nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2024‒02‒05
nineteen papers chosen by
Georg Man,

  1. Integration and Financial Stability: A Post-Global Crisis Assessment By Giraldo, Iader; Giraldo, Iader; Gomez-Gonzalez, Jose E; Uribe, Jorge M
  2. Profits, ‘Superstar’ Firms and Capital Flows By Lidia Smitkova
  3. Insurance corporations’ balance sheets, financial stability and monetary policy By Kaufmann, Christoph; Leyva, Jaime; Storz, Manuela
  4. Unintended consequences of QE: Real estate prices and financial stability By Berg, Tobias; Haselmann, Rainer; Kick, Thomas; Schreiber, Sebastian
  5. Central Bank Crisis Interventions: A Review of the Recent Literature on Potential Costs By Patrick Aldridge; David Cimon; Rishi Vala
  6. Destabilisation of bank deposits across destinations: assessment and policy implications By Bindseil, Ulrich; Senner, Richard
  7. The long-term earnings' effects of a credit market disruption By Adamopoulou, Effrosyni; De Philippis, Marta; Sette, Enrico; Viviano, Eliana
  8. Intergenerational Mobility and Credit By J. Carter Braxton; Nisha Chikhale; Kyle F. Herkenhoff; Gordon M. Phillips
  9. EXIM’s Exit: The Real Effects of Trade Financing by Export Credit Agencies By Poorya Kabir; Adrien Matray; Karsten Müller; Chenzi Xu
  10. Underinvestment and Capital Misallocation Under Sovereign Risk By Carlos Esquivel
  11. The Sovereign Default Risk of Giant Oil Discoveries By Carlos Esquivel
  12. Expansionary Fiscal Consolidation Under Sovereign Risk By Carlos Esquivel
  13. Risikoverbund zwischen Banken und Staaten: Eine empirische Analyse für den Euroraum By Andreas Nastansky; Sarah Siris
  14. Global Bank Lending and Exchange Rates By Jonas Becker; Maik Schmeling; Andreas Schrimpf
  15. Sector wise Savings in India- An Analysis By Sivakumar, Marimuthu
  16. Non-substitutable consumption growth risk By Dittmar, Robert F.; Schlag, Christian; Thimme, Julian
  17. Centralized vs Decentralized Markets: The Role of Connectivity By Simone Alfarano; Albert Banal-Estañol; Eva Camacho; Giulia Iori; Burcu Kapar; Rohit Rahi
  18. Liquidity Policies with Opacity By Asano, Koji
  19. The Hilton Young mission of ‘money doctors’ from Britain to Poland, 1923 – 1924 By William A. Allen

  1. By: Giraldo, Iader (FLAR); Giraldo, Iader (FLAR); Gomez-Gonzalez, Jose E (Department of Finance, Information Systems, and Economics, City University of New York – Lehman College, Bronx); Uribe, Jorge M (Faculty of Economics and Business, Universitat Oberta de Catalunya)
    Abstract: In this study, we revisit the debate regarding the effects of financial openness on financial stability. In contrast to previous studies, our approach involves measuring the direct influences of openness on stability through a varied set of proxies used to capture the diverse dimensions of both of these concepts within a unified estimation framework. Employing state-of-the-art machine learning techniques, our estimates enable us to isolate the focal effects while controlling for a comprehensive set of macroeconomic, political, and institutional variables. Covering the period spanning 2010 to 2020 across 45 countries, our results indicate that, in the majority of cases, increased financial openness is beneficial for financial stability. Greater levels of integration tends to reduce the ratio of nonperforming loans to total loans, concurrently improving capital adequacy ratios and the ratio of provisions to nonperforming loans. Additionally, heightened openness leads to an increase in the levels of bank liquidity. Importantly, these enhancements to financial stability occur without any adverse effects on bank profitability. This suggests that policies aimed at fostering greater integration with global financial markets and promoting increased bank competition can exert positive impacts on financial stability without compromising bank profitability.
    Keywords: Openness; integration; Financial stability; Double-Debiased Machine Learning
    JEL: F21 F32 G21 G28
    Date: 2024–01–17
  2. By: Lidia Smitkova
    Abstract: In this paper, I study financial liberalization between economies with differing aggregate profit shares. I show that if firms compete oligopolistically, then economies which generate more very large — ‘superstar’ — firms enjoy higher aggregate profit shares. Embedding this setup in a two-country model with heterogeneous agents and non-homothetic saving behavior, I show that more profitable economies feature lower autarkic interest rate and experience capital outflows during financial liberalization. Calibrating the model to eight European economies, I show that the profit share gap can explain 29% of variation in the current account imbalances incurred between 1998 and 2019.
    Date: 2023–12–20
  3. By: Kaufmann, Christoph; Leyva, Jaime; Storz, Manuela
    Abstract: The euro area insurance sector and its relevance for real economy financing have grown significantly over the last two decades. This paper analyses the effects of monetary policy on the size and composition of insurers’ balance sheets, as well as the implications of these effects for financial stability. We find that changes in monetary policy have a significant impact on both sector size and risk-taking. Insurers’ balance sheets grow materially after a monetary loosening, implying an increase of the sector’s financial intermediation capacity and an active transmission of monetary policy through the insurance sector. We also find evidence of portfolio re-balancing consistent with the risk-taking channel of monetary policy. After a monetary loosening, insurers increase credit, liquidity and duration risk-taking in their asset portfolios. Our results suggest that extended periods of low interest rates lead to rising financial stability risks among non-bank financial intermediaries. JEL Classification: E52, G11, G22, G23
    Keywords: monetary policy transmission, non-bank financial intermediation, portfolio re-balancing, risk-taking
    Date: 2024–01
  4. By: Berg, Tobias; Haselmann, Rainer; Kick, Thomas; Schreiber, Sebastian
    Abstract: We investigate how unconventional monetary policy, via central banks' purchases of corporate bonds, unfolds in credit-saturated markets. While this policy results in a loosening of credit market conditions as intended by policymakers, we report two unintended side effects. First, the policy impacts the allocation of credit among industries. Affected banks reallocate loans from investment-grade firms active on bond markets almost entirely to real estate asset managers. Other industries do not obtain more loans, particularly real estate developers and construction firms. We document an increase in real estate prices due to this policy, which fuels real estate overvaluation. Second, more loan write-offs arise from lending to these firms, and banks are not compensated for this risk by higher interest rates. We document a drop in bank profitability and, at the same time, a higher reliance on real estate collateral. Our findings suggest that central banks' quantitative easing has substantial adverse effects in credit-saturated economies.
    Date: 2023
  5. By: Patrick Aldridge; David Cimon; Rishi Vala
    Abstract: Central banks may engage in large-scale lending and asset purchases to stabilize financial markets and implement monetary policy during crises. The ability of these actions to restore financial market functioning is well documented; however, they come with costs. We provide a literature review of the costs associated with these central bank actions, without commenting on the net benefits they provide. We find support for the premise that crisis actions may negatively impact market liquidity, distort asset prices, create conflicts between monetary and financial stability objectives and increase rent seeking and unproductive uses of the liquidity provided by the central bank. We discuss measures that may mitigate the negative impacts of crisis actions.
    Keywords: Central bank research; Financial institutions; Financial markets; Financial stability, Lender of last resort
    JEL: E5 E58 G10 G20
    Date: 2023–12
  6. By: Bindseil, Ulrich; Senner, Richard
    Abstract: Rapid and large deposit outflows from banks have regained attention in the context of the March 2023 demises of Credit Suisse, SVB and other regional US banks. Moreover, the possible introduction of CBDC or a marked success of stablecoins are perceived as additional clouds over the future of deposit funding. While the bank run literature rarely pays attention to where bank deposits can flow to, this paper distinguishes the different flow of funds mechanics across all possible destinations and reviews for each the current and prospective future factors that may contribute to the observed increase of the speed and size of bank runs. While some of these factors can be contained through policy measures, others, like the intensified competition between banks will inevitably stay, and bank balance sheet management and liquidity regulation need to accept the new normal of somewhat less stable and more expensive sight deposits. JEL Classification: E42, E51, G21, G23
    Keywords: bank funding, bank runs, financial stability, flows of funds, liquidity crisis
    Date: 2024–01
  7. By: Adamopoulou, Effrosyni; De Philippis, Marta; Sette, Enrico; Viviano, Eliana
    Abstract: This paper studies the long-term consequences on firms and workers of the credit crunch triggered by the 2007-2008 global financial crisis. Relying on a unique matched bank-employer-employee administrative dataset, we construct a firm-specific credit supply shock and examine firms' and workers' outcomes for 11 years after the crisis. We find that highly-exposed firms shrink permanently and invest less; these effects are larger for high capital-intensive firms. The impact on workers' earnings is also long-lasting, especially for high skilled workers, who are more complementary to capital. Displaced workers reallocate mostly to low capital-intensive firms, experiencing persistent wage losses.
    Keywords: credit crunch, employment, wages, long term effects, linked bank-employer-employee panel data, capital-skill complementarity
    JEL: E24 E44 G21 J21 J31 J63
    Date: 2023
  8. By: J. Carter Braxton; Nisha Chikhale; Kyle F. Herkenhoff; Gordon M. Phillips
    Abstract: We combine the Decennial Census, credit reports, and administrative earnings to create the first panel dataset linking parent’s credit access to the labor market outcomes of children in the U.S. We find that a 10% increase in parent’s unused revolving credit during their children’s adolescence (13 to 18 years old) is associated with 0.28% to 0.37% greater labor earnings of their children during early adulthood (25 to 30 years old). Using these empirical elasticities, we estimate a dynastic, defaultable debt model to examine how the democratization of credit since the 1970s – modeled as both greater credit limits and more lenient bankruptcy – affected intergenerational mobility. Surprisingly, we find that the democratization of credit led to less intergenerational mobility and greater inequality. Two offsetting forces underlie this result: (1) greater credit limits raise mobility by facilitating borrowing and investment among low-income households; (2) however, more lenient bankruptcy policy lowers mobility since low-income households dissave, hit their constraints more often, and reduce investments in their children. Quantitatively, the democratization of credit is dominated by more lenient bankruptcy policy and so mobility declines between the 1970s and 2000s.
    JEL: D14 E21 J13 J24
    Date: 2024–01
  9. By: Poorya Kabir; Adrien Matray; Karsten Müller; Chenzi Xu
    Abstract: We study the role of export credit agencies—the predominant tool of industrial policy—on firm behavior by using the effective shutdown of the Export-Import Bank of the United States (EXIM) from 2015-2019 as a natural experiment. We show that firms that previously relied on EXIM support saw a 18% drop in global sales after the agency closed down, driven by a reduction in exports. Firms affected by the shutdown were unable to make up for the loss of trade financing, especially if they were financially constrained, and consequently laid off employees and curtailed investment. These negative effects were more pronounced for firms with higher export opportunities and higher ex-ante marginal revenue products of capital. Lower exports at the firm level aggregate up to lower total exports for industries most reliant on EXIM support. These findings suggest that government policies aimed at providing trade financing can boost exports and firm growth even in countries with well-developed financial markets without necessarily leading to a misallocation of resources.
    JEL: F13 F14 G31 H25 O24
    Date: 2024–01
  10. By: Carlos Esquivel (Rutgers University)
    Abstract: Capital and its sectoral allocation affect default incentives. Under general assumptions, default risk is decreasing in the total stock of capital and increasing in the share of capital allocated to non-tradable production. This implies that when competitive households make all investment decisions capital has two externalities: a capital-stock externality and a portfolio externality. These hamper the ability of a benevolent government to make optimal borrowing and default decisions and are exacerbated during periods of distress. Competitive equilibria feature underinvestment, larger non-traded sectors, more default, and lower debt and consumption than a centralized planner's allocation. Select number of author(s): : 1
    Keywords: Soveriegn default, Underinvestment, Investment externalities
    JEL: F34 F41 H63
    Date: 2024–11–12
  11. By: Carlos Esquivel (Rutgers University)
    Abstract: I study the impact of giant oil field discoveries on default risk. I document that interest rate spreads of emerging economies increase by 1.3 percentage points following a discovery of median size. I develop a sovereign default model with investment, three-sector production, and oil discoveries. Following a discovery, borrowing and investment increase. Capital reallocates from manufacturing toward oil and non-traded sectors, increasing the volatility of tradable income. Borrowing increases default risk and higher volatility increases the risk premium, both of which increase spreads. Discoveries generate welfare gains of 0.44 percent. Insurance against low oil prices increases these gains to 0.60. Select number of author(s): : 1
    Keywords: Soveriegn default, Oil Discoveries
    JEL: F34 F41 Q33
    Date: 2024–11–12
  12. By: Carlos Esquivel (Rutgers University; The World Bank Research Department)
    Abstract: We study how debt limits can be expansionary in economies facing sovereign risk. We develop a sovereign debt model with capital accumulation, long-term debt, and fiscal rules that features two distortions: debt dilution and a pecuniary externality of private investment on spreads. The optimal debt limit increases capital accumulation due to lower sovereign risk, generating an economic expansion in the long run. Welfare gains are a result of lower sovereign spreads due to expectations about future borrowing and investment. We present evidence of a positive (negative) relation between debt limits and investment (spreads), consistent with the predictions of the model.
    Keywords: Fiscal Rules, Sovereign Debt, Expansionary Fiscal Consolidation
    JEL: F34 F41
    Date: 2024–11–12
  13. By: Andreas Nastansky (Hochschule für Wirtschaft und Recht (HWR) Berlin); Sarah Siris
    Abstract: Die Begrenzung systemischer Risiken ist essentieller Bestandteil der neuen internationalen Finanzmarktordnung. Dabei galt es nicht nur die Verflechtung der Banken untereinander, sondern auch die Verbindung zwischen den Staatsfinanzen und der Solvenz der nationalen Bankensysteme (dem sog. Risikoverbund zwischen Staat und Banken) zu durchbrechen. Der Beitrag beleuchtet die Entwicklung der Forderungen gegenüber Staaten in den Bankbilanzen der Euroländer und des Eurosystems im Zeitverlauf sowie den daraus erwachsenden Risiken für die Finanzstabilität. Hierzu werden die Determinanten des Risikoverbunds theoretisch wie empirisch analysiert. Die fiskalische Kapazität der Eurostaaten wird anhand verschiedener Faktoren wie der Verschuldungsquote, dem Leistungsbilanzsaldo und der Kredit-BIP Lücke aufgezeigt; anschließend werden die Strukturen der Bankensysteme im Euroraum untersucht. Im Einzelnen werden die private und staatliche Gesamtverschuldung, die konsolidierte Bankenbilanzsumme und die darin enthaltenen Verbindlichkeiten sowie der Anteil des Bankensektors an der Bruttowertschöpfung in Relation zur Wirtschaftsleistung betrachtet. Außerdem finden NPE-Bestände in den Bankbilanzen sowie die Renditen der emittierten Staatsanleihen und damit in Verbindung stehenden CDS-Spreads Betrachtung. Zusätzlich werden die Konzentration, der Verschuldungsgrad, Liquiditätsziffern sowie länderspezifische Unterschiede in Art und Fristigkeit der Refinanzierung der Bankensektoren abgebildet. Auf Basis der empirischen Befunde werden im Hinblick auf die wechselseitigen Ansteckungseffekte zwischen Banken und Staaten Implikationen für die Finanzmarktregulierung diskutiert.
    Keywords: Banken, Staatsanleihen, Staatsverschuldung, fiskalische Kapazität, systemisches Risiko
    JEL: E59 G18 H81
    Date: 2024–01
  14. By: Jonas Becker; Maik Schmeling; Andreas Schrimpf
    Abstract: We estimate the impact of banks' cross-currency lending on exchange rates to shed light on the importance of flows as a major force affecting FX market outcomes. When non-US banks extend more loans in US dollars (USD) relative to US banks originating foreign currency-denominated loans, the USD appreciates significantly. When a foreign bank grants a cross-currency USD loan, it needs to obtain USD liquidity which puts pressure on funding markets and leads to an appreciation of USD. This effect – which we estimate via a granular instrumental variable approach – has greatly intensified since the global financial crisis and crucially depends on how banks fund the provision of cross-currency loans. In line with this mechanism, we show that cross-currency lending also affects the FX swap market (and deviations from covered interest parity), as well as other segments of the US short-term funding market.
    Keywords: cross-currency lending, exchange rates, granular instrumental variable, CIP deviation
    JEL: F31 E44 G21
    Date: 2024–01
  15. By: Sivakumar, Marimuthu
    Abstract: Capital formation plays a predominant role in all types of economics whether they are developed or developing development is not possible without capital formation.From the classical days, savings has been considered as one of the determinants of growth. To lead the underdeveloped countries to the path of development, rate of savings must be enhanced. For the individuals and households, savings provide a cushion of security against future contingencies, whereas for the nation, savings provide the funds needed in the developmental efforts. Savings is the unspent income. Developing countries such as India need household sectors savings which are very much imperative of the economic development of the nation.
    Keywords: India- Savings- Household Sector Saving- Capital Formation.
    JEL: E20 E21 E22
    Date: 2023–12–27
  16. By: Dittmar, Robert F.; Schlag, Christian; Thimme, Julian
    Abstract: Standard applications of the consumption-based asset pricing model assume that goods and services within the nondurable consumption bundle are substitutes. We estimate substitution elasticities between different consumption bundles and show that households cannot substitute energy consumption by consumption of other nondurables. As a consequence, energy consumption affects the pricing function as a separate factor. Variation in energy consumption betas explains a large part of the premia related to value, investment, and operating profitability. For example, value stocks are typically more energy-intensive than growth stocks and thus riskier, since they suffer more from the oil supply shocks that also affect households.
    Keywords: Asset pricing, consumption, cross-section of stock returns
    JEL: G12 E44 D81
    Date: 2023
  17. By: Simone Alfarano; Albert Banal-Estañol; Eva Camacho; Giulia Iori; Burcu Kapar; Rohit Rahi
    Abstract: We consider a setting in which privately informed agents are located in a network and trade a risky asset with other agents with whom they are directly connected. We compare the performance, both theoretically and experimentally, of a complete network (centralized market) to incomplete networks with differing levels of connectivity (decentralized markets). We show that decentralized markets can deliver higher informational efficiency, with prices closer to fundamentals, as well as higher welfare for mean-variance investors.
    Keywords: Networks, heuristic learning, informational efficiency, experimental asset markets
    JEL: C92 D82 G14
    Date: 2024–01
  18. By: Asano, Koji
    Abstract: We examine liquidity policies in an environment in which banks can cover liquidity needs by hoarding liquidity or selling legacy assets to expert investors. They can acquire costly information regarding asset quality and deprive banks with bad assets from accessing the asset market. To prevent expert scrutiny, banks must accept fire sale prices for their assets. These depressed prices induce banks to hoard inefficiently low (high) amounts of liquidity when the likelihood of a liquidity shock is relatively low (high). We show that policy interventions aimed at maintaining opacity in the asset market encourage (discourage) liquidity hoarding when there is underhoarding (overhoarding) of liquidity. This suggests that ex-post interventions can serve as substitutes for ex-ante liquidity regulations.
    Keywords: liquidity, information acquisition, financial crisis, liquidity regulation
    JEL: D82 G01 G21
    Date: 2023–12–20
  19. By: William A. Allen (National Institute of Economic and Social Research)
    Abstract: The history of ‘money doctors’ despatched to give financial advice to countries thought to be in need of it has mainly concentrated on American advisers (e.g. Flandreau 2003). This paper gives an account of a British mission to Poland in 1923 – 1924, a period which coincided with the ending of Poland’s hyper-inflation. It describes how the mission contributed to Poland’s monetary stabilisation in 1924, and explores the tensions that arose about the scope and functions of the mission, and of foreign advisers more generally, both between the mission and the Polish authorities, and within the mission.
    Keywords: Poland, money doctors, inflation, Hilton Young, Grabski, monetary reform
    JEL: N14 N24 N44
    Date: 2024

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