nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2024‒03‒04
twenty-two papers chosen by
Georg Man,

  1. Analyzing the Impact of Financial Inclusion on Economic Growth in Bangladesh By Ganapati Kumar Biswas
  2. Financial inclusion through digital channels and the growth-inequality-poverty triangle: Evidence from Africa By Wale-Awe, Olawale; Evans, Olaniyi
  3. Banking Without Branches By Amberg, Niklas; Becker, Bo
  4. Non-Banking Sector development effect on Economic Growth. A Nighttime light data approach By Leonard Mushunje; Maxwell Mashasha
  5. The role of the New Development Bank on Economic growth and Development in the BRICS states By Sithole, Mixo Sweetness; Hlongwane, Nyiko Worship
  6. La inclusión financiera como política de inserción productiva e implicaciones para las políticas públicas: lecciones aprendidas By Pérez Caldentey, Esteban
  7. The Impact of China’s “Stadium Diplomacy” on Local Economic Development in Sub-Saharan Africa By Lindlacher Valentin; Gustav Pirich
  8. Banks, Credit Reallocation, and Creative Destruction By Christian Keuschnigg; Michael Kogler; Johannes Matt
  9. The Spirit of Capitalism, Entrepreneurship, and Talent Allocation By Yang Ming; Heng-fu Zou
  10. Value Chain Microfinance By Lorenzo Casaburi; Jack Willis
  11. I (don’t) owe you: sovereign default and borrowing behavior By Georgarakos, Dimitris; Popov, Alexander
  12. Macroprudential Policies and Dollarisation: Implications for the Financial System and a Cross-Exchange Rate Regime Analysis By Fisnik Bajrami
  13. Interest Rate Uncertainty and Firm Decisions By Anne Duquerroy; Klodiana Istrefi; Sarah Mouabbi
  14. Tech-Driven Intermediation in the Originate-to-Distribute Model By Zhiguo He; Sheila Jiang; Douglas Xu
  15. Customer data access and fintech entry: early evidence from open banking By Babina, Tania; Bahaj, Saleem; Buchak, Greg; De Marco, Filippo; Foulis, Angus; Gornall, Will; Mazzola, Francesco; Yu, Tong
  16. Outside or inside the firm? The impact of debt financing on the exit routes of start-up firms By HONJO, Yuji; IWAKI, Yunosuke; KATO, Masatoshi
  17. The reflux phase in monetary circuit theory and stock–flow consistent models By Edouard Cottin-Euziol; Hassan Bougrine; Louis-Philippe Rochon
  18. Do Monetary Policy and Economic Conditions Impact Innovation? Evidence from Australian Administrative Data By Omer Majeed; Jonathan Hambur; Robert Breunig
  19. How changes in the share of constrained households affect the effectiveness of monetary policy By Felipe Alves; Sushant Acharya
  20. The effect of new housing supply in structural models: a forecasting performance evaluation By Girstmair, Stefan
  21. International Trade in Brown Shares and Economic Development By Benink, Harald; Huizinga, Harry; Raes, Louis; Zhang, Lishu
  22. Determinants of renewable energy consumption in Madagascar: Evidence from feature selection algorithms By Franck Ramaharo; Fitiavana Randriamifidy

  1. By: Ganapati Kumar Biswas
    Abstract: Financial inclusion is touted one of the principal drivers for economic growth for an economy. The study aims to explore the impact of financial inclusion on economic growth in Bangladesh. In my study, I used the number of loan accounts as the proxy for financial inclusion. Using time series data from spans from 2004-2021, the study revealed that there exists a long-run relationship between GDP, financial inclusion, and other macroeconomic variables in Bangladesh. The study also found that financial inclusion had a positive impact on economic growth of Bangladesh during the study period. Therefore, the policymakers and the central bank of Bangladesh as the apex authority of financial system should promote financial inclusion activities to achieve sustainable economic growth.
    Date: 2024–01
  2. By: Wale-Awe, Olawale; Evans, Olaniyi
    Abstract: This study investigates the causal relationship between digital financial inclusion (DFI) and the growth-inequality-poverty triangle in a panel of 42 African countries for the period 1995 to 2018. Simultaneous-equations models, the two-step system generalized method of moments (GMM) versus the default one-step approach, and Toda Yamamoto causality test are used to investigate this relationship. The main results provide evidence that digital financial inclusion has significant negative effects on poverty and inequality, but significant positive effects on growth of GDP per capita, implying that increase in DFI is associated with reduction in poverty and inequality, but increase in economic growth. The implication is that DFI can promote economic growth, as well as alleviate poverty and stem the tide of inequality. The empirical results further show that there is unidirectional causality flowing from DFI to growth and inequality while bi-directional causality exists between DFI and poverty. Interestingly, there is bi-directional causality between growth and inequality, growth, and poverty, as well as between inequality and poverty. Overall, the findings imply that improving digital access to financial services across the continent is essential to increasing income levels, alleviating poverty, and aiding more even distribution of income. Future studies can improve on the extant literature by exploring whether the established findings withstand empirical analysis within country-specific settings.
    Keywords: Bitcoin returns, efficient market hypothesis, long memory in volatility, cryptocurrency
    JEL: G1 G10 O1 O12
    Date: 2023–01–06
  3. By: Amberg, Niklas (Research Department, Central Bank of Sweden); Becker, Bo (Stockholm School of Economics, CEPR and ECGI)
    Abstract: The decline in cash use and growing use of digital distribution for retail banking leads to a reduced need for bank branches. Lending to small and medium sized firms (SMEs) has not benefited as much from a digital transformation, and widespread branch closures may reduce their supply of credit. Using the closing of two thirds of Swedish branches as a laboratory, we document that corporate lending declines rapidly following branch closures, mainly via reduced lending to small and young firms. The reduced credit supply has real effects: local firms experience a decline in employment and sales and an increase in exit risk after branch closures. Our results thus suggest that the disappearance of bank branches have far-reaching implications for the economy
    Keywords: Banks; branch closures; credit supply
    JEL: D22 G21 G32 R12 R32
    Date: 2024–02–01
  4. By: Leonard Mushunje; Maxwell Mashasha
    Abstract: This paper uses nighttime light(NTL) data to measure the nexus of the non-banking sector, particularly insurance, and economic growth in South Africa. We hypothesize that insurance sector growth positively propels economic growth due to its economic growth-supportive traits like investment protection and optimal risk mitigation. We also claim that Nighttime light data is a good economic measure than Gross domestic product (GDP). We used weighted regressions to measure the relationships between nighttime light data, GDP, and insurance sector development. We used time series South African GDP data collected from the World Bank for the period running from 2000 to 2018, and the nighttime lights data from the National Geophysical Data Centre (NGDC) in partnership with the National Oceanic and Atmospheric Administration (NOAA). From the models fitted and the reported BIC, AIC, and likelihood ratios, the insurance sector proved to have more predictive power on economic development in South Africa, and radiance light explained economic growth better than GDP and GDP/Capita. We concluded that nighttime data is a good proxy for economic growth than GDP/Capita in emerging economies like South Africa, where secondary data needs to be more robust and sometimes inflated. The findings will guide researchers and policymakers on what drives economic development and what policies to put in place. It would be interesting to extend the current study to other sectors such as micro-finances, mutual and hedge funds.
    Date: 2023–11
  5. By: Sithole, Mixo Sweetness; Hlongwane, Nyiko Worship
    Abstract: The purpose of this study is to analyse how the BRICS countries' New Development Bank (NDB) promotes economic growth and development. This study aims to evaluate the influence of the NDB on crucial measures of economic growth and development in the BRICS nations by a thorough review of the bank's operations, financing mechanisms, and project portfolios. The study utilized the panel data from 1997-2022 using variables such as economic growth, employment, and trade. The study deployed a PMG estimator and Granger causality model. The results revealed positive bidirectional statistically significant relationship between broad money and economic growth in BRICS. The study recommended that NDB should promote growth of broad money as it boosts economic growth.
    Keywords: New Development Bank, Economic growth, BRICS, Pooled Mean Group estimator, Granger causality.
    JEL: C0 C3
    Date: 2023–07–07
  6. By: Pérez Caldentey, Esteban
    Abstract: Un objetivo central de la banca de desarrollo es promover la inclusión financiera para las micro pequeñas y medianas empresas (MyPyMEs). La inclusión financiera se entiende como una política de inserción productiva. Por una parte, engloba todos los esfuerzos e iniciativas orientados a brindar acceso a los servicios financieros formales a quienes carecen de él. En base al trabajo de la CEPAL el documento recoge lecciones aprendidas sobre la inclusión financiera de las MyPyMEs y sobre la forma en la cual la banca de desarrollo enfrenta la inclusión financiera. Cerrar la brecha financiera de las MyPyMes requiere un importante esfuerzo de estandarización, representatividad y profundización de las estadísticas y encuestas relativas a la situación financiera de lasMyPyMEs.La exclusión financiera y el rol de la banca de desarrollo no responden solo a imperfecciones de mercado. La distinción entre exclusión voluntaria e involuntaria conlleva la necesidad de distinguir entre el riesgo del prestamista y el riesgo del prestatario que tienen distintas distintas características y determinantes. La banca de desarrollo ha diseñado instrumentos existosos para la inclusión financiera, pero con una escala limitada y un impacto reducido.
    Date: 2024–02–05
  7. By: Lindlacher Valentin; Gustav Pirich
    Abstract: This study investigates the economic impact of China’s “stadium diplomacy” in Sub-Saharan Africa. Exploiting the staggered timing of the construction in a difference-in-differences framework, we analyze the effect of Chinese-built and financed stadiums on local economic development. Employing nighttime light satellite data, we provide both an aggregate and spatially disaggregated assessment of these investments. We find that a stadium’s city nighttime light intensity increases by 25 percent, on average, after stadium completion. The stadium’s direct surrounding increases by 34 percent, on average, in its nighttime light activity. The effects can be attributed to the stadiums but are not only visible close to the stadium’s location. The effect remains strong when controlling for other local Chinese investments. Thus, we find evidence for beneficial effects of Chinese-built and financed stadiums on local economic development in Sub-Saharan Africa, contrasting with the widely held notion that China’s development finance projects constitute “white elephants”.
    Keywords: stadium diplomacy, regional development, nighttime light, local public infrastructure, Sub-Saharan Africa
    JEL: O18 R11 O55 R53 Z20
    Date: 2024
  8. By: Christian Keuschnigg (University of St.Gallen, Institute of Economics (FGN-HSG)); Michael Kogler (German Council of Economic Experts); Johannes Matt (London School of Economics (LSE); Centre for Macroeconomics (CFM))
    Abstract: How do banks’ lending decisions influence firm turnover and creative destruction? We develop a dynamic general equilibrium model in which banks restructure loans with high default risk, thereby releasing funds for new lending and forcing firms with poor prospects to close down. By reducing banks’ reliance on external funds, loan restructuring lowers the equilibrium interest rate, which stimulates firm creation. We derive analytical and quantitative results from the model calibrated to German data: A lower cost of loan liquidation (e.g., improved insolvency laws) accelerates firm entry and exit, and boosts aggregate capital productivity mainly by incentivizing more active credit reallocation. Restructuring also complements policies that aim at stimulating firm creation (e.g., R&D subsidies) as it mitigates a crowding-out of entry via the interest rate.
    Keywords: Creative destruction, reallocation, bank credit, productivity
    JEL: E23 E44 G21 O4
    Date: 2024–01
  9. By: Yang Ming (Central University of Finance and Economics); Heng-fu Zou (Central University of Finance and Economics)
    Abstract: This paper develops a theoretical model to explore the impact of the spirit of capitalism (SOC) on entrepreneurship and the allocative efficiency of talent. In the presence of financial frictions, both individual abilities and wealth play crucial roles in shaping occupational choices. Consequently, individuals with a stronger SOC are more inclined towards entrepreneurship. However, this heightened entrepreneurial activity leads to allocative inefficiencies in talent allocation, as some wealthy but less skilled individuals pursue entrepreneurial ventures. Mitigating financial frictions serves to enhance overall productivity by rectifying this inefficiency, though its influence on entrepreneurship remains uncertain. Conversely, increasing the fraction of individuals with higher SOC yields non-monotonic effects on both aggregate productivity and entrepreneurship. The calibrated model introduces a novel perspective on the decline in entrepreneurship witnessed in the U.S. and other advanced economies over recent decades.
    Keywords: spirit of capitalism, entrepreneurship, talent allocation, occupational choice
    JEL: J24 O15 O16
    Date: 2024–01–20
  10. By: Lorenzo Casaburi; Jack Willis
    Abstract: We study the provision of financial services to small firms, consumers, and workers in developing countries as part of value chain relationships: value chain microfinance (VCMF). We first explore how VCMF can both overcome barriers to financial access – including asymmetric information, enforcement, and behavioral biases – and strengthen value chains, but also how it can introduce new challenges. We then review a recent empirical literature at the intersection of value chains and microfinance studying the demand for and effects of VCMF in credit, insurance, and savings markets. We conclude by highlighting promising directions for future work.
    JEL: G20 L14 O16 O17 Q14
    Date: 2024–01
  11. By: Georgarakos, Dimitris; Popov, Alexander
    Abstract: Using microdata from a U.S. household survey, we document that immigrants who lived through a sovereign default episode are 6% less likely to hold debt relative to otherwise similar immigrants who reside in the same U.S. state and come from the same foreign country but who did not experience a default. Conditional on holding debt, consumers in the former group borrow less and service lower debt burdens. The negative effect on borrowing behavior of having experienced a sovereign default increases with family size and declines with education. These findings highlight the role of personal experience in shaping households’ financial decisions. JEL Classification: G11, G51, H63, D83
    Keywords: experiences, household borrowing, immigrant, sovereign default
    Date: 2024–01
  12. By: Fisnik Bajrami (Charles University, Institute of Economic Studies, Faculty of Social Sciences, Prague, Czech Republic.)
    Abstract: Macroprudential policy has gained prominence for promoting financial stability. In this paper, we assess the effectiveness of macroprudential policy in reducing credit growth over a 22-year period across 129 countries. Additionally, we investigate the interaction between macroprudential policy, dollarisation, and various exchange rate regimes, examining their impact on different financial stability indicators. Our findings indicate that macroprudential policy significantly reduces credit growth within a quarter of implementation, though this is not evident in the case of soft peg exchange rate regimes. Furthermore, our analysis reveals that dollarised countries exhibit superior outcomes in financial stability when compared to alternative exchange rate regimes.
    Keywords: macroprudential policy, dollarisation, exchange rate, credit growth, non-performing loans, inflation, interest rates, empirical evaluation
    JEL: E42 E52 E58
    Date: 2024–02
  13. By: Anne Duquerroy; Klodiana Istrefi; Sarah Mouabbi
    Abstract: We examine the effects of uncertainty regarding the path of interest rates on firms’ decisions in the euro area. In the presence of heightened short-term interest rate uncertainty, firms tend to decrease their future investments and hiring activities. They also adopt a more cautious approach by hoarding cash and cutting dividend payments. Firm heterogeneity is crucial, as the negative effect on future investment is magnified when firms are ex-ante exposed to interest rate risk, face financial constraints or lack hedging strategies. These effects operate mainly through a financing and cash flow channel, highlighting the presence of a Finance-Interest-Rate-Uncertainty multiplier, whereby the effects of this uncertainty are amplified by the presence of financial constraints. Conversely, we find no significant effects of long-term interest rate uncertainty on firm decisions.
    Keywords: Interest Rate Uncertainty, Firm Heterogeneity, Financial Constraints, Rollover Risk, Investment, Employment, Cash Holding, Euro Area
    JEL: E43 E52 E22 G32
    Date: 2024
  14. By: Zhiguo He; Sheila Jiang; Douglas Xu
    Abstract: This paper develops a general equilibrium model to examine the role of information technology when intermediaries facilitate the origination and distribution of assets given information asymmetry. Information technology measures the informativeness of asset-quality signals received by intermediaries, who purchase assets produced by originators and then resell them to uninformed investors. Allowing intermediaries to operate has a mixed social welfare effect: Uninformed intermediation can be welfare reducing when adverse selection is severe in the economy, while informed intermediation always improves social welfare.
    JEL: D52 D82 G21 G23 O33
    Date: 2024–01
  15. By: Babina, Tania (Columbia University); Bahaj, Saleem (Bank of England); Buchak, Greg (Stanford University); De Marco, Filippo (Bocconi University); Foulis, Angus (Bank of England); Gornall, Will (University of British Columbia); Mazzola, Francesco (ESCP Business School); Yu, Tong (Imperial College London and Financial Conduct Authority)
    Abstract: Open banking (OB) empowers bank customers to share transaction data with fintechs and other banks. 49 countries have adopted OB policies. Consumer trust in fintechs predicts OB policy adoption and adoption spurs investment in fintechs. UK microdata shows that OB enables: i) consumers to access both financial advice and credit; and ii) small and medium‑sized enterprises to establish new fintech lending relationships. In a calibrated model, OB universally improves welfare through entry and product improvements when used for advice. When used for credit, OB promotes entry and competition by reducing adverse selection, but higher prices for costlier or privacy-conscious consumers partially offset these benefits
    Keywords: Open banking; entrepreneurship; fintech; financial innovation; data access; data rights; data portability; Big Data; financial regulation; financial sector; banks
    JEL: G21 G28
    Date: 2024–02–08
  16. By: HONJO, Yuji; IWAKI, Yunosuke; KATO, Masatoshi
    Abstract: This study explores the impact of initial debt financing on the survival of start-up firms by identifying three types of exit routes: bankruptcy, voluntary liquidation, and merger. Using a discrete-time duration model for Japanese start-up firms, we examine how debt financing affects the time from founding to exit. We find that firms that initially rely on debt financing from outside creditors are more likely to go bankrupt and that long-term debt, rather than short-term debt, is positively associated with the time to exit due to bankruptcy. In contrast, such firms are less likely to liquidate voluntarily, and long-term debt is negatively associated with the time to voluntary liquidation. Moreover, they are less likely to exit via merger, and long-term debt is negatively associated with the time to exit via merger. Furthermore, unlike voluntary liquidation and merger, macroeconomic conditions influence the likelihood of bankruptcy.
    Keywords: Bankruptcy, Debt financing, Long-term debt, Merger, Outside creditors, Start-up, Voluntary liquidation
    JEL: G33 G34 M13
    Date: 2024–01
  17. By: Edouard Cottin-Euziol (LC2S - Laboratoire caribéen de sciences sociales - CNRS - Centre National de la Recherche Scientifique - UA - Université des Antilles); Hassan Bougrine (Laurentian University); Louis-Philippe Rochon (Laurentian University)
    Abstract: Stock–flow consistent (SFC) modelling and monetary circuit theory (MCT) have many similarities. However, an important difference concerns the reflux phase, during which the credits issued by banks are repaid. This phase is constitutive of MCT models, but does not generally appear explicitly in SFC models. The authors propose here to develop an SFC model in which the bank loans issued at the beginning of a period are explicitly repaid at the end of it. The repayment of long-term bank loans financing investments will then represent a leakage outside the monetary circuit and affect the level of aggregate demand and the dynamics of the model. The authors show that considering these repayments could have a lasting effect on corporate profits, corporate indebtedness, and growth of production. This result suggests that it could be interesting to focus more on the reflux phase within SFC models, taking inspiration from MCT.
    Keywords: monetary circuit, stock–flow consistency, reflux, bank loans
    Date: 2024
  18. By: Omer Majeed (Reserve Bank of Australia); Jonathan Hambur (Reserve Bank of Australia); Robert Breunig (Crawford School of Public Policy, Australian National University)
    Abstract: Recent papers have argued that monetary policy and economic conditions can influence the amount of innovative activity in the economy, and therefore productivity and living standards in the future. This paper examines whether this is the case for Australia, a small open economy that tends to import innovation from overseas. We find that contractionary (expansionary) monetary policy reduces (increases) aggregate research and development (R&D) spending, and that lower (higher) R&D spending reduces (increases) future productivity. However, using firm-level data and a broader survey measure of innovation that also captures adoption, we find heterogeneous responses across different firm types. Small firms decrease innovation in response to contractionary monetary policy shocks whereas large firms increase innovation. This heterogeneity appears to reflect differing exposure to the channels through which monetary policy affects innovation. These channels include affecting demand or affecting financial conditions and constraints. We also find that US monetary policy spills over and affects Australian firms' innovation. Overall, our results suggest that monetary policy and economic conditions have medium-run effects on productivity, though the effects are more heterogeneous than previously documented. While the effects may cancel out over a cycle, this finding highlights the importance of stabilisation policy in preventing medium-run economic scarring.
    Keywords: innovation; monetary policy; firm-level data
    JEL: E52 O30
    Date: 2024–02
  19. By: Felipe Alves; Sushant Acharya
    Abstract: We measure how the change in the share of constrained households in Canada following the COVID-19 recession has impacted the effectiveness of monetary policy.
    Keywords: Coronavirus disease (COVID-19); Monetary policy transmission
    JEL: E21 E40 E50
    Date: 2024–02
  20. By: Girstmair, Stefan
    Abstract: This paper investigates the importance of including data on new housing supply in Dynamic Stochastic General Equilibrium (DSGE) models in forecasting the Great Financial Crisis (GFC), focusing on the U.S. While existing models have added a financial sector and real estate sector, they have largely overlooked housing supply. I develop an extended DSGE model that includes both the financial sector and endogenous housing supply and show that forecasting accuracy significantly improves when data on new houses is included. Robustness checks confirm the importance of these additions to the model. The findings highlight the necessity of combining model extension and housing supply data for accurate forecasting during economic crises. I identify negative housing demand shocks and escalating adjustment costs as primary drivers of the GFC, propagating into the real economy and accelerating through the financial sector. Additionally, this paper addresses the zero lower bound challenge in modeling forward guidance using a regime change approach. JEL Classification: E17, E32, E37, R21, R31
    Keywords: Bayesian estimation, DSGE, housing, model projection
    Date: 2024–01
  21. By: Benink, Harald (Tilburg University, Center For Economic Research); Huizinga, Harry (Tilburg University, Center For Economic Research); Raes, Louis (Tilburg University, Center For Economic Research); Zhang, Lishu (Tilburg University, Center For Economic Research)
    Keywords: Carbon Intensity; divestment; Foreign Investment
    Date: 2024
  22. By: Franck Ramaharo; Fitiavana Randriamifidy
    Abstract: The aim of this note is to identify the factors influencing renewable energy consumption in Madagascar. We tested 12 features covering macroeconomic, financial, social, and environmental aspects, including economic growth, domestic investment, foreign direct investment, financial development, industrial development, inflation, income distribution, trade openness, exchange rate, tourism development, environmental quality, and urbanization. To assess their significance, we assumed a linear relationship between renewable energy consumption and these features over the 1990-2021 period. Next, we applied different machine learning feature selection algorithms classified as filter-based (relative importance for linear regression, correlation method), embedded (LASSO), and wrapper-based (best subset regression, stepwise regression, recursive feature elimination, iterative predictor weighting partial least squares, Boruta, simulated annealing, and genetic algorithms) methods. Our analysis revealed that the five most influential drivers stem from macroeconomic aspects. We found that domestic investment, foreign direct investment, and inflation positively contribute to the adoption of renewable energy sources. On the other hand, industrial development and trade openness negatively affect renewable energy consumption in Madagascar.
    Date: 2023–10

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