators and the conditional distribution of GDP growth has recently been challenged. We show how one can use textual economic news combined with a shallow Neural Network to construct an alternative financial indicator based on word embeddings. By design the index associates growth-at-risk to news about credit, leverage and funding, and we document that the proposed indicator is particularly informative about the lower left tail of the GDP distribution and delivers significantly better out-of-sample density forecasts than commonly used alternatives. Speaking to theories on endogenous information choice and credit-market sentiment we further document that the news-based index likely carries information about beliefs rather than fundamentals.
    Date: 2023–12
  20. By: Miguel C. Herculano (Reserve Bank of New Zealand)
    Abstract: Financial conditions refer to the state of financial variables such as interest rates, share prices, house prices and exchange rates. If financial conditions in the economy are ‘loose’, they stimulate real economic activity, and if they are ‘tight’, economic activity is constrained. The implications of financial conditions for macroeconomic outcomes has motivated the development of financial conditions indices (FCIs) that summarise common movements in financial and macroeconomic data. In general, an FCI offers a gauge of how shifts in central bank policy and economic outlooks, including foreign financial condition shocks, are filtering out into the real world. A timely FCI would help the policy-maker assess, almost in real time, whether financial conditions in the economy are loose or tight. However, the development of a timely FCI is not a straightforward task because the data used to estimate it may be available at different frequencies – semi-annual or quarterly or weekly or daily intervals - and are also often incomplete. Financial data are available at ‘high frequencies’, that is, sometimes even at a daily or hourly frequency, but may be hampered by missing values. On the other hand, macroeconomic time series such as Gross Domestic Product, GDP, or household consumption are only available at quarterly frequencies. In this paper, Miguel Herculano constructs a monthly FCI for New Zealand, using novel estimation techniques that resolve problems posed by missing data, and also enable the use of data that are available at different time frequencies. Since the new FCI is timelier than other alternatives that are available only at a quarterly frequency, it makes it more appealing to policymakers. The new FCI summarises information from 73 relevant financial and macroeconomic variables that are available at either monthly or quarterly frequencies. Interest rate spreads and mortgage lending are found to be the most relevant contributors to the dynamics of the monthly FCI. Estimates suggest that changes in the FCI have exerted relatively stronger influences on the New Zealand business cycle in more recent years. The predictive content of the financial conditions index for forecasting GDP and unemployment is not explored in the current version of the paper and is left for future research. About the research programme The Reserve Bank carries out a wide range of research related to monetary policy. This research programme may or may not change our overall view of monetary policy- whether rates should be raised or cut and by how much. The Reserve Bank’s overarching aim is to promote the prosperity and well-being of all New Zealanders. With monetary policy, our core focus is to support full employment and low and stable inflation. Monetary policy remains an effective, but blunt, tool to achieve these goals
    Date: 2022–02
  21. By: Jingyi Tian; Jun Nagayasu
    Abstract: As an important domain of information technology development, artificial intelligence (AI) has garnered significant popularity in the financial sector. While AI offers numerous advantages, investigating potential risks associated with the widespread use of AI has become a critical point for researchers. We examine the impact of AI technologies on systemic risk within China’s financial industry. Our findings suggest that AI helps mitigate the increase of systemic risk. However, the impact of AI differs across different financial sectors and is more pronounced during crisis periods. Our study also suggests that AI can decrease systemic risk by enhancing the human capital of financial firms. Moreover, the theoretical framework presented in this paper provides insights into the notion that imprudent allocation of AI-related investment could potentially contribute to an increase in systemic risk.
    Date: 2023–11
  22. By: Alkis Georgiadis-Harris; Maxi Guennewig
    Abstract: Since the Great Financial Crisis, the share of deposits—both insured and uninsured—in bank liabilities has increased substantially. In this paper, we document this fact for the largest US banks. We show that it can be theoretically explained by the introduction of resolution powers, i.e. the ability to impose losses on bank shareholders and creditors. In such a world, banks issue deposits in order to channel resources towards uninsured depositors, imposing losses on insured depositors and forcing the government to conduct bailouts. Our model suggests that resolution and deposit insurance must be complemented by equity or long-term debt requirements.
    Keywords: Bank Resolution, Deposit Insurance, and Fragility
    JEL: G18 G21 G32
    Date: 2023–12
  23. By: Wendschlag, Mikael (Department of Economic History, Uppsala University)
    Abstract: In early April 1929, eight Swedish savings banks were found insolvent and closed due to economic crimes committed by some of their founders. After the crash, the Swedish parliament entered a debate about whether the state should cover some, all or none of the losses of the failed banks’ 88 000 depositors. The debate, mainly between the right party and the social democrats, was characterized by competing narratives about the causes of the crash, whether the state should intervene or not, whether there existed an implicit deposit insurance or not, who should be covered among the depositors, by how much, and how an intervention should be funded and administered. The debate, and the policy decision, is unique in Swedish banking history and illustrate the importance of narratives to understand political responses to bank crashes and crises. The debate ended in mid-May with a decision to partially cover the depositors’ losses.
    Keywords: bank crashes; competing narratives; deposit insurance; memories
    JEL: B52 G01 G28 H12 N24
    Date: 2023–12–08
  24. By: Marcos Chamon (IMF); Francisco Roldán (IMF)
    Abstract: We investigate the effect of uncertainty about the nature of output costs of sovereign default on debt tolerance. While the theoretical literature assumes output losses lasting until market access is restored, the empirical evidence points to persistent effects, and output may not return to its pre-default trend. We include such uncertainty in a model of sovereign default and find that it can significantly boost equilibrium debt levels. We also consider a government which is averse to this type of uncertainty and seeks robust decision rules. We calibrate the model to match evidence on the output trajectory around debt restructuring episodes and infer output costs of about the size found in the empirical literature, alongside significant uncertainty about their permanence and a strong desire for robustness.
    Keywords: Sovereign debt, default, debt tolerance, permanent costs, robustness
    JEL: E43 E44 F34 H63
    Date: 2023–12
  25. By: Botta, Alberto; Spinola, Danilo; Yajima, Giuliano; Porcile, Gabriel
    Abstract: This paper studies the relationship between financial integration, external debt sustainability, and fiscal policy space in emerging and developing (EDE) countries. We do so by applying Pasinetti’s “geometry of debt sustainability” to EDE countries and analysing how it is shaped by exposure to global financial cycles. Through the lenses of Pasinetti’s theoretical framework, we study whether global finance opens “windows of opportunities” or creates more constraints for EDE countries in offering fiscal support for structural changes, including green structural transformations. This analysis is crucial for tackling the pressing issue of the climate crisis. We suggest EDE countries may face a “gridlock”. Global finance and pressures to keep external debt sustainable make them struggle to maintain vital public investment and enact counter-cyclical fiscal actions. Lack of fiscal space in turn exacerbates technological backwardness, which feeds back in the form of more binding external constraints and tighter “surveillance” by international creditors. We support our theoretical analysis with an econometric study over a sample of 55 countries from 1980-2018. Capital controls and external macroprudential policy emerge as fundamental policies enabling EDE countries to adeptly manoeuvre through debt challenges without falling into the pitfalls of stagnation and enduring technological underdevelopment.
    Keywords: Financial globalisation; fiscal space; structural change
    Date: 2023–12–15
  26. By: Montes Rojas Gabriel; Carrera Jorge; Panigo Demián; Solla Mariquena; Toledo Fernando
    Abstract: We study the relationship between income inequality and external wealth using dynamic panel data models with annual observations of 88 emerging and developing economies for the period 1970-2020. We find evidence in favor of a significant and positive association between inequality indicators and net external wealth. This relationship is statistically significant for all income inequality measures and net external wealth variables. If the Top 1 of the richest individuals in a given country increments their share by 1 percentage point this will produce an average same-year increment in net foreign assets of 0.45% in terms of the country’s GDP. The long-run effect is more than double in magnitude (1.05% of GDP). For the Top 10, the long-run effect increases tenfold (11.6% of GDP). When disaggregated into foreign assets and liabilities, we find a heterogeneous behavior of the financial elites. These findings reveal that financialized elites have a greater propensity to accumulate external wealth than the rest of the population.
    JEL: O15 E21
    Date: 2023–11
  27. By: Jäger, Philipp; Schacht, Philip
    Abstract: We use recently published long-run microdata (SCF+) to investigate generational wealth dynamics in the U.S. over the last seven decades. We document that the median wealth of people born in the first half of the 20th century increased from one ten-year birth cohort to the next. For people born in the second half of the century, median wealth successively declined from cohort to cohort while wealth inequality within birth cohorts increased markedly. A synthetic saving approach reveals that the trend reversal is mainly caused by changes in savings, which are a result of stagnating income levels and, importantly, declining saving rates. We find no evidence that shifts in wealth accumulation preferences, observable household characteristics or other demographic changes can explain our findings.
    Abstract: Wir verwenden kürzlich veröffentlichte langfristige Mikrodaten (SCF+), um die Dynamik des Generationenvermögens in den USA über die letzten sieben Jahrzehnte zu untersuchen. Wir dokumentieren, dass Medianvermögen von Menschen die in der ersten Hälfte des 20ten Jahrhunderts geboren wurden von einer Zehnjahreskohorte zur Nächsten anstieg. Für die in der zweiten Hälfte des 20ten Jahrhunderts Geborenen ging das Medianvermögen von Kohorte zu Kohorte sukzessive zurück, während die Vermögensungleichheit innerhalb der Geburtskohorten deutlich zunahm. Eine synthetische Sparberechnung zeigt, dass die Trendumkehr vor allem auf Veränderungen in der Ersparnisbildung zurückzuführen ist, die in stagnierenden Einkommensniveaus und, vor allem, in sinkenden Sparquoten begründet liegt. Wir finden keine Hinweise darauf dass Verschiebungen in den Präferenzen für Vermögensbildung, beobachtbare Haushaltsmerkmale oder andere demografische Veränderungen unsere Ergebnisse erklären können.
    Keywords: Wealth inequality, cohorts, synthetic saving, United States
    JEL: D14 D31 E21 J10
    Date: 2023
  28. By: Laurent Bossavie (World Bank); Joseph-Simon Görlach (Bocconi University); Çağlar Özden (World Bank); He Wang
    Abstract: This paper examines international temporary migration as an intermediary step among aspiring entrepreneurs to accumulate the needed capital when they face credit constraints at home. The analysis is based on a representative dataset of lifetime employment histories of return migrants from Bangladesh. After establishing the credit constraints that potential entrepreneurs face, the paper shows that non-agricultural self-employment rates are significantly higher among returning migrants over half versus around 20% of non-migrants. Most migrants transition into self-employment by using their savings from abroad as the main source of financing. The paper then offers, for the first time, a detailed account of the financial costs and benefits of international migration. Our findings suggest that temporary migration can contribute to the structural transformation of lower-income countries by enabling credit-constrained workers to enter into non-agricultural entrepreneurship.
    Keywords: Temporary migration, credit constraints, risky investment, entrepreneurship
    Date: 2023–12
  29. By: Pierfederico Asdrubali
    Abstract: A well-functioning and efficient Venture Capital (VC) market is one of the key pillars to enhance European medium- and long-term economic growth, through the creation of new businesses and sustainable employment, the improvement of managerial practices and increased capital investments, which boost innovation, productivity and competitiveness. These conditions are enhanced in the presence of an integrated VC market, which improves capital allocation, generates economies of scale and spurs competition and diversification of financing sources.This paper analyses cross-border VC flows in Europe in the 2007-2020 period, highlighting the deep fragmentation of the European market, with each country featuring its own peculiarities and evident disparities, and Northern European countries, the UK, and Ireland witnessing significantly higher cross-border volumes than Eastern-European and Mediterranean countries. Overall, the analysis of cross-border investments in the industry confirms that they are still rather infrequent, mainly due to local bias, with the domestic component accounting on average for 64.0% of the total VC activity and cross-border investments within Europe accounting on average for only 23.1%. Using a Grubel-Lloyd index, we find that the highest values of two-way flows of venture capital are concentrated in the major financial centres, with a prominent role of the United Kingdom. Furthermore, theory-grounded gravity equations investigate the determinants of cross-border VC flows, exploring, inter alia, the role of different financial structures across countries. Besides GDP (or market capitalisation) and distance, the quality of institutions and especially the degree of global financial integration do play a role in shaping cross-border VC flows. The uneven development of the financial market within Europe ‒ with a market-based country cluster distinct from a bank-based country cluster ‒ appears to matter little for cross-border VC flows.
    JEL: C58 F36 G24
    Date: 2023–11

This nep-fdg issue is ©2024 by Georg Man. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.