nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2024‒03‒11
twenty-two papers chosen by
Georg Man,

  1. Is Schumpeter Right? Fintech and Economic Growth By Mr. Serhan Cevik
  2. The Financial Development, Savings and Economic Growth Nexus Empirical Evidence from Ethiopia By Anulo, Olkamo, Degefe
  3. Oman: Selected Issues By International Monetary Fund
  4. The differential effects of foreign aid to sub-Saharan Africa By Akame, Afuge; Mavrotas, George
  5. Learning from KfW's ex-post evaluations? How conflicting objectives can limit their usefulness By Dörrbecker, Nicola M.
  6. Wealth redistribution in bubbles and crashes By An, Li; Lou, Dong; Shi, Donghui
  7. The Italian Banking System During the 1907 Financial Crisis and the Role of the Bank of Italy By Francesco Vercelli
  8. Stabilizing the Financial Markets through Communication and Informed Trading By Guo, Qi; Huang, Shao'an; Wang, Gaowang
  9. Smooth Regulatory Intervention By Schilling, Linda
  10. Evolution of Debt Financing toward Less-Regulated Financial Intermediaries in the United States By Isil Erel; Eduard Inozemtsev
  11. The lending implications of banks holding excess capital By Neryvia Pillay; Konstantin Makrelov
  12. Decomposing systemic risk measures by bank business model in Luxembourg By Xisong Jin
  13. Back to the roots of internal credit risk models: Does risk explain why banks' risk-weighted asset levels converge over time? By Böhnke, Victoria; Ongena, Steven; Paraschiv, Florentina; Reite, Endre J.
  14. How good are banks' forecasts? By Heckmann, Lotta; Memmel, Christoph
  15. Public debt and growth in Asian developing economies: evidence of non-linearity and geographical heterogeneity By Doojav, Gan-Ochir; Baatarkhuu, Munkhbayar
  16. Costly Increases in Public Debt when r By Yongquan Cao; Vitor Gaspar; Mr. Adrian Peralta Alva
  17. Leveraging interest-growth differentials: Hidden effects of government financial assets in the European Union By José Alves; Clarisse Wagner
  18. Banks and Purchases of Government Bonds: the Italian Experience from 1890 to Present By Paolo Piselli; Francesco Vercelli
  19. Government-Made House Price Bubbles? Austerity, Homeownership, Rental, and Credit Liberalization Policies and the “Irrational Exuberance” on Housing Markets By Konstantin A. Kholodilin; Sebastian Kohl; Florian Müller
  20. The Housing Supply Channel of Monetary Policy By Bruno Albuquerque; Martin Iseringhausen; Frederic Opitz
  21. Managing the transition to central bank digital currency By Assenmacher, Katrin; Ferrari Minesso, Massimo; Mehl, Arnaud; Pagliari, Maria Sole
  22. Integrating Out Natural Disaster Shocks By Franziska Bremus; Malte Rieth

  1. By: Mr. Serhan Cevik
    Abstract: The rise of fintech is revolutionizing the financial landscape, with products and companies advancing innovative technologies to improve and automate financial services. In this paper, I use a novel dataset and implement a dynamic modelling to investigate the relationship between fintech and economic growth in a panel of 198 countries over the period 2012–2020. This cross-country approach—utilizing direct measures of fintech and dealing with potential endogeneity—provides interesting empirical insights. First, the impact magnitude and statistical significance of fintech on real GDP per capita growth depend on the type of instrument (digital lending vs. digital capital raising). While digital lending has a statistically significant positive effect on economic growth, digital capital raising has a large but insignificant effect. Second, the overall impact of fintech including all instruments is positive and statistically significant because of the overwhelming share of digital lending in total. Finally, while the positive relationship between fintech and growth is stronger in magnitude in advanced economies, the statistical significance of this effect is higher in developing countries. Taken as a whole, these results confirm Schumpeter’s prediction that financial innovation can promote growth, but not every type of fintech becomes an accelerator.
    Date: 2024–02–02
  2. By: Anulo, Olkamo, Degefe
    Abstract: Ethiopia has experienced substantial growth in per capita income, domestic savings, and financial sector developments over the past four decades. This paper aims to examine the causal relationship between certain variables in Ethiopia from 1981 to 2023. The variables considered in this paper include per capita income, private sector credit, domestic savings, and the rate of change in the consumer price index. Per capita income and private sector credit are used as proxies to measure real economic growth and financial sector development, while the inflation rate plays a crucial role in controlling these variables. The study used the bounds cointegration test within the Autoregressive Distributive Lag (ARDL) model framework to investigate the existence of long-run integration among series. The ADF unit root test was employed to determine whether variables remained stationary. This paper used the Granger causality test to determine causal influences in the Ethiopian economy. The vector error correction model was employed for this purpose. The study also aimed to identify hypotheses that support these causal influences. The findings affirm the existence of bidirectional causal relationships among the variables. Thus, the Ethiopian economy adheres to a feedback hypothesis, which suggests that an expansion of real economic growth will favour efficient financial development and stimulate savings. Similarly, having a well-functional financial sector development and steadfast domestic resources plays a crucial role in promoting economic growth.
    Keywords: Testing hypotheses, domestic savings, private sector credit, and Real economy growth
    JEL: E6
    Date: 2024–02–15
  3. By: International Monetary Fund
    Abstract: Selected Issues
    Date: 2024–01–29
  4. By: Akame, Afuge; Mavrotas, George
    Abstract: This paper explores the impact of various forms of donor aid on economic growth in 39 sub-Saharan African countries from 2002 to 2020. The findings suggest that while total aid positively influences growth, different aid modalities have varying effects, with project aid and technical assistance boosting growth, while budget support and humanitarian assistance hinder it. The study emphasizes the importance of disaggregating aid types in research on aid effectiveness, challenging the traditional approach of using a single figure for aid in policy recommendations.
    Keywords: COVID-19, aid, sub-Saharan Africa
    Date: 2024–01
  5. By: Dörrbecker, Nicola M.
    Abstract: The effectiveness of development cooperation (DC) is a topic of extensive debate in this policy field. Yet despite numerous review and evaluation formats designed to promote learning processes and hence enhance effectiveness, it is often impossible to document these improvements. Against this backdrop, the present paper aims to analyse the usefulness of ex-post evaluations (EPEs) by KfW Development Bank - both within KfW Development Bank and at the German Federal Ministry for Economic Cooperation and Development (BMZ), from which it receives its commissions. Research indicates that EPEs are conducted with great care. Moreover, EPEs can contribute to the legitimacy of (financial) DC, as project results are considered and presented in a structured manner. Nevertheless, the people interviewed for this study regard EPEs as (highly) subjective assessments and believe that these evaluations may under certain circumstances not be comparable with one another. Yet EPEs need to be comparable, because their overall ratings are used to calculate the success rate, which is currently around 81%. This in turn affects KfW's reporting on its performance to BMZ and to the public. The data from the interviews shows that trade-offs during the production and use of EPEs appear to limit the usefulness of this format. EPEs are designed to deliver accountability to the public and to BMZ and to promote learning within KfW. These are conflicting objectives, however, as they would each require a different approach. According to those interviewed at KfW and BMZ, EPEs are seldom read or used. Interviewees explain that EPEs are rarely relevant to people working in operational areas, as the evaluations are not published until several years after the project concerned has been completed and only occasionally contain information that is relevant to current projects. The evaluations cannot be conducted sooner, however, as otherwise they would not be able to assess the sustainability and development impact of a project. Moreover, interviews and evidence from other studies indicate that EPEs are of limited relevance to political steering at BMZ, even in aggregated form. Nonetheless, the author believes that it would not be an option to no longer conduct EPEs, as they are the only way to review the development impact and sustainability of a representative number of projects in an affordable way, thus forming the basis for delivering accountability. Reconciling the conflicting goals of learning and accountability is challenging. For the learning component, it would appear to be a good idea to make greater use of cross-sectional analyses and to establish a central support structure for all implementing organisations and BMZ with a view to compiling all the key information from the evaluations and forwarding it to both BMZ and KfW and to the partner countries in a form tailored to meet their needs. For the accountability component, transparency also needs to be enhanced by making completed evaluation reports available to the public promptly and in full. In addition to an evaluation of international research literature, this paper particularly draws on empirical interview data. A total of 13 specifically selected experts from the German DC system were interviewed. This interview data thus forms an illustrative but not representative sample.
    Keywords: Financial cooperation, ex-post evaluations (EPE), Kreditanstalt für Wiederaufbau (KfW), accountability, learning, learning organisation, effectiveness, impact measurement, knowledge management, steering
    Date: 2023
  6. By: An, Li; Lou, Dong; Shi, Donghui
    Abstract: What are the social-economic consequences of financial market bubbles and crashes? Using novel comprehensive administrative data from China, we document a substantial increase in inequality of wealth held in equity by Chinese households in the 2014–15 bubble-crash episode: the largest 0.5% households in the equity market gain, while the bottom 85% lose, 250B RMB through active trading in this period, or 30% of either group's initial equity wealth. In comparison, the return differential between the top and bottom household groups in 2012–14, a period of a relatively calm market, is on the order of 1 to 3%. We examine several possible explanations for these findings and discuss their broader implications.
    Keywords: bubbles and crashes; investment skills; market participation; wealth inequality; 71903106; 71790591; 71790605
    JEL: D14 D31 D91 G11 O16
    Date: 2022–03–01
  7. By: Francesco Vercelli (Bank of Italy)
    Abstract: This paper examines the Italian banking system during the 1907 financial crisis, from start to finish. Using bank balance sheet data from the Historical Archive of Credit in Italy, we analyse the developments of the banking system in the run-up to the crisis. We show that the four Italian mixed banks, which registered a rapid growth at the beginning of the 20th century, were little engaged in the traditional activity of bill discounting and largely involved in ‘repurchase agreements’ on stocks and in correspondent current accounts. Because of this business model, the mixed banks – and in particular the Società Bancaria Italiana – turned out to be fragile when the international crisis hit the country. Then we analyse the complex interactions between the major financial institutions and the government in order to face the crisis. We focus on the role of the Bank of Italy, which acted as a modern central bank for the first time since its creation.
    Keywords: financial crisis, history of banking
    JEL: C81 G21 N23 N24
    Date: 2022–06
  8. By: Guo, Qi; Huang, Shao'an; Wang, Gaowang
    Abstract: We develop a model of government intervention with information disclosure in which a government with two private signals trades directly in financial markets to stabilize asset prices. Government intervention through informed trading stabilizes financial markets and affects market quality (market liquidity and price efficiency) through a noise channel and an information channel. Information disclosure negatively affects financial stability by deteriorating the information advantages of the government, while its final effects on market quality hinge on the relative sizes of the noise effect and the information effect. Under different information disclosure scenarios, there exist potential tradeoffs between financial stability and price efficiency.
    Keywords: government intervention; information disclosure; financial stability; price efficiency; market liquidity
    JEL: D8 G1
    Date: 2024–02–08
  9. By: Schilling, Linda
    Abstract: Policy makers have developed different forms of policy intervention for stopping, or preventing runs on financial firms. This paper provides a general framework to characterize the types of policy intervention that indeed lower the run-propensity of investors versus those that cause adverse investor behavior, which increases the run-propensity. I employ a general global game to analyze and compare a large set of regulatory policies. I show that common policies such as Emergency Liquidity Assistance, and redemption (withdrawal) fees either exhibit features that lower firm stability ex ante, or have offsetting features rendering the policy ineffective.
    Keywords: financial regulation, bank runs, global games, policy effectiveness, bank resolution, withdrawal fees, emergency liquidity assistance, lender of last resort policies, money market mutual fund gates, suspension of convertibility
    JEL: D81 D82 G21 G28 G33 G38
    Date: 2024–02–03
  10. By: Isil Erel; Eduard Inozemtsev
    Abstract: Nonbank lenders have been playing an increasing role in supplying debt, especially after the Great Recession. How important are the distortions in the greater regulation of banks that differentially limit risk-taking across alternative providers of credit? How might the growing role of nonbanks in credit markets affect financial stability? This selective review addresses these questions and discusses how banks and nonbanks helped provide liquidity to the nonfinancial sector during the COVID-19 pandemic shock. We argue that tighter bank regulation has created incentives for nonbanks to increase their participation in credit markets, a trend that creates concerns about financial stability.
    JEL: G21 G22 G23 G24 G28
    Date: 2024–02
  11. By: Neryvia Pillay; Konstantin Makrelov
    Abstract: Banks hold capital above microprudential and macroprudential regulatory requirements for a variety of reasons, including as a risk mitigation measure. In this study, we assess how decisions around the size of excess capital as well as monetary and financial stability actions impact sectoral lending in South Africa. Using a unique set of micro data for the South African banking sector for the period 2008 to 2020, provided by South Africas Prudential Authority, our analysis controls for bank characteristics such as bank size, profitability and liquidity. Our results suggest that banks decisions around holding additional capital affect their lending. As expected, monetary policy actions have a strong impact on bank lending and so do regulatory changes to bank capital requirements. These impacts tend to be smaller for larger banks, in line with results published in the global literature. Our results highlight the difficulties of thinking about policy in a Tinbergen rule type of world. Fiscal, microprudential, macroprudential and monetary policy actions can affect price and financial stability goals through their impact on credit extension. When policies work at cross purposes, they can easily undermine each others goals.
    Date: 2024–01–16
  12. By: Xisong Jin
    Abstract: This paper introduces a forward-looking bank-level stress testing framework for a large-scale system to assess three forms of banking system vulnerability– bank capital fragility, bank capital adequacy and bank solvency. Results for Luxembourg are provided with a decomposition by bank business model and domicile type. The paper goes on to assess how these systemic risk indicators are linked to macroeconomic variables, and investigates their predictive power for Luxembourg’s nominal GDP growth one year ahead. Several important findings are documented over 2003Q2 to 2023Q3. First, the systemic risk indicators responded to the main stock market crashes in a timely manner. However, contributions from different bank business models and domicile types varied over time. Second, association with key macroeconomic variables (interest rates, liquidity flow, euro area consumer confidence and business climate) depended on the different characteristics of systemic risk across bank business models. Third, the systemic risk indicators contributed to explaining nominal GDP growth one year ahead. However, the systemic risk component associated with search-for-yield behavior and fee & commission generating activities could also explain nominal GDP growth, suggesting that if banks became more dependent on these income sources, they could create financial stability issues in the long run. Overall, the framework provides a useful monitoring toolkit that tracks changes in forward-looking systemic risk and risk spillovers in the Luxembourg banking sector.
    Keywords: Financial stability, systemic risk, macro-prudential policy, dynamic dependence, banking business model, financial stress index, coronavirus COVID-19, macro-financial linkages.
    JEL: C1 E5 F3 G1
    Date: 2024–02
  13. By: Böhnke, Victoria; Ongena, Steven; Paraschiv, Florentina; Reite, Endre J.
    Abstract: The internal ratings-based (IRB) approach maps bank risk profiles more adequately than the standardized approach. After switching to IRB, banks' risk-weighted asset (RWA) densities are thus expected to diverge, especially across countries with different supervisory strictness and risk levels. However, when examining 52 listed banks headquartered in 14 European countries that adopted the IRB approach, we observe a downward convergence of their RWA densities over time. We test whether this convergence can be entirely explained by differences in the size of the banks, loss levels, country risk, and/or time of IRB implementation. Our findings indicate that this is not the case. Whereas banks in high-risk countries with less strict regulation and/or supervision, reduce their RWA densities, banks elsewhere increase theirs. Especially for banks in high-risk countries, RWA densities seem to underestimate banks' economic risk. Hence, the IRB approach enables regulatory arbitrage, whereby authorities may only enforce strict supervision on capital requirements if they do not jeopardize bank existence.
    Keywords: Capital regulation, credit risk, internal ratings-based approach, regulatory arbitrage, risk-weighted assets
    JEL: G21 G28
    Date: 2024
  14. By: Heckmann, Lotta; Memmel, Christoph
    Abstract: We analyse the ftnancial forecasts small and medium-sized German banks provided in several waves of a quantitative survey, called LIRES, and compare them with the results the banks actually realized. Based on this unique data set, we ftnd that the predictions are relevant, especially concerning the net interest income for the next year, and persistent, but neither unbiased nor rational. We also ftnd slight evidence for a positive relationship between planning and performance, i.e. banks whose predictions are more accurate tend to have a higher return on assets. Looking at the forecasts made just before the end of the low-interest rate environment, we observe that the explanatory power of predictions went down.
    Keywords: Forecasts, Banks, Quantitative Survey (LIRES)
    JEL: G21
    Date: 2024
  15. By: Doojav, Gan-Ochir; Baatarkhuu, Munkhbayar
    Abstract: This paper examines the non-linear effects of public debt on economic growth in Asian developing economies using panel Generalized Method of Moments (GMM) regressions and panel vector autoregression (VAR) models. We find a statistically significant non-linear effect of public debt (as a percent of GDP) on GDP per capita growth, with a turning point at 52 percent and 50 percent of GDP for all Asian developing and Asian coastal developing economies, respectively. It is found that asymmetric mutual feedback effects exist between the growth and the public debt depending on the public debt level. The two-way effects are statistically significant and more evident when the public debt exceeds its threshold level. Our results also show evidence of geographical (cross-country) heterogeneity in the mutual feedback effects. These findings have important policy implications, including the need to use geographic (or region)-specific debt threshold levels and asymmetric response coefficients in public debt policy analysis.
    Keywords: Public debt, economic growth, Asian developing countries, sustainability of debt, non-linearity, geographical heterogeneity
    JEL: C23 E62 F34 H63 O11 R11
    Date: 2023
  16. By: Yongquan Cao; Vitor Gaspar; Mr. Adrian Peralta Alva
    Abstract: This paper quantifies the costs of a permanent increase in debt to GDP. We employ a deterministic, overlapping generations model with two assets and no risk of default. The two assets are public debt and private (productive) capital. We assume that the return on private capital equals the interest rate on public debt plus an exogenously given spread. Employing a analytical version of the model we show an example in which a permanent rise in the public debt ratio leads to a significant reduction in steady-state GDP even as r
    Keywords: Crowding out; public debt
    Date: 2024–01–12
  17. By: José Alves; Clarisse Wagner
    Abstract: Conditions of fiscal sustainability have been widely studied in the literature. Fiscal reaction functions or cointegration between government revenues and expenditures are two approaches that economists have been paying their attention, not only on a theoretical perspective, but also empirically assessing the sustainability of several economies during different timespans. Whereas a predominant focus has been attributed to primary deficits, little attention has been dedicated to government financial assets contribution to government debt paths. Given that government financial assets represent a large proportion of gross debt accumulation, we enquire about their role on government debt leveraging of economic growth over interest rates, focusing on a channel of gross debt, investment, external balance and ratings, in 27 European Union economies during the period from 2000 to 2022. Large heterogeneities in the statistical characteristics of the series and impacts of financial assets on interest rate-growth rate differentials call for a closer attention to financial assets on a granular approach at individual country level, rather than on the aggregate. Our results highlight the importance of government financial assets holdings to the short and long-run debt trajectories, enhancing or potentially undermining gains from primary deficits consolidation efforts and consequently on the differentials between interest rates and output growth.
    Keywords: Public debt; Stock Flow Adjustments; Financial Assets Holdings; ARDL; PMG
    JEL: C23 E44 F65 H60 H63
    Date: 2024–01
  18. By: Paolo Piselli (Bank of Italy); Francesco Vercelli (Bank of Italy)
    Abstract: The paper studies banks investment in Italian government bonds from 1890 to the present. First, through an extensive statistical reconstruction and in-depth analysis of historical sources, it shows how the economic and institutional environment has influenced the purchases of government securities, analyzing in particular the conditions and structure of the market for public bonds (supply, available financial instruments, yields, riskiness), regulation and moral suasion action by public authorities. Second, using a database of Italian banks' balance sheets from 1890 to the present, an econometric analysis is conducted of the microeconomic determinants of demand for government bonds, such as funding, liquidity, profitability, and default risk. Finally, it is shown how the contribution of these determinants changes during periods of increased sovereign debt riskiness.
    Keywords: storia bancaria, titoli di stato
    JEL: C23 G21 G28 N23 N24
    Date: 2023–10
  19. By: Konstantin A. Kholodilin; Sebastian Kohl; Florian Müller
    Abstract: Housing bubbles and crashes are catastrophic events for economies, implying enormous destruction of housing wealth, financial default risks, construction unemployment, and business cycle downturns. This paper investigates whether governmental housing policies can affect economies’ propensity to build up speculative house price bubbles. Specifically, we focus on the liberalization effects of rent and credit regulation as well as homeownership and austerity policies. Drawing on a long-run time series from 16 countries since 1870, we identify speculative price bubbles through explosive root tests, corroborated by a narrative approach. Estimating logit models, we find that tighter rent and credit controls make bubbles less likely to emerge by dampening price increases, while certain homeownership and tenant subsidies and government austerity increase the likelihood of bubbles. The paper illustrates the logic of rent, credit, homeownership and austerity effects with two case studies.
    Keywords: speculative house price bubbles, rent control, homeowner taxation, explosive roots, panel data logit model
    JEL: C43 O18 R38
    Date: 2023
  20. By: Bruno Albuquerque; Martin Iseringhausen; Frederic Opitz
    Abstract: We study the role of regional housing markets in the transmission of US monetary policy. Using a FAVAR model over 1999q1–2019q4, we find sizeable heterogeneity in the responses of US states to a contractionary monetary policy shock. Part of this regional variation is due to differences in housing supply elasticities, household debt overhang, and housing wealth (volatility). Our analysis indicates that house prices and consumption respond more in supply-inelastic states and in states with large household debt imbalances, where negative housing wealth effects bite more strongly and borrowing constraints become more binding. Moreover, financial stability risks increase sharply in these areas as mortgage delinquencies and foreclosures surge, worsening banks’ balance sheets. Finally, monetary policy may have a stronger effect on housing tenure decisions in supply-inelastic states, where the homeownership rate and price-to-rent ratios decline by more. Our findings stress the importance of regional housing supply conditions in assessing the macrofinancial effects of rising interest rates.
    Keywords: Credit conditions; FAVAR; house prices; monetary policy; regional data; supply elasticities
    Date: 2024–02–02
  21. By: Assenmacher, Katrin; Ferrari Minesso, Massimo; Mehl, Arnaud; Pagliari, Maria Sole
    Abstract: We develop a two-country DSGE model with financial frictions to study the transition from a steady-state without CBDC to one in which the home country issues a CBDC. The CBDC provides households with a liquid, convenient and storage-cost free means of payments which reduces the market power of banks on deposits. In the steady-state CBDC unambiguously improves welfare without disintermediating the banking sector. But macroeconomic volatility in the transition period to the new steady-state increases for plausible values of the latter. Demand for CBDC and money overshoot, thereby crowding out bank deposits and leading to initial declines in investment, consumption and output. We use non-linear solution methods with occasionally binding constraints to explore how alternative policies reduce volatility in the transition, contrasting the effects of restrictions on non-residents, binding caps, tiered remuneration and central bank asset purchases. Binding caps reduce disintermediation and output losses in the transition most effectively, with an optimal level of around 40% of steady-state CBDC demand. JEL Classification: E50, E58, F30, F41
    Keywords: central bank digital currency, occasionally binding constraints, open-economy DSGE models, steadystate transition
    Date: 2024–02
  22. By: Franziska Bremus; Malte Rieth
    Abstract: We study the role of international financial integration in buffering natural disaster shocks, using a large sample of advanced and emerging economies. Conditioning on such exogenous events addresses the endogeneity between financial structures and economic conditions. We document that integration improves shock absorption: output, consumption, and investment are significantly higher after a shock in states of high integration than in states of low integration. However, the benefits of international risk sharing mostly come to advanced economies. Emerging markets only profit from more integration if they have good institutions or high debt assets, whereas higher debt liabilities weaken the recovery.
    Keywords: Financial integration, natural disasters, international risk sharing, dynamic panel model, emerging markets
    JEL: Q54 E44 F36 F62 G11 G15
    Date: 2023

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