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on Financial Development and Growth |
| By: | Bougheas, Spiros; Commendatore, Pasquale; Gardini, Laura; Kubin, Ingrid; Zörner, Thomas O. |
| Abstract: | We introduce a banking sector and heterogeneous agents in the dynamic overlapping generations model of Matsuyama et al. (2016). Our model captures the benefits and costs of an advanced banking system. While it allocates resources to productive activities, it can also hinder progress if it invests in projects that do not contribute to capital formation, and potentially triggering instabilities due to the emergence of cycles. Our intergenerational dynamic framework, enables us to show that income inequality between agents increases during recessions, confirming empirical observations. Moreover, we identify both changes in production factor prices and the reallocation of agents across occupations as driving factors behind the increased inequality. |
| Keywords: | Banks; Financial Innovation; Cycles; Income Inequality |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wus005:62095520&r=fdg |
| By: | Ferdinand Fichtner; Heike Joebges |
| Abstract: | The existing econometric evidence on the relationship between stock indices and real economic activity is inconclusive despite theoretical arguments suggesting a long-term relationship. Previous studies indicate that the link between stock prices and growth became weaker in the 1980s. In this paper, we revisit this issue for the period between 1991 and 2019, and address potential explanations for the decoupling. Specifically, we examine the asymmetric effects of stock index increases and decreases, consider the impact of foreign demand on the relationship, control for changes in factor income distribution, and incorporate long-term interest rates as a proxy for changes in discount rates. Our analysis suggests that the relationship between stock prices and GDP remains fairly unstable, with stronger evidence for a link in more recent periods of our sample. All in all, we find the long-run effect of a permanent one-percent change of stock prices on GDP to be around 0.2 percent. The effect mostly materializes within two to three years. Effects tend to be less pronounced and are slower to materialize for non-Anglo-Saxon economies and in the case of stock price decreases. |
| Keywords: | macroeconomic fluctuations; financial markets; stock prices; ARDL bounds test; asymmetric cointegration |
| JEL: | C53 E44 E47 G12 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:imk:studie:90-2024&r=fdg |
| By: | Iván Alfaro; Nicholas Bloom; Xiaoji Lin |
| Abstract: | We show how real and financial frictions amplify, prolong and propagate the negative impact of uncertainty shocks. We first use a novel instrumentation strategy to address endogeneity in estimating the impact of uncertainty by exploiting differential firm exposure to exchange rate, policy, and energy price volatility in a panel of US firms. Using common proxies for financial constraints we show that ex-ante financially constrained firms cut their investment even more than unconstrained firms following an uncertainty shock. We then build a general equilibrium heterogeneous firms model with real and financial frictions, finding financial frictions: i) amplify uncertainty shocks by doubling their impact on output; ii) increase persistence by extending the duration of the drop by 50%; and iii) propagate uncertainty shocks by spreading their impact onto financial variables. These results highlight why in periods of greater financial frictions uncertainty can be particularly damaging |
| Keywords: | Uncertainty, Financial frictions, Investment, Employment, Cash Holding, Equity payouts |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:bbq:wpaper:0001&r=fdg |
| By: | Conrado Brum Civelli (Banco Central del Uruguay; Universidad Complutense de Madrid; Universidad de la República Oriental del Uruguay); Alejandro Fried Gindel (Banco Central del Uruguay); Alfredo Garcia-Hiernaux (Universidad Complutense de Madrid) |
| Abstract: | The Russian invasion of Ukraine in early 2022, triggered a wave of risk aversion in the global financial markets. However, in contrast to previous events, South American emerging economies experienced limited impact to this more restrictive global financial environment. To assess the financial conditions of these economies over time, particularly Brazil, Chile and Uruguay, we propose an International Financial Conditions Index for South American economies (IFCI-SA), built from a Dynamic Factor Model. This index includes standard variables provided by the literature, along with sovereign debt risk premia and the most relevant commodity prices for these economies. We use our indicator to study the influential role played by commodity prices in the financial conditions of South American emerging economies from October 2007 to May 2022, paying particular attention to the financial implications stemming from the conflict in Ukraine. |
| Keywords: | International Financial Conditions, South American Economies, Emerging Economies, Dynamic Factor Model |
| JEL: | F30 F34 F37 G15 G17 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:bku:doctra:2023006&r=fdg |
| By: | Corentin Roussel |
| Abstract: | Output floor has emerged as a possibly important tool to ensure financial stability within the banking system. This paper proposes to assess the quantitative potential of output floor to ensure financial stability through the lens of a general equilibrium model for the Euro Area. We get three main results. First, implementation of output floor entails macrofinancial stabilization benefits for Euro Area activities in the long run, which confirms results found by financial European regulators. Second, along financial and economic cycles, output floor activation reduces volatility of banks capital to risk-weighted-asset ratio and the dispersion of this ratio between core and periphery banks, consistently with the desired outcome defined by financial regulators. Third, moderate banking openness in Euro Area limits cross-border credit flows spillovers, which does not affect output floor efficiency. However, full banking openness (i.e. banking union) produces high spillovers and erodes this efficiency. |
| Keywords: | Output Floor, Credit Risk, Banking System, Euro Area, DSGE. |
| JEL: | G21 F36 F41 E44 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2024-18&r=fdg |
| By: | Cecilia Dassatti (Banco Central del Uruguay) |
| Abstract: | During the first half of 2008, the Central Bank of Uruguay introduced changes in the regulation of reserve and liquidity requirements, increasing the requirements for short-term funding and funding from non-residents as well as introducing a requirement for interbank funding. The combination of these reforms with data that follows all loans granted to non-financial firms in Uruguay, allows me to identify their impact on the supply of credit. Following a difference-in-difference approach, I compare lending before and after the introduction of the policy changes among banks with different degrees of exposition to the funds targeted by the policies. The results suggest that restrictions to short-term finance from banks imply a reduction of credit availability as predicted by the literature. |
| Keywords: | banks, reserve requirements, monetary policy, macroprudential policy |
| JEL: | G20 G28 E65 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:bku:doctra:2023001&r=fdg |
| By: | Serena Merrino; Keagile Lesame; Ilias Chondrogiannis |
| Abstract: | In 2013, South Africa amended its bank regulatory framework in line with the Basel III accord, which introduced system-wide capital and liquidity adequacy requirements designed to curb the economys financial cycle so-called macroprudential policy. These regulations aim to create a more resilient banking system, but they can also lead to changes in lending behaviour, potentially affecting the availability and terms of loans to specific segments of the credit market. This is especially important in emerging markets such as South Africa, where market segmentation and inequality are more prominent than elsewhere. This paper examines how South Africas credit market has responded to macroprudential policy measures, with a focus on borrowers heterogeneity, to evaluate whether financial stability objectives are achieved at the expense of an equitable credit allocation. Our empirical approach is two-fold and employs both panel and time-series data for the period 20082023. We find that macroprudential regulation has reduced lending to households, especially if poor, to the benefit of firms, especially if large. We also find that this regulation triggers lenders adverse selection by penalising more creditworthy enterprises. Our results suggest that while Basel III has reduced reckless consumer credit, it has also redistributed finance in ways that are not beneficial to long-term growth and financial stability. |
| Date: | 2024–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:rbz:wpaper:11062&r=fdg |
| By: | Viral V. Acharya; Nicola Cetorelli; Bruce Tuckman |
| Abstract: | In recent years, assets of non-bank financial intermediaries (NBFIs) have grown significantly relative to those of banks. These two sectors are commonly viewed either as operating in parallel, performing different activities, or as substitutes, performing substantially similar activities, with banks inside and NBFIs outside the perimeter of banking regulation. We argue instead that NBFI and bank businesses and risks are so interwoven that they are better described as having transformed over time rather than as having migrated from banks to NBFIs. These transformations are at least in part a response to regulation and are such that banks remain special as both routine and emergency liquidity providers to NBFIs. We support this perspective as follows: (i) The new and enhanced financial accounts data for the United States (“From Whom to Whom”) show that banks and NBFIs finance each other, with NBFIs especially dependent on banks; (ii) Case studies and regulatory data show that banks remain exposed to credit and funding risks, which at first glance seem to have moved to NBFIs, and also to contingent liquidity risk from the provision of credit lines to NBFIs; and (iii) Empirical work confirms bank-NBFI linkages through the correlation of their abnormal equity returns and market-based measures of systemic risk. We discuss some potential regulatory responses, including treating the two sectors holistically; recognizing the implications for risk propagation and amplification; and exploring new ways to internalize the costs of systemic risk. |
| JEL: | G01 G20 G21 G22 G23 G24 G28 G29 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32316&r=fdg |
| By: | Yuliyan Mitkov (University of Bonn); Ulrich Schüwer (Goethe University Frankfurt) |
| Abstract: | We use tools from survival analysis to study the equilibrium probability of bank failure in a model with imperfect correlation in loan defaults where a systematic risk factor and idiosyncratic frailty factors govern borrower credit worth. We derive several surprising results: in equilibrium, a bank can be more likely to fail with less risky than with more risky borrowers. In addition, the equilibrium relationship between borrower and bank risk can be fundamentally altered by a greater dispersion of the frailty factors, similar to how mixing items of different durability can fundamentally change the overall aging pattern. |
| Keywords: | Correlated defaults, borrower heterogeneity, bank failure, survival analysis |
| JEL: | G21 G28 E43 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkdps:294&r=fdg |
| By: | Andreas Fagereng; Matthieu Gomez; Emilien Gouin-Bonenfant; Martin Holm; Benjamin Moll; Gisle Natvik |
| Abstract: | Over the last several decades, there has been a large increase in asset valuations across many asset classes. These rising valuations had important effects on the distribution of wealth. However, little is known regarding their effect on the distribution of welfare. To make progress on this question, we derive a sufficient statistic for the (money metric) welfare effect of a change in asset valuations, which depends on the present value of an individual’s net asset sales: rising asset prices benefit prospective sellers and harm prospective buyers. We estimate this quantity using panel microdata covering the universe of financial transactions in Norway from 1994 to 2019. We find that rising asset valuations had large redistributive effects: they redistributed from the young towards the old and from the poor towards the wealthy. |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:bbq:wpaper:0002&r=fdg |
| By: | Nicolas Caramp; Dejanir H. Silva |
| Abstract: | We study the role of asset revaluation in the monetary transmission mechanism. We build an analytical heterogeneous-agents model with two main ingredients: i) rare disasters; ii) heterogeneous beliefs. The model captures time-varying risk premia and precautionary savings in a setting that nests the textbook New Keynesian model. The model generates large movements in asset prices after a monetary shock but these movements can be neutral on real variables. Real effects depend on the redistribution among agents with heterogeneous precautionary motives. In a calibrated exercise, we find that this channel accounts for the majority of the transmission to output. |
| Keywords: | monetary policy, wealth effects, asset prices, aggregate risk, heterogeneity beliefs |
| JEL: | E21 E44 E52 G12 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_11049&r=fdg |
| By: | Oliver Binz; John Graham; Matthew Kubic |
| Abstract: | Financial reports present assets, liabilities, and earnings on a nominal basis (unadjusted for inflation). Using a novel dataset of nearly a century of financial reports, this paper examines whether and how inflation affects the relation between accounting earnings and stock market value, i.e., earnings relevance. On the one hand, inflation may decrease earnings relevance as historical cost accounting relies on historical transaction prices that become less relevant when inflation changes the price level. On the other hand, inflation may increase earnings relevance by increasing firms’ discount rates and thereby shifting agents’ focus towards nearer-term payoffs. Consistent with the latter hypothesis, we document a strong positive relation between earnings relevance and inflation. Cross-sectional tests indicate that this relation is stronger for firms that are more sensitive to discount rate changes. We find that inflation is of first-order importance relative to determinants of earnings relevance explored in prior literature. |
| JEL: | E31 G10 M40 M41 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32364&r=fdg |
| By: | Altavilla, Carlo; Gürkaynak, Refet S.; Quaedvlieg, Rogier |
| Abstract: | We establish basic facts about the external finance premium. Tens of millions of individual loan contracts extended to euro area firms allow studying the determinants of the external finance premium at the country, bank, firm, and contract levels of disaggregation. At the country level, the variance in the premium is closely linked to sovereign spreads, which are important in understanding financial amplification mechanisms. However, country-level differences only explain half of the total variance. The rest is predominantly attributed to variances at the bank and firm levels, which are influenced by the respective balance sheet characteristics. Studying the response of the external finance premium to monetary policy, we find that balance sheet vulnerabilities of banks and firms strengthen the transmission of policy measures to financing conditions. Moreover, our findings reveal an asymmetrical effect contingent upon the sign and type of the policies. Specifically, policy rate hikes and quantitative easing measures exert a more pronounced impact on lending spreads, further magnified through their repercussions on the external finance premium. JEL Classification: E44, E58, F45, G15, G21 |
| Keywords: | euro area, external finance premium, financial accelerator, loan pricing |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242934&r=fdg |
| By: | Kouakou Jean Claude Brou (UPPA - Université de Pau et des Pays de l'Adour, UO - Université d'Orléans); M. Thiam (UPPA - Université de Pau et des Pays de l'Adour, UO - Université d'Orléans) |
| Abstract: | This paper aims to study the impact of external debt on capital flight conditional on the institutional quality of host countries. Three major contributions emerge. First, the role of external debt in capital flight is clarified. Econometric results based on 26 sub-Saharan African countries over the period 1970-2015 show a positive relationship between external debt and capital flight. Second, high quality institutions weaken the link between debt and capital flight somewhat, although they do not eliminate it completely. The results suggest that improving the quality of institutions in sub-Saharan African countries could help minimise the contribution of external debt to capital flight. Third, the analysis takes into account panel data, the persistence of capital flight and the potential endogeneity of the regressors. |
| Keywords: | Capital flight, Africa, External Debt, institutional quality |
| Date: | 2023–12–30 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04540643&r=fdg |
| By: | Salim Chahine (Central Bank of Lebanon & ECGI); Ugo Panizza (Geneva Graduate Institute & CEPR); Guilherme Suedekum (Geneva Graduate Institute) |
| Abstract: | This paper studies whether IMF programs and their size affect borrowing costs by comparing the coupon of bonds issued around an IMF arrangement. By comparing bonds issued immediately before the inset of the program with bonds issued immediately after the program, we show that, on average, the approval of the program leads to a 72-basis points reduction in borrowing costs and program size matters. Our point estimates indicate that when program size increases by one percent of GDP, borrowing costs decrease by 23 basis points. We also show that program size only matters for ex-post programs (i.e., those implemented during crises). For precautionary ex-ante programs, borrowing costs increase with program size. However, the effect of program size is small and, therefore, ex-ante programs never lead to a statistically significant increase in borrowing costs and in most cases lead to a significant reduction in borrowing costs. |
| Keywords: | IMF programs; Sovereign debt; Bond yields; International financial markets |
| JEL: | F22 F33 F34 G01 G15 |
| Date: | 2024–04–25 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp06-2024&r=fdg |
| By: | Masashige Hamano (Waseda University); Yuki Murakami (Waseda University) |
| Abstract: | This paper investigates the stabilization role of government spending in a collateral constrained small open economy. The economy is characterized by inefficiencies in borrowing decisions, resulting from pecuniary externalities and the amplification mechanism of the debt-deflation spiral. In this context, government spending serves to maintain financial stability, extending beyond the efficient provision of public goods. When the economy borrows up to its limit, the optimal response is fiscal stimulus, which mitigates the amplification of the debt-deflation mechanism. The optimal time-consistent policy prevents recessionary shocks from leading to a financial crisis accompanied by a drastic reversal of the current account. We show that an implementable government spending policy, which maintains a constant ratio to GDP, approximates the optimal policy and achieves a second-best outcome. |
| Keywords: | Small open economy; financial crises; optimal government spending |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:wap:wpaper:2401&r=fdg |
| By: | Matteo Cacciatore; Bruno Feunou; Galip Kemal Ozhan |
| Abstract: | The decline in safe real interest rates over the past three decades has reignited discussions on the neutral real interest rate, known as R*. We review insights from the literature on R*, addressing its determinants and estimation methods, as well as the factors influencing its decline and its future trajectory. While there is a consensus that R* has declined, alternative estimation approaches can yield substantially different point estimates over time. The estimated neutral range is large and uncertain, especially in real-time and when comparing estimates based on macroeconomic data with those inferred from financial data. Evidence suggests that factors such as increased longevity, declining fertility rates and scarcity of safe assets, as well as income inequality, contribute to lowering R*. Existing evidence also suggests the COVID-19 pandemic did not substantially impact R*. Going forward, there is an upside risk that some pre-existing trends might weaken or reverse. |
| Keywords: | Interest rates, Monetary policy, Monetary policy framework |
| JEL: | C8 D22 E4 L2 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:24-03&r=fdg |
| By: | Ragnar Enger Juelsrud; Ella Getz Wold |
| Abstract: | In this paper we use a novel natural experiment and Norwegian tax data to quantify the causal impact of unemployment risk on individual savings. We show theoretically that higher unemployment risk increases liquid savings and has an ambiguous impact on illiquid savings in partial equilibrium. In line with the model predictions, our empirical results confirm that a one percentage point increase in unemployment rates increases liquid savings by 1.3 percent in the cross-section. Reassuringly, this effect is driven by low-tenured workers, who face the highest increase in risk. Illiquid savings remain unaffected, implying an increase in the overall liquidity of individual saving portfolios. Using two independent approaches to quantify the overall importance of the unemployment risk channel in explaining saving dynamics during recessions, we find that at least 80% of the recession-induced increase in liquid savings can be explained by higher unemployment risk. |
| Keywords: | Unemployment risk, precautionary savings, portfolio allocation, household finance, recessions, uncertainty |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:bbq:wpaper:0006&r=fdg |
| By: | Benjamin Collier; Sabrina T. Howell; Lea Rendell |
| Abstract: | Does emergency credit prevent long-term financial distress? We study the causal effects of government-provided recovery loans to small businesses following natural disasters. The rapid financial injection might enable viable firms to survive and grow or might hobble precarious firms with more risk and interest obligations. We show that the loans reduce exit and bankruptcy, increase employment and revenue, unlock private credit, and reduce delinquency. These effects, especially the crowding-in of private credit, appear to reflect resolving uncertainty about repair. We do not find capital reallocation away from neighboring firms and see some evidence of positive spillovers on local entry. |
| Keywords: | Financing frictions, natural disasters, climate change adaptation, entrepreneurship, government credit |
| JEL: | G21 G32 H81 Q54 R33 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:cen:wpaper:24-20&r=fdg |