nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2024‒04‒01
eighteen papers chosen by
Georg Man,

  1. Finance in a Time of Disruptive Growth By Nicolae B. Gârleanu; Stavros Panageas
  2. The Distributional Effects of Asset Returns By Jesús Fernández-Villaverde; Oren Levintal
  3. Uncertainty or Frictions? A Quantitative Model of Scarce Safe Assets By Cosmin L. Ilut; Pavel Krivenko; Martin Schneider
  4. Rational bubbles on assets with a fundamental value By Lise Clain-Chamosset-Yvrard; Xavier Raurich; Thomas Seegmuller
  5. IMF Programs and Financial Flows to Offshore Centers By Shekhar Aiyar; Manasa Patnam
  6. Exploring the Effects of FTAs on Chilean Exports: Heterogeneous responses and Financial Constraints By Roberto Alvarez; Eugenia Andreasen
  7. An Application to Model Uncertainty in Modelling Non-Performing Loans By Mehmet Selman Colak; Yavuz Kilic; Huseyin Ozturk; Mehmet Emre Samci
  9. Collateral Effects: The Role of FinTech in Small Business Lending By Paul Beaumont; Huan Tang; Éric Vansteenberghe
  10. What Gets Measured Gets Managed: Investment and the Cost of Capital By He, Zhiguo; Liao, Guanmin; Wang, Baolian
  11. Taxation when Markets are not Competitive: Evidence from a Loan Tax By Brugués, Felipe; De Simone, Rebeca
  12. Emerging Markets Bond Index Performance and Sovereign Default: The Case of Ecuador By Zanoni, Wladimir; Díaz, Emily; Paredes, Jorge; Andrian, Leandro Gaston; Maldonado, Juan Lorenzo
  13. Sovereign Risk and Local Currency Lending Rates: Evidence from Five OECD Countries By Selcuk Gul
  14. "Quantifying sovereign risk in the euro area" By Manish K. Singh; Marta Gómez-Puig; Simón Sosvilla-Rivero
  15. High Frequency Monitoring of Credit Creation: A New Tool for Central Banks in Emerging Market Economies By Giraldo, Carlos; Giraldo, Iader; Gomez-Gonzalez, Jose E.; Uribe, Jorge M.
  16. Monetary Policy Has a Long-Lasting Impact on Credit: Evidence from 91 VAR Studies By Josef Bajzik; Jan Janku; Simona Malovana; Klara Moravcova; Ngoc Anh Ngo
  17. Excess reserves and monetary policy tightening By Fricke, Daniel; Greppmair, Stefan; Paludkiewicz, Karol
  18. Modelling Monetary and Fiscal Policy to Achieve Climate Goals By Yener Altunbas; Xiaoxi Qu; John Thornton

  1. By: Nicolae B. Gârleanu; Stavros Panageas
    Abstract: We propose a unified theory of asset price determination encompassing both “conventional” and “alternative” asset classes (private equity, real estate, etc.). The model features disruption of old by young firms and skewness in the distribution of innovative rents among the young innovators. The relative size of asset classes, the dynamics of rich investors’ wealth, and the returns of the various asset classes are jointly determined in equilibrium. Besides explaining the observed patterns of returns across asset classes, we analyze the theoretical properties of the most widely used performance-evaluation measure for alternative investments. We also provide connections between the growth of alternative investments, the dispersion of returns across investors, and the turnover inside the ranks of wealthy individuals.
    JEL: G11 G12 G24 O49
    Date: 2024–03
  2. By: Jesús Fernández-Villaverde; Oren Levintal
    Abstract: We study the distributional effects of asset returns using a heterogeneous-agent model estimated to match the joint distribution of wealth and returns. In the model, endogenous portfolio decisions play a key role through their impact on households' wealth accumulation. We find substantial welfare effects of changes in asset returns. A permanent decline of one percentage point in expected returns increases the consumption share of the top 10% by 6% permanently. Our findings suggest that lower returns increase inequality, which contradicts Piketty's (2014) r-g formula. To resolve this contradiction, we derive a generalized formula that includes the consumption/wealth ratio and which is consistent with our empirical and theoretical findings. Nonetheless, wealth inequality within the Pareto tail is fairly insensitive to asset returns. Instead, inequality between the Pareto tail and the lower range of the distribution responds strongly to asset returns through their differential effects on active savings relative to wealth. Simulations suggest that asset price dynamics can explain the main variations in U.S. top wealth shares since the 1960s.
    JEL: E0 E20
    Date: 2024–03
  3. By: Cosmin L. Ilut; Pavel Krivenko; Martin Schneider
    Abstract: Why did the real interest rate decline and the equity premium increase over the last 30 years? This paper assesses the role of uncertainty and credit market frictions. We quantify a model with heterogeneous households using data on asset prices and macro aggregates, as well as on households' debt and equity positions. We find that compensation for both uncertainty and frictions is reflected in asset prices. Moreover, a secular increase in frictions is important to understand jointly the decline in real rate and the relative scarcity of debt. Modeling uncertainty as ambiguity allows for tractable characterization of asset premia and precautionary savings effects in steady state.
    JEL: E2 E4 G1
    Date: 2024–03
  4. By: Lise Clain-Chamosset-Yvrard (Univ. Lyon, Universit´e Lumi`ere Lyon 2, GATE UMR 5824); Xavier Raurich (Departament d’Economia and CREB, Universitat de Barcelona); Thomas Seegmuller (Aix-Marseille Univ., CNRS, AMSE, Marseille, France)
    Abstract: In this paper, we provide a simple framework to show the existence of stationary bubbles on dividend-yielding financial assets. These bubbles are compatible with a positive stationary fundamental value, rather than requiring its collapse in the long run. This result is obtained in an exchange overlapping generations economy with vintage financial assets that depreciate over time. New assets are introduced in each period, ensuring a constant aggregate supply of financial assets. Depreciation introduces a gap between the return of bubbles and the rate at which the dividends are discounted. Because the return of bubble can be lower or equal to the growth rate, we can have stationary equilibria with both a positive bubble and a positive fundamental value. Finally, our framework also allows us to discuss the role of the substitutability between financial assets on the level of bubbles and fundamental values.
    Keywords: Rational bubbles, financial assets, fundamental value
    JEL: E21 E44 G12
    Date: 2024–03
  5. By: Shekhar Aiyar (Johns Hopkins SAIS, Bruegel and NCAER); Manasa Patnam (International Monetary Fund)
    Abstract: This paper examines whether IMF lending is associated with increases in outflows to offshore financial centers (OFCs), known for bank secrecy and asset protection, relative to other international destinations. Using quarterly data from the BIS on bilateral bank deposits, we are unable to detect any positive and statistically significant effect of IMF loan disbursements on bank deposits in OFCs. The result holds even after restricting the sample to the duration of the IMF program, where disbursement quarters and non-disbursement quarters should be subject to similar degrees of macroeconomic stress. It is also robust to using the scheduled tranche of disbursements as an instrument for actual disbursements. While the effects vary by the type and conditionality of the IMF program, as well as the amount of lending, none of the effects are found to be positive and statistically significant. We also estimate whether the recent surge in emergency lending, during the Covid-19 crisis, is associated with an increase in outflows to OFCsbut find no evidence to support this.
    Keywords: Financial Flows, Aid, Corruption, Governance.
    JEL: D73 F35 P16
    Date: 2024–01–01
  6. By: Roberto Alvarez; Eugenia Andreasen
    Abstract: In this paper, we examine the influence of Free Trade Agreements (FTAs) on Chilean exports during the past thirty years. Over the last three decades, Chile has entered into 31 FTAs with 65 countries, encompassing nearly 90% of global GDP. Despite this, there's a notable absence of empirical evidence regarding the extent and nature of the impact of these agreements on export volumes and product diversification. With a rich dataset encompassing bilateral trade flows at the product-level and key financial indicators, we employ a differencein-differences approach to provide robust evidence of the positive impact of these FTAs on export levels and the variety of products exported. Our analysis also reveals variations in these effects based on the industries' initial export share and trading partners' income levels. Furthermore, we investigate how FTAs interacted with the financial development and capital control policies of trading partners, demonstrating their role in mitigating financial constraints on trade.
    Date: 2024–03
  7. By: Mehmet Selman Colak; Yavuz Kilic; Huseyin Ozturk; Mehmet Emre Samci
    Abstract: [EN] The asset quality of a banking system has the utmost importance not only for the soundness of the banking sector, but also for other major components of an economy. The lack of consensus on a certain set of variables for modeling asset quality leads to a problem, which is also known as “model uncertainty”. In this study, we investigate how non-performing loans in the Turkish banking system respond to changes in macroeconomic and bank-specific variables. To address model uncertainty, we employ a model averaging approach. Our results confirm the main findings in the literature with regards to the nexus between asset quality and macroeconomic and bank-specific variables. In addition, parameter estimates obtained from 1, 023 models using combinations of 10 variables suggest that even under extreme shocks, the NPL ratio of the Turkish banking sector remains within reasonable limits. [TR] Bankacilik sisteminin aktif kalitesi, sadece bankacilik sektorunun saglamligi acisindan degil, ekonominin diger temel bilesenleri acisindan da buyuk onem arz etmektedir. Aktif kalitesinin modellenmesinde belirli bir dizi degisken uzerinde fikir birliginin bulunmamasi, “model belirsizligi” olarak da bilinen bir soruna yol acmaktadir. Bu calismada, Turk bankacilik sistemindeki takipteki kredilerin makroekonomik ve bankaya ozgu degiskenlerdeki degisimlere nasil tepki verdigi incelenmektedir. Model belirsizligi sorununu gidermek icin model ortalamasi yaklasimi kullanilmaktadir. Sonuclarimiz, aktif kalitesi ile makroekonomik ve bankaya ozgu degiskenler arasindaki baglantiya iliskin literaturdeki ana bulgulari dogrulamaktadir. Ayrica, 10 degiskenin kombinasyonu kullanilarak 1023 modelden elde edilen katsayi tahminleri, asiri soklarda bile takipteki kredi oraninin makul sinirlar icinde kaldigini ortaya koymaktadir.
    Date: 2024
  8. By: Christophe J. GODLEWSKI (LaRGE Research Center, Université de Strasbourg); Malgorzata OLSZAK (Wydzial Zarzadzania, Uniwersytet Warszawski)
    Abstract: We analyze the impact of macroprudential policies on corporate loans. We utilize a dataset of over 4, 800 syndicated loans from 1999-2017, matched with detailed macroprudential policy data from the European Central Bank. We investigate how overall policy stance and specific tools influence key loan terms at origination, including the amount, maturity, collateral, and covenants. Drawing upon hypotheses related to credit growth, risk-taking, and efficiency transmission channels, we show that a tighter macroprudential policy leads to an increase in loan amounts and collateralization. These effects are most prominent for tools that tighten lending standards and capital buffers, particularly in domestic credit markets. Additionally, we provide insights into the influence of loan, borrower, and lender characteristics on the impact of macroprudential policy on loan terms. Our findings offer novel empirical evidence of macroprudential transmission occurring through risk-shifting and compensating behaviors in private debt markets.
    Keywords: macroprudential policy, bank loans, financial contracting, Europe
    JEL: G21 G28 G32
    Date: 2024
  9. By: Paul Beaumont; Huan Tang; Éric Vansteenberghe
    Abstract: This paper investigates the impact of introducing junior unsecured loans via FinTech crowdlending platforms in the small business lending market. Using French administrative data, we find that FinTech borrowers experience a 20% increase in bank credit following FinTech loan origination. We establish causality using a shift-share instrument exploiting firms’ differential exposure to banks’ collateral requirements. The credit expansion only occurs when FinTech borrowers invest in new assets, and Fintech borrowers are subsequently more likely to pledge collateral to banks. This suggests that firms use FinTech loans to acquire assets that they then pledge to banks, thereby increasing their total borrowing capacity. <p> Cet article examine l'impact de l'introduction de prêts non garantis juniors via les plateforme FinTech de crowdlending sur le marché du prêt aux petites entreprises. En utilisant des données administratives françaises, nous constatons que les emprunteurs FinTech connaissent une augmentation de 20% de leur crédit bancaire suite à l'origination du prêt FinTech. Nous établissons la causalité en utilisant un instrument dit shiftshare qui exploite l'exposition différentielle des entreprises aux exigences de garantie des banques. L'expansion du crédit ne se produit que lorsque les emprunteurs FinTech investissent dans de nouveaux actifs, et ces emprunteurs FinTech sont par la suite plus susceptibles de mettre en gage des garanties aux banques. Cela suggère que les entreprises utilisent les prêts FinTech pour acquérir des actifs qu'elles mettent ensuite en gage aux banques, augmentant ainsi leur capacité d'emprunt totale.
    Keywords: FinTech, SMEs, small business lending; FinTech, PMEs, prêts aux petites entreprises
    JEL: G21 G23 G33
    Date: 2024
  10. By: He, Zhiguo (U of Chicago); Liao, Guanmin (Renmin U of China); Wang, Baolian (U of Florida)
    Abstract: We study the impact of government-led incentive systems by examining a staggered reform in the Chinese state-owned enterprise (SOE) performance evaluation policy. To improve capital allocative efficiency, regulators switched from using return on equity (ROE) to economic value added (EVA). However, this EVA policy takes a one-size-fits-all approach by stipulating a fixed cost of capital for virtually all SOEs, neglecting the potential heterogeneity of firm-specific costs of capital. We show that SOEs responded to the evaluation reform by altering their investment decisions, particularly when the actual borrowing rate deviated further from the stipulated rate. Besides providing an estimate of the cost of capital's impact on investment, our paper offers causal evidence that incentive schemes affect real investment and sheds new light on economic reform challenges in China.
    JEL: G31 G34 M12 M52 P31
    Date: 2023–08
  11. By: Brugués, Felipe; De Simone, Rebeca
    Abstract: We study the interaction of market structure and tax-and-subsidy strategies utilizing pass-through estimates from the unexpected introduction of a loan tax in Ecuador, a quantitative model, and a comprehensive commercial-loan dataset. Our model generalizes bank competition theories, including Bertrand-Nash competition, credit rationing, and joint-maximization. While we find the loan tax is distortionary, neglecting the possibility of non-competitive lending inflates estimated tax deadweight loss by 80% because non-competitive banks internalize some of the burden. Conversely, subsidies are less effective in non-competitive settings. If competition were stronger, tax revenue would be 10% lower. The findings suggest that policymakers should consider market structure in tax-and-subsidy strategies.
    Keywords: Banks;Government regulation of banks;Taxation and subsidies;market structure;firm strategy;market performance
    JEL: G21 G28
    Date: 2024–02
  12. By: Zanoni, Wladimir; Díaz, Emily; Paredes, Jorge; Andrian, Leandro Gaston; Maldonado, Juan Lorenzo
    Abstract: This paper delves into the dynamic impact of Ecuador's 2008 sovereign debt default on the subsequent performance of the country's bonds, specifically as measured by the Emerging Markets Bond Index (EMBI). Through a blend of qualitative and quantitative analyses, the paper develops a framework for understanding the interplay between macroeconomic and political fundamentals, global liquidity dynamics, and investor behaviors. Employing a synthetic control method, the study assesses the default's impact on Ecuadors EMBI performance, revealing a dynamically heterogeneous influence that fluctuates with evolving macroeconomic and political landscapes. The findings highlight the importance of considering a broad spectrum of economic variables in sovereign risk assessment, especially for economies with significant exposure to volatile commodity markets. The study offers insights into the complex dynamics governing sovereign bond markets post default, emphasizing the roles of fiscal discipline, investor communication, and political stability in mitigating sovereign risk.
    Keywords: Sovereign Debt Default;EMBI;Fiscal Distress Analysis;Investor Behavior Dynamics;Ecuadorian Economic Policy
    JEL: F34 G15 H63 F65 E44
    Date: 2024–03
  13. By: Selcuk Gul
    Abstract: [EN] This study aims to identify the role played by the sovereign risk in determining the local currency lending rates to the non-financial sector. In this context, lending rate equations for five emerging countries that are members of the Organisation for Economic Cooperation and Development (OECD) are estimated by the Autoregressive Distributed Lag (ARDL) model. The findings indicate that the impact of sovereign risk on lending rates varies among countries. While an increase in the sovereign risk premium leads to a significant rise in the local currency lending rates in Türkiye, its impacts on the lending rates are relatively low in Poland and Mexico and almost negligible in Hungary and Chile. Results imply that, in the case of Türkiye, as the decline in the risk premium, accompanying the monetary tightening policy initiated in June 2023, become permanent, it may have a reducing effect on the financing costs of the non-financial sector in the medium-to-long term. [TR] Bu calisma, finansal olmayan sektore verilen yerli para cinsiden kredi faizlerinin belirlenmesinde ulke riskinin oynadigi rolu ortaya koymayi amaclamaktadir. Bu cercevede, Ekonomik Kalkinma ve Isbirligi Teskilati (OECD) uyeleri arasindan secilmis bes gelismekte olan ulke icin kredi faizi denklemleri Otoregresif Gecikmesi Dagitilmis (ARDL) modeli ile tahmin edilmektedir. Bulgular, ulke riskinin kredi faizleri uzerindeki etkisinin ulkeler arasinda degiskenlik gosterdigine isaret etmektedir. Ulke risk primindeki artis finansal olmayan sektore verilen yerli para cinsinden kredi faizlerini Turkiye ekonomisinde onemli oranda artirirken, Polonya ve Meksika'da soz konusu artisin kredi faizleri uzerindeki etkisinin daha zayif, Macaristan ve Sili’de ise neredeyse ihmal edilebilir duzeyde oldugu gorulmektedir. Sonuclar, Turkiye ozelinde, 2023 yilinin haziran ayinda uygulanmaya baslanan parasal sikilastirma politikasina eslik eden risk primindeki dususun kalici hale gelmesiyle, orta ve uzun vadede finansal olmayan sektorun finansman maliyetlerini azaltici etkide bulunabilecegini ima etmektedir.
    Date: 2024
  14. By: Manish K. Singh (Department of Management Studies, Indian Institute of Technology Delhi.); Marta Gómez-Puig (Department of Economics & Riskcenter, Universitat de Barcelona, Spain.); Simón Sosvilla-Rivero (Complutense Institute for Economic Analysis, Universidad Complutense de Madrid, 28223 Madrid, Spain. T: +34-913 942 342.)
    Abstract: The choice of the optimal sovereign risk indicator is crucial in the context of the euro area (EA) countries, which faced a fierce sovereign debt crisis. Traditional indicators of sovereign risk (CDS, bond yields, and credit rating) do not take into consideration the priority structure of creditors and are highly influenced by market sentiment. We propose a new indicator (DtD) to quantify sovereign risk for eleven EA countries over the period 2004Q1-2019Q4. Using contingent claims’ methodology, DtD incorporates the seniority structure of creditors in an existing theoretical model. Our results suggest that (1) DtD is a leading indicator of sovereign risk and (2) adding information from the public sector’s balance sheet structure to market information, helps better incorporate macroeconomic fundamentals in the sovereign risk measure, overcoming some of the weaknesses documented in the traditional indicators.
    Keywords: Sovereign default risk, Euro area countries, Contingent claims, Distance-to- default. JEL classification: E62, H3, C11.
    Date: 2024–02
  15. By: Giraldo, Carlos (Latin American Reserve Fund); Giraldo, Iader (Latin American Reserve Fund); Gomez-Gonzalez, Jose E. (City University of New York – Lehman College); Uribe, Jorge M. (Universitat Oberta de Catalunya)
    Abstract: This study utilizes weekly datasets on loan growth in Colombia to develop a daily indicator of credit expansion using a two-step machine learning approach. Initially, employing Random Forests (RF), missing data in the raw credit indicator is filled using high frequency indicators like spreads, interest rates, and stock market returns. Subsequently, Quantile Random Forest identifies periods of excessive credit creation, particularly focusing on growth quantiles above 95%, indicative of potential financial instability. Unlike previous studies, this research combines machine learning with mixed frequency analysis to create a versatile early warning instrument for identifying instances of excessive credit growth in emerging market economies. This methodology, with its ability to handle nonlinear relationships and accommodate diverse scenarios, offers significant value to central bankers and macroprudential authorities in safeguarding financial stability.
    Keywords: Credit growth; Machine learning methodology; Excessive credit creation; Financial stability
    JEL: C45 E44 G21
    Date: 2024–03–10
  16. By: Josef Bajzik; Jan Janku; Simona Malovana; Klara Moravcova; Ngoc Anh Ngo
    Abstract: We synthesized 3, 175 estimates (454 impulse responses) of the semi-elasticity of credit with respect to changes in the monetary policy rate from 91 vector autoregression studies. We found that monetary policy tightening consistently yields a negative and long-lasting response in both credit volume and credit growth. Several factors contribute to the substantial heterogeneity of the effect sizes in this literature. First, publication selectivity significantly exaggerates the mean reported estimate, because insignificant results are under-reported. Second, researchers' choice of estimation design has a significant impact on the estimated response. Studies using Bayesian methods and including house prices report a smaller decline in credit, while studies with sign restrictions show a larger drop than those using recursive identification.
    Keywords: Bayesian model averaging, credit, interest rates, meta-analysis, monetary policy transmission, publication bias
    JEL: C83 E52 R21
    Date: 2023–12
  17. By: Fricke, Daniel; Greppmair, Stefan; Paludkiewicz, Karol
    Abstract: We show that the transmission of the European Central Bank's (ECB) recent monetary policy tightening differs across banks depending on their level of excess reserves. Specifically, the net worth of reserve-rich banks may display a boost when the interest rate paid on reserves increases strongly. Focusing on the ECB's 2022 rate hiking cycle, we show that reserve-rich banks' credit supply is less sensitive to the monetary policy tightening compared to other banks. The effect varies in the cross-section of both banks and firms. The results are binding at the firm level, indicating the presence of real effects.
    Keywords: interest rates, bank lending, excess liquidity, monetary policy
    JEL: E43 E44 E52 G21
    Date: 2024
  18. By: Yener Altunbas (Bangor University); Xiaoxi Qu (Bangor University); John Thornton (University of East Anglia)
    Abstract: We present and estimate a Bernanke et al. (1999)-type dynamic general equilibrium model modified to allow the authorities to use monetary and fiscal policy to shape bank behavior in support of climate goals. In the model, central bank refinancing and reserve requirements are employed to support bank lending for environmentally friendly projects at lower rates of interest than for other projects. At the same time, fiscal policy supports green bank lending through loan guarantees, which also reduces the relative cost of borrowing by green firms. Under reasonable parameters of the model, rediscount lending is shown to be the most effective policy tool for directing bank lending to support climate goals
    Date: 2024–03

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