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on Financial Development and Growth |
| By: | Jacob Sesugh Angahar (NISER - Nigeria institute of social and Economic Research Ibadan) |
| Abstract: | This research examined the modeling of the financial intermediation functions of banks in Nigeria. The effectiveness of financial intermediation was determined by its impact on economic growth in Nigeria. Secondary time series data were collected to determine the association between variables. The study adopted an ex post facto research design and used ordinary least squares regression tests that reveal the predictive power of the model as well as the relative statistics of the short-term variables, while testing for the existence of a long-term equilibrium relationship, based on the multivariate cointegration technique performed. The results of the study suggest that there are both short-term and long-term relationships between financial intermediation and economic growth in Nigeria. Specifically, CBCPS has a positive relationship with GDP, while MS and MLR have a positive and significant relationship with GDP in the long run. The study recommends, inter alia, that monetary authorities, in particular the Central Bank of Nigeria, has to use measures to force banks to reduce their interest rates on loans. This will increase investment and enhance the overall performance of the economy's productive sectors. |
| Keywords: | Financial intermediation banks credit to private sector maximum lending rate money supply economic growth, Financial intermediation, banks, credit to private sector, maximum lending rate, money supply, economic growth |
| Date: | 2024–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04493271&r=fdg |
| By: | Leo Dörr (Chair for Economic Policy, University of Hamburg) |
| Abstract: | : This paper provides new empirical findings on the aid–growth relation. We find evidence for considerable asymmetry in the aid–growth relation; i.e., aid cuts have a large negative impact on economic activity, while increasing aid may be ineffective in promoting growth. Development aid thus largely replaces rather than complements domestic resources. We innovate by combining dynamic generalized method of moments techniques with asymmetric effect analysis. Unlike previous studies in this area, our empirical design allows us to account for potential weak instrument problems and endogeneity concerns when estimating the effects of aid upturns and downturns separately. |
| Date: | 2024–03–22 |
| URL: | http://d.repec.org/n?u=RePEc:hce:wpaper:076&r=fdg |
| By: | Gianluca Pallante; Mattia Guerini; Mauro Napoletano; Andrea Roventini |
| Abstract: | We extend the Schumpeter meeting Keynes (K+S; see Dosi et al., 2010, 2013, 2015) to model the emergence and the dynamics of an interbank network in the money market. The extended model allows banks to directly exchange funds, while evaluating their interbank positions using a network- based clearing mechanism (NEVA, see Barucca et al., 2020). These novel adds on, allow us to better measure financial contagion and systemic risk events in the model and to study the possible interactions between micro-prudential and macro-prudential policies. We find that the model can replicate new stylized facts concerning the topology of the interbank network, as well as the dynamics of individual banks’ balance sheets. Policy results suggest that the economic system at large can benefit from the introduction of a micro-prudential regulation that takes into account the interbank network relationships. Such a policy decreases the incidence of systemic risk events and the bankruptcies of financial institutions. Moreover, a trade-off between financial stability and macroeconomic performance does not emerge in a two-pillar regulatory framework grounded on i) a Basel III macro-prudential regulation and ii) a NEVA-based micro-prudential policy. Indeed, the NEVA allows the economic system to achieve financial stability without overly stringent capital requirements. |
| Keywords: | Financial contagion, Systemic risk, Micro-prudential policy, Macro-prudential policy, Macroeconomic stability, Agent-based computational economics |
| Date: | 2024–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:ssa:lemwps:2024/08&r=fdg |
| By: | Salih Zeki Atilgan; Tarik Aydogdu; Mehmet Selman Colak; Muhammed Hasan Yilmaz |
| Abstract: | In this paper, we propose the use of regularization and shrinkage methods to address the variable selection problem in predicting credit growth. Using data from the 10 largest Turkish banks and a broader set of macro-financial predictors for the period 2012-2023, we find that the models generated by the Least Absolute Shrinkage and Selection Operator (LASSO) method have superior predictive power (lower level of forecast errors) for bank-level total credit growth compared to alternative factor-augmented models through recursive out-of-sample forecasting exercises. Our baseline findings remain intact against alternative choices of the tuning parameter and LASSO specifications. In addition to the dynamics of the total credit growth, the improvement in prediction accuracy is evident for commercial credit growth at all horizons, while the effect is limited to short-term horizons for consumer credit growth. Furthermore, additional robustness checks show that the baseline results do not vary considerably against different sample coverage and benchmark models. In the subsequent analyses, we utilize the LASSO method to synthesize the “residual credit” indicator as a proxy for excessive credit movements deviating from the level implied by macro-financial dynamics. In the scope of a case study, using this indicator as an input for local projection estimates, we show that recent inflationary pressures have resulted in excessive lending activity, which is not fully explained by macro-financial dynamics, in the period 2020-2023. |
| Keywords: | Credit growth, Forecasting, LASSO, Residual credit, Local projection |
| JEL: | G21 C53 C55 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:2402&r=fdg |
| By: | Nicoletti, Giulio; Rariga, Judit; Rodriguez d’Acri, Costanza |
| Abstract: | We study the impact of a liquidity shock affecting investment funds on the financing conditions of firms. The abrupt liquidity needs of investment funds, triggered by the outbreak of the Covid-19 pandemic, prompted a retrenchment from bond purchases of firms and a withdrawal of short term funds from banks, impacting firm financing costs directly via bond markets, and indirectly via banks. According to our results, the spreads of corporate bonds held by investment funds increased. Furthermore, an increase in the short term funding exposure of a bank to investment funds triggered a contraction in new loans to euro area firms. Overall, our results show that while non-banks in general support firm financing by acting as a spare tyre when banks do not, their own stress can trigger a contractionary credit supply effect for firms. JEL Classification: E52, G23, G30 |
| Keywords: | bank lending channel, bond lending channel, firm financing, investment funds, monetary policy |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242917&r=fdg |
| By: | Tamas Briglevics (Central Bank of Hungary); Artashes Karapetyan (ESSEC Business School); Steven Ongena (University of Zürich; Swiss Finance Institute; KU Leuven; NTNU Business School and CEPR); Schindele Ibolya (Central European University; Corvinus University and Central Bank of Hungary) |
| Abstract: | We exploit a nation-wide introduction of mandatory disclosure of borrowers’ total credit exposures and show that sharing such information increases credit access independent of borrowers’ history. Differentiating between borrowers applying to competitor banks and those reapplying to their current banks, as well as between borrowers with and without default history, we find an overall increase in credit access measured by both loan application acceptance and credit amount. While credit access increases, default rates decrease, generating an increase in aggregate welfare. (78 words) |
| Keywords: | information sharing, bank lending, household access to credit |
| JEL: | G21 G28 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2024/1&r=fdg |
| By: | Ezra Oberfield; Esteban Rossi-Hansberg; Nicholas Trachter; Derek T. Wenning |
| Abstract: | We study the spatial expansion of banks in response to banking deregulation in the 1980s and 90s. During this period, large banks expanded rapidly, mostly by adding new branches in new locations, while many small banks exited. We document that large banks sorted into the densest markets, but that sorting weakened over time as large banks expanded to more marginal markets in search of locations with a relative abundance of retail deposits. This allowed large banks to reduce their dependence on expensive wholesale funding and grow further. To rationalize these patterns we propose a theory of multi-branch banks that sort into heterogeneous locations. Our theory yields two forms of sorting. First, span-of-control sorting incentivizes top firms to select the largest markets and smaller banks the more marginal ones. Second, mismatch sorting incentivizes banks to locate in more marginal locations, where deposits are abundant relative to loan demand, to better align their deposits and loans and minimize wholesale funding. Together, these two forms of sorting account well for the sorting patterns we document in the data. |
| JEL: | D20 G21 G24 L23 L25 R12 R19 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32256&r=fdg |
| By: | Koresh Galil (BGU); Eva Varon (BGU) |
| Keywords: | Banks, Stocks volatility, National culture, Covid-19, Uncertainty avoidance, Individualism |
| JEL: | G12 G21 Z10 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:bgu:wpaper:2307&r=fdg |
| By: | Gehrke, Esther (University of Wageningen); Genthner, Robert (University of Göttingen); Kis-Katos, Krisztina (University of Goettingen) |
| Abstract: | We analyze the effect of rising protectionism towards foreign direct investment (FDI) on domestic employment, exploiting revisions in Indonesia’s highly-granular negative investment list, and spatial variation in the exposure of the manufacturing sector to these investment restrictions. Rising FDI restrictions caused employment gains at the local level, explaining about one-tenth of the aggregate employment increases observed between 2006 and 2016 in Indonesia. These employment gains went along with a reorganization of the local production structure, and new firm entries in the manufacturing sector that are concentrated among micro and small enterprises. While our results are consistent with an increase in the labor-to-capital ratio and reduced productivity among regulated firms (which allowed smaller and less productive firms to enter the market), we also document that at least half of the employment gains are driven by spillover-effects along the local value chain and into the service sector. |
| Keywords: | FDI regulation, Indonesia, local labor markets |
| JEL: | F16 F21 F23 J23 J31 L51 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp16835&r=fdg |
| By: | Ichiro Muto (General Manager, Aomori Branch, Bank of Japan (E-mail: ichirou.mutou@boj.or.jp)); Fumitaka Nakamura (Director, Institute for Monetary and Economic Studies, Bank of Japan (currently, International Monetary Fund, E-mail: fumitaka.nakamura@boj.or.jp)); Makoto Nirei (Professor, Graduate School of Economics, University of Tokyo (E-mail: nirei@e.u-tokyo.ac.jp)) |
| Abstract: | What are the main drivers of the recent increase in wealth concentration in the U.S.? This paper quantifies the role played by digitalization using a tractable model with heterogeneous agents with risk aversion. The model combines (1) digital capital that substitutes for labor in the production process and (2) households' investments in risky digital assets to replicate the asset growth of the wealthy since the 1990s. In the equilibrium, a small number of prosperous households with low risk aversion, i.e., digital entrepreneurs, hold most of the risky digital capital, whereas a large number of risk-averse households rely mainly on labor income. Hence, when digitalization advances, these risk-tolerant households enjoy higher returns from digital capital, further accumulating digital capital disproportionately. Based on the model calibrated to the U.S. economy, we show that digitalization (an increase in digital productivity by 21-43 percent) has contributed to more than about 50 percent of the increase in the share of wealth of the top 1 percent of households and more than about 80 percent of that of the top 0.1 percent of households observed over the last 30 years. Moreover, it explains about 20-40 percent increase in the annual savings of the top 1 percent of households. Finally, the comparative statics on the macroeconomic variables show that while advances in digitalization decrease the labor share by 3-5 percentage points, which is in line with the empirical literature, it also increases wages, meaning that risk- averse households, who rely mainly on labor earnings, also gain some benefits from digitalization. |
| Keywords: | Digitalization, Entrepreneurship, Wealth inequality, Savings inequality |
| JEL: | E21 E22 E24 E25 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:24-e-01&r=fdg |
| By: | Paul Beaudry; Katya Kartashova; Césaire Meh |
| Abstract: | Understanding factors that drive asset demand is central to explaining movements in long-term real interest rates. In this paper, we begin by documenting that much of the increase in the demand for assets in the US in the 30 years prior to Covid represented greater desire to hold assets by households of given age and income levels. For example, if we focus on the 55-64 age group, its wealth-to-income ratio increased by 45-55%, depending on whether housing is included or not. We then develop a model of asset demands which combines retirement motives and inter-temporal substitution motives to quantitatively explore different factors that may have contributed to such an increase. Our findings suggest that decreasing interest rates likely led to a substantial increase in demand for retirement wealth. We also explore some of the across group heterogeneity and show how social security may explain why the lowest income groups did not follow the general trend. Finally, we discuss macroeconomic implications of long-run asset demands that are a decreasing function of interest rates. |
| JEL: | E20 E40 G10 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32248&r=fdg |
| By: | Takuma Kunieda (Kwansei Gakuin University); Akihisa Shibata (Kyoto University) |
| Abstract: | Although many studies in macroeconomics have examined the role of insurance in the presence of income risk, whether aggregate shocks are insurable has not been sufficiently investigated. We present a simple two-period general equilibrium model to show the conditions under which insurance against aggregate shocks works in an economy with constant-elasticity-substitution (CES) production technology and the Greenwood- Hercowitz-Huffman (GHH) utility function (Greenwood et al., 1988). Our theoretical investigation clarifies that only when agents are heterogeneous in their ability or initial wealth can aggregate shocks be insurable. From our quantitative investigation, we find that (i) agents with lower ability enjoy greater welfare improvement from insurance, and as agents’ ability increases, the welfare improvement diminishes, (ii) agents enjoy greater welfare improvement when the damage from disasters is more severe and when the frequency of disasters is greater, and (iii) although the welfare improvement increases as agents’initial wealth increases, the impact of a difference in agents' initial wealth on the difference in the contribution of insurance is very moderate. |
| Keywords: | aggregate shocks, heterogeneous agents, state-contingent claims, incomplete market |
| JEL: | D52 G12 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:1102&r=fdg |
| By: | Andrea Gazzani (Bank of Italy); Vicente Herrera (SQM/Pontificia Universidad Católica de Chile); Alejandro Vicondoa (Pontificia Universidad Católica de Chile) |
| Abstract: | Commodity price fluctuations are a significant driver of business cycles in Emerging Economies (EMEs). While previous works have emphasized the link between commodity prices and financial conditions, none of them has explored empirically the potentially sign-dependent effects induced by commodity price shocks on domestic macro-financial conditions. Using a non-linear panel local projections model, we show that negative commodity price shocks induce stronger and faster effects on output and investment relative to positive shocks in EMEs. The trade balance improves after a negative shock due to the tightening of domestic financial conditions whereas it is unresponsive after a positive one. The response of financial conditions, both in terms of an increase in country spreads as well as in terms of a fall in net capital flows, is thus crucial in explaining the asymmetric responses. The faster and stronger spillover from faltering - rather than surging - commodity prices to the macro-financial conditions of commodity-exporting EMEs has important implications for the designof optimal policies in EMEs. |
| Keywords: | commodity prices, capital flows, financial frictions, non-linear effects |
| JEL: | F41 F44 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:aoz:wpaper:311&r=fdg |
| By: | Tsendsuren Batsuuri; Shan He; Ruofei Hu; Jonathan Leslie; Flora Lutz |
| Abstract: | This study applies state-of-the-art machine learning (ML) techniques to forecast IMF-supported programs, analyzes the ML prediction results relative to traditional econometric approaches, explores non-linear relationships among predictors indicative of IMF-supported programs, and evaluates model robustness with regard to different feature sets and time periods. ML models consistently outperform traditional methods in out-of-sample prediction of new IMF-supported arrangements with key predictors that align well with the literature and show consensus across different algorithms. The analysis underscores the importance of incorporating a variety of external, fiscal, real, and financial features as well as institutional factors like membership in regional financing arrangements. The findings also highlight the varying influence of data processing choices such as feature selection, sampling techniques, and missing data imputation on the performance of different ML models and therefore indicate the usefulness of a flexible, algorithm-tailored approach. Additionally, the results reveal that models that are most effective in near and medium-term predictions may tend to underperform over the long term, thus illustrating the need for regular updates or more stable – albeit potentially near-term suboptimal – models when frequent updates are impractical. |
| Keywords: | Early warning systems; IMF Lending; Machine Learning |
| Date: | 2024–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/054&r=fdg |
| By: | Florian Schuster; Ms. Marwa Alnasaa; Lahcen Bounader; Il Jung; Jeta Menkulasi; Joana da Mota |
| Abstract: | Many countries find themselves with elevated debt levels, increased debt vulnerabilities, and tight financing conditions, while also facing increased spending needs for development and transition to a greener economy. This paper aims to place the current debt landscape in a historical context and investigate the drivers of debt surges, to what degree they result in a crisis as well as examine post-surge debt trajectories and under what conditions debt follows a non-declining path. We find that fiscal policy and stock-flow adjustments play important roles in debt dynamics with the valuation effects arising from currency depreciation explaining more than half of stock flow adjustments in LICs. Debt surges are estimated to result in a financial crisis with a probability of 11–20 percent and spending-driven fiscal expansions during debt surges tend to result in a high probability of non-declining debt path. |
| Keywords: | Public debt; debt surges; financial crisis; stock-flow adjustment; exchange rate depreciation; fiscal expansion |
| Date: | 2024–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/050&r=fdg |
| By: | Pablo Burriel (Banco de España); Mar Delgado-Téllez (EUROPEAN CENTRAL BANK); Camila Figueroa (AFI); Iván Kataryniuk (Banco de España); Javier J. Pérez (Banco de España) |
| Abstract: | This paper proposes a novel approach to estimating the contribution of macroeconomic factors to sovereign spreads in the euro area, defined as the spread level consistent with the country’s prevailing macroeconomic conditions. Despite the wealth of papers estimating sovereign spreads, model-dependency and lack of robustness remain key considerations. Accordingly, we propose a “thick modeling” empirical framework, based on the estimation of a wide range of models. We focus on 10-year sovereign bond yields for nine euro area countries, using a sample that covers the period January 2000 to December 2023. Our results show that observed spreads behave in line with macro-financial determinants in “normal” times. Macroeconomic determinants are also able to account for a significant fraction of the observed sovereign spread dynamics in most episodes of financial turbulence, such as the pandemic and the aftermath of the Russian invasion of Ukraine. However, we find evidence of some deviations of sovereign spreads from their estimated values during the 2010-2012 euro area sovereign debt crisis. In this period, macroeconomic indicators are able to explain at most 26% of the observed peaks in spreads among non-core countries. |
| Keywords: | sovereign bond spreads, euro area, macroeconomic fundamentals |
| JEL: | E44 O52 G15 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2408&r=fdg |
| By: | De Santis, Roberto A.; Tornese, Tommaso |
| Abstract: | We use nonlinear empirical methods to uncover non-linearities in the propagation of monetary policy shocks. We find that the transmission on output, goods prices and asset prices is stronger in a low growth regime, contrary to the findings of Tenreyro and Thwaites (2016). The impact is stronger on private investment and durables and milder on the consumption of nondurable goods and services. In periods of low growth, a contractionary monetary policy implies lower expected Treasury rates and higher premia along the entire Treasury yield curve. Similarly, the corporate excess bond premium rises and the stock market drops substantially during recessions. We use the monetary policy surprises and their predictors provided by Bauer and Swanson (2023a), and identify an additional predictor, the National Financial Condition Index (NFCI), which is relevant in the nonlinear setting. A Threshold VAR, a Smooth-Transition VAR and nonlinear local projection methods all corroborate the findings. JEL Classification: C32, E32 |
| Keywords: | asset prices, business cycles, local projections, monetary policy, non-linearities, STVAR, TVAR |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242919&r=fdg |
| By: | Makram El-Shagi (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan); Steven Yamarik (Department of Economics, California State University Long Beach, CA) |
| Abstract: | This paper examines the impact of Federal Reserve policy on income inequality across US states. We use the local projections method of Jordà to estimate impulse response functions for each state. We find that a restrictive monetary policy increases income inequality in almost all states, but with different magnitudes. Subsequent panel analysis examines the possible transmission mechanisms that can account for these differences. Our empirical results confirm the theoretical predictions – inequality is increased by higher inflation, home ownership, and earnings in the finance, insurance and real estate (FIRE) sector; but decreased by higher housing prices, unionization rates, educational attainment and minimum wage. |
| Keywords: | monetary policy, inequality, US states, local projections |
| JEL: | D31 D63 E52 R19 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:fds:dpaper:202404&r=fdg |
| By: | Makram El-Shagi (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan) |
| Abstract: | In this paper, we assess the impact of monetary policy shocks on the income distribution in the Eurozone after the Global Financial Crisis, i.e., a time of unconventional monetary policy. Unlike previous papers that focus on the precrisis era, where monetary policy was primarily conducted through interest rates, expansionary policy typically increases inequality. This can be mitigated by highly developed financial markets and sound institutions that limit rent seeking. |
| Keywords: | monetary policy, inequality, Eurozone |
| JEL: | D33 E52 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:fds:dpaper:202402&r=fdg |
| By: | Makram El-Shagi (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan); Kiril Tochkov (Texas Christian University, Fort Worth, TX, US) |
| Abstract: | Unitary monetary policy in large emerging economies with substantial regional disparities is likely to have heterogeneous effects with unintended consequences. This paper explores the regional effects of monetary policy in China by estimating the response of a series of provincial variables to a national monetary policy shock using quarterly data over the period 1999-2022. Regional heterogeneity is assessed by comparing the results from a fixed-effects and a mean-group estimator. The response of consumer prices and loans is found to be homogeneous across provinces, while that of output and property prices exhibits significant regional variation. Further analysis of the differential response for two provincial clusters indicates that output in Western China experiences faster drops after a contractionary monetary policy shock and takes longer to recover than in Eastern and Central China. In the same context, property prices react with a delay and endure a more gradual recovery after the shock. The advancement of market institutions, the share of state-owned enterprises, and the size of the private sector are identified as potential determinants of the differential response across the two regional clusters. |
| Keywords: | monetary policy, regional effects, China |
| JEL: | E52 E58 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:fds:dpaper:202401&r=fdg |
| By: | Simone Auer (Bank of Italy); Nicola Branzoli (Bank of Italy); Giuseppe Ferrero (Bank of Italy); Antonio Ilari (Bank of Italy); Francesco Palazzo (Bank of Italy); Edoardo Rainone (Bank of Italy) |
| Abstract: | This paper describes the role of central bank and commercial bank money in a modern monetary system and the possible implications of the introduction of a central bank digital currency (CBDC) for the banking system and the economy as a whole. The analysis shows that the impact of a CBDC depends on a number of design choices and on how credit institutions re-optimize their balance sheets in response to the outflow of deposits caused by the substitution of private money with public digital money. We provide a set of illustrative simulations on the impact of a CBDC on the funding structure and profitability of credit institutions using data on Italian banks between June 2021 and March 2023. The analysis suggests that the overall impact on banks' funding could be manageable in the presence of individual holding limits and in an environment characterized by ample liquidity and stable funding for credit institutions. The cost of covering the reduction of deposits would be relatively higher for intermediaries with low excess reserves and for those that may need to issue long-term liabilities to maintain stable funding levels above regulatory requirements. |
| Keywords: | central bank digital currency, monetary policy, financial stability, banks, money |
| JEL: | E41 E42 E43 E44 E51 E58 G21 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_829_24&r=fdg |