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on Financial Development and Growth |
| By: | Gary Richardson; Marco Del Angel; Michael Gou |
| Abstract: | During the Progressive Era (1900-29), economic growth was rapid but volatile. Boom and busts witnessed the formation and failure of tens of thousands of firms and thousands of banks. This essay uses new data and methods to identify causal links between failures of banks and bankruptcies of firms. Our analysis indicates that bank failures triggered bankruptcies of firms that depended upon banks for ongoing access to commercial credit. Firms that did not depend upon banks for credit did not fail in appreciably larger numbers after banks failed or during financial panics. |
| JEL: | E44 G21 N22 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32345&r=fdg |
| By: | Carlos Cantú; Rocío Gondo; Berenice Martinez |
| Abstract: | We quantify the trade-offs of using reserve requirements (RR) as a financial stability tool. A tightening in RR reduces the amplitude of the credit cycle. This lowers the frequency and strength of financial stress episodes but at a cost of lower growth in credit and economic activity. We find that the gains from a lower probability and magnitude of financial stress episodes are greater than the costs from the initial reduction in economic activity. In addition, we find that RR have a stronger effect on emerging market economies than in advanced economies, both in terms of costs and benefits. Finally, we find that uniform RR have a stronger effect than RR that differenciate by maturity or currency. |
| Keywords: | reserve requirements, macroprudential policy, financial stress episodes, early-warning system, financial cycle |
| JEL: | E44 E58 F41 G01 G28 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1182&r=fdg |
| By: | Manuel Amador; Javier Bianchi |
| Abstract: | We examine banking regulation in a macroeconomic model of bank runs. We construct a general equilibrium model where banks may default because of fundamental or self-fulfilling runs. With only fundamental defaults, we show that the competitive equilibrium is constrained efficient. However, when banks are vulnerable to runs, banks’ leverage decisions are not ex-ante optimal: individual banks do not internalize that higher leverage makes other banks more vulnerable. The theory calls for introducing minimum capital requirements, even in the absence of bailouts. |
| JEL: | E32 E44 E58 G01 G21 G33 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32341&r=fdg |
| By: | Alkis Georgiadis-Harris; Maxi Guennewig; Yuliyan Mitkov |
| Abstract: | Since Diamond and Dybvig (1983), banks have been viewed as inherently fragile. We challenge this view in a general mechanism design framework, where we allow for flexibility in the design of banking mechanisms while maintaining limited commitment of the intermediary to future mechanisms. We őnd that the unique equilibrium outcome is efficient. Consequently, runs cannot occur in equilibrium. Our analysis points to the ultimate source of fragility: banks are fragile if they cannot collect and optimally respond to useful information during a run and not because they engage in maturity transformation. We link our banking mechanisms to recent technological advances surrounding ‘smart contracts, ’ which enrich the practical possibilities for banking arrangements. |
| Keywords: | Bank runs, financial fragility, mechanism design, limited commitment, smart contracts |
| JEL: | D82 G2 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_540&r=fdg |
| By: | Thanh Le (University of Wollongong [Australia]); Cuong Le Van (CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Ngoc-Sang Pham (Métis Lab EM Normandie - EM Normandie - École de Management de Normandie); Cagri Saglam (Bilkent University [Ankara]) |
| Abstract: | We establish the existence of a competitive equilibrium in a two-period stochastic economy with incomplete financial markets by using Sperner's lemma. Our existence result covers (but is not limited to) several results in the literature, including the cases of nominal and numéraire assets. Moreover, there may exist a continuum of equilibrium prices. |
| Keywords: | Sperner's lemma, fixed-point theorem, general equilibrium, incomplete market, indeterminacy |
| Date: | 2024–03–28 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04552148&r=fdg |
| By: | Francesco Lancia; Alessia Russo; Tim Worrall |
| Abstract: | How should successive generations insure each other when the young can default on previously promised transfers to the old? This paper studies intergenerational insurance that maximizes the expected discounted utility of all generations subject to participation constraints for each generation. If complete insurance is unattainable, the optimal intergenerational insurance is history-dependent even when the environment is stationary. The risk from a generational shock is spread into the future, with periodic resetting. Interpreting intergenerational insurance in terms of debt, the fiscal reaction function is nonlinear and the risk premium on debt is lower than the risk premium with complete insurance. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.10090&r=fdg |
| By: | Hetzel, Robert L.; Humphrey, Thomas M.; Tavlas, George S. |
| Abstract: | Carl Snyder was one of the most prominent U.S. monetary economists of the 1920s and 1930s. His pioneering work on constructing the empirical counterparts of the terms in the equation of exchange led him to formulate a four percent monetary growth rule. Snyder is especially apposite because he was on the staff of the New York Federal Reserve Bank. Despite his pioneering empirical work and his position as an insider, why did Snyder fail to effectively challenge the dominant real bills views of the Federal Reserve (Fed)? A short answer is that he did not possess a convincing version of the quantity theory that attributed the Great Depression to a contraction in the money stock produced by the Fed as opposed to the dominant real bills view attributing it to the collapse of speculative excess. |
| Date: | 2024–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:5xqt9&r=fdg |
| By: | Anni T. Isojärvi; Sam Jerow |
| Abstract: | In recent decades, income and wealth inequality have risen notably in the United States and other countries around the world. Importantly, such rises in inequality have been shown to predict financial crises. |
| Date: | 2024–04–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2024-04-19-2&r=fdg |
| By: | John K Njenga (UoN - University of Nairobi) |
| Keywords: | ARIMA Model, Box-Jenkins Methodology, domestic credit, forecasting |
| Date: | 2024–04–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04542996&r=fdg |
| By: | Braggion, Fabio (Tilburg University, School of Economics and Management); Frehen, Rik (Tilburg University, School of Economics and Management); Jerphanion, Emiel (Tilburg University, School of Economics and Management) |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiutis:314d080e-d48e-40cf-9334-4f532f4ba86c&r=fdg |
| By: | Gong Cheng; Eric Jondeau; Benoit Mojon; Dimitri Vayanos |
| Abstract: | We study the impact of green investors on stock prices in a dynamic equilibrium model where investors are green, passive or active. Green investors track an index that progressively excludes the stocks of the brownest firms; passive investors hold a value-weighted index of all stocks; and active investors hold a mean-variance efficient portfolio of all stocks. Contrary to the literature, we find large drops in the stock prices of the brownest firms and moderate increases for greener firms. These effects occur primarily upon the announcement of the green index's formation and continue during the exclusion phase. The announcement effects imply a first-mover advantage to early adopters of decarbonisation strategies. |
| JEL: | G12 G23 Q54 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32317&r=fdg |
| By: | Nadeem Ul Haque (Pakistan Institute of Development Economics, Islamabad); Shahid Mehmood (Pakistan Institute of Development Economics, Islamabad); Hafiz Hanzla Jalil (Pakistan Institute of Development Economics, Islamabad); Ambreen Shabbir (Pakistan Institute of Development Economics, Islamabad); Syeda Um Ul Baneen (Pakistan Institute of Development Economics, Islamabad) |
| Abstract: | Pakistan has been a regular receiver of foreign aid since its inception. It would not be misplaced to state that Pakistan is addicted to aid! Since its inception, till FY 22-23, the commitments of foreign aid have crossed the $200 billion mark. There is no single, concise estimate of how much of that committed aid has actually been credited and disbursed. Based on the estimates from various sources, brought together and counterchecked due to their various methodologies, we estimate that at least $155 billion has been credited and disbursed/used up for various purposes (development and non-development) in Pakistan. This is besides the aid that was credited but has not been documented due to various reasons. |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:pid:rrepot:2024:12&r=fdg |
| By: | Edem Effiong, Ubong; Justin Ukere, Idongesit; Polycarp Ekpe, John |
| Abstract: | In this paper, the influence of fiscal policy (government expenditure and taxation) and interest rate on the manufacturing sector of the Nigerian economy was explored for the period 1981 to 2021. The study utilized the autoregressive distributed lag (ARDL) model approach since some of our variables were integrated at level and others at first difference, and the bounds test reporting the existence of long run relationship in the model. Findings of the study in tudy indicated that in the short run, government expenditure and its one-period lag exerted a negative and significant influence on manufacturing sector performance; value added tax exerted a positive and significant effect on manufacturing sector performance while its one-period lag exerted a negative and significant effect; and interest rate exerted a positive and significant effect on manufacturing sector performance. In the long run, government expenditure put forth a negative but insignificant effect on manufacturing sector performance; while value added tax and interest rate exert positive and significant effect. In the disaggregated model, recurrent expenditure exerts a negative and significant effect; capital expenditure exerted a positive and significant effect; value added tax exerted a negative and significant effect; and interest rate put forth a positive and significant influence on manufacturing sector performance. The study recommended that there is need for a reduction in the cost of governance as a huge proportion of public spending is used in running the government other than being utilized in stirring critical sectors that could stir manufacturing sector performance. |
| Keywords: | Government Expenditure; Tax; Interest Rate; I ; Industrialization; Ma ; Manufacturing |
| JEL: | J53 |
| Date: | 2024–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120679&r=fdg |
| By: | Abhishek Kumar; Sushanta Mallick |
| Abstract: | Given the rise in the government debt level in recent times, this paper aims to examine the effect of an increase in government size on risk premium and its transmission in the economy. We jointly identify the term spread shock (originating at the short end and the long end) and the government size shock, using max share identification. Term spread shock originating at the long end is driven by higher risk premium, unlike the shock originating at the short end, and increases inflation and reduces growth. |
| Keywords: | Debt, Fiscal policy, Monetary policy, Fiscal consolidation |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp-2024-24&r=fdg |
| By: | Tianbao Zhou; Zhixin Liu; Yingying Xu |
| Abstract: | Based on the quarterly data from 26 advanced economies (AEs) and 18 emerging market economies (EMs) over the past two decades, this paper estimates the short- and medium-term impacts of financial cycles on the duration and amplitude of public debt cycles. The results indicate that public debt expansions are larger than their contractions in duration and amplitude, aligning with the "deficit bias hypothesis" and being more pronounced in EMs than in AEs. The impacts of various financial cycles are different. Specifically, credit cycles in EMs significantly impact the duration and amplitude of public debt cycles. Notably, short- and medium-term credit booms in EMs shorten the duration of public debt contractions and reduce the amplitude. Fast credit growth in AEs prolongs the duration of public debt expansions and increases the amplitude. However, credit cycles in AEs show no significant impact. For house price cycles, the overall impact is stronger in EMs than in AEs, differing between short- and medium-term cycles. Finally, the impact of equity price cycles is significant in the short term, but not in the medium term. Equity price busts are more likely to prolong the expansion of public debt in EMs while increasing the amplitude of public debt contractions in AEs. Uncovering the impacts of multiple financial cycles on public debt cycles provides implications for better debt policies under different financial conditions. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.17412&r=fdg |
| By: | Tiago Pinheiro |
| Abstract: | We analyze the effects of the Portuguese COVID-19 sovereign loan guarantee scheme on financial stability using a DSGE model. Sovereign loan guarantees decrease the default rate of banks, increase credit, and speed up economic recovery. On the other hand, guarantees increase the leverage and default rate of firms. These effects are larger the lower the sensitivity of the capital of banks to capital requirements. Behind these results are the reduction in regulatory risk-weights and the transfer of loan losses from banks to the sovereign brought by sovereign loan guarantees. |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w202313&r=fdg |
| By: | Lucke, Bernd |
| Abstract: | After more than 20 years of European Monetary Union (EMU), surprisingly few scientific studies exist which study the growth effects of introducing a common currency in large parts of the European Union. I do so using a large panel (NUTS3 data) of regional data for the EU-15. Some 800 (treated) regions were subject to a policy intervention when their country joined the Euro, while some 200 control regions were not. In a synthetic control approach as explored e. g. by Abadie, Diamond and Hainmueller (ADH, 2010), I estimate the causal effects of EMU both with the standard ADH-methodology and with a novel approach which estimates counterfactuals from the control group in post-treatment time. The results from both approaches are very similar: EMU has benefited regions with export-oriented and highly competitive companies e. g. in Germany, while it has had sizable detrimental growth effects on most French and Mediterranean Eurozone regions. Over eighteen years, these losses in growth cumulate to losses in per-capita income of between 15% and 30% vis-à-vis the non-EMU counterfactual. |
| Keywords: | European Monetary Union, synthetic control methods |
| JEL: | C12 C13 C21 C23 E65 F33 N14 |
| Date: | 2022–11–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120662&r=fdg |
| By: | Menzie D. Chinn; Jeffrey A. Frankel; Hiro Ito |
| Abstract: | We begin by examining determinants of aggregate foreign exchange reserve holdings by central banks (size of issuing country’s economy and financial markets, ability of the currency to hold value, and inertia). But understanding the determination of reserve holdings probably requires going beyond the aggregate numbers, instead observing individual central bank behavior, including characteristics of the holding country (bilateral trade with the issuing country, bilateral currency peg, and proxies for bilateral exposure to sanctions), in addition to the characteristics of the reserve currency issuer. On a currency-by-currency basis, US dollar holdings are somewhat well explained by several issuer characteristics; but the other currencies are less successfully explained. It may be that the results from currency-by-currency estimation are impaired by insufficient sample size. This consideration offers a motivation for pooling the data across the major currencies and imposing the constraints that reserve holdings are determined in the same way for each currency. In this setting, most economic determinants enter with significance: economic size as measured by GDP, size of financial markets as measured by foreign exchange turnover, bilateral currency peg, and bilateral trade share. However, geopolitical variables (bilateral alliance, bilateral sanctions) usually do not enter with significance. |
| JEL: | F33 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32387&r=fdg |
| By: | Rogelio Mercado Jr.; Luca Sanfilippo |
| Abstract: | Portfolio bond flows to emerging and developing market economies (EDMEs) from multi-sector bond funds (MSBFs) are volatile and highly concentrated, rendering them potentially risky. This paper uses a recent MSBF flows dataset to shed more light on capital flow push and pull factors and to provide new evidence on the effectiveness of capital account tightening measures in reducing volatile MSBF flows. The results show: (i) higher U.S. monetary policy rates and global risk aversion significantly reduce aggregate MSBF flows and those denominated in hard currencies, while stronger global commodity price growth and global liquidity significantly increase them; (ii) global and domestic GDP growth (surprisingly) have a countercyclical impact on MSBF flows during our sample period, and, importantly, (iii) capital account tightening measures that target fixed income investment funds are effective in reducing MSBF flows to EDMEs, especially during periods of increased stress. Together, these results provide new insights into multi-sector bond funds and the importance of designing and implementing targeted capital control measures. |
| Keywords: | multi-sector bond funds, portfolio bond flows, and capital controls |
| JEL: | G23 F21 F38 F41 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2024-28&r=fdg |
| By: | Jakree Koosakul; Alexei Miksjuk |
| Abstract: | The expansion of bilateral swap arrangements (BSAs) since the Global Financial Crisis has led to a substantial reconfiguration of the Global Financial Safety Net (GFSN). This paper examines the drivers of BSA supply using a novel dataset on all publicly documented BSAs. It finds that countries with well-developed financial markets and institutions and high trade openness are more likely to backstop other economies by establishing BSAs. In addition, their choice of BSA counterparts is driven by strong investment and trade exposures to these countries, with variation in the relative importance of these factors across major BSA providers. The paper shows that geopolitical considerations often affect such decisions, as BSAs are less likely to be established between geopolitically distant countries and more likely between countries in the same regional economic bloc. |
| Keywords: | Bilateral swap arrangements; geoeconomic fragmentation; global financial safety net; liquidity provision |
| Date: | 2024–04–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/088&r=fdg |
| By: | Pedro Dias Moreira; João Monteiro |
| Abstract: | How do exporting firms react to changes in the cost of credit? To answer this question, we exploit an exogenous variation in banking regulation which increases the cost of financing forexports in the European Union. Using a unique dataset which combines customs, firm-level, and credit registry data on Portuguese firms we find that in response to an increase in the costof credit, exports fall by 10 percent through the intensive margin. In the extensive margin, we also show that there is a sharp drop in entry as well as an increase in firm exit. Within a firm, we document that firms reduce their dependence on bank credit by adjusting their product mix, as firms shift towards products with a low dependence on working capital and bank credit. We also provide direct evidence of the mechanism through which the change in banking regulation operates. We find that loan rates for exporting firms increase and that loan amounts fall by 7 percent. We then turn to aggregate trade data for all E.U. countries. We find that there is an overall decline in exports, but that this decline is driven by countries with undercapitalized banks or where bank equity is scarce. This finding suggests that the health of the banking system is an important determinant of how exports react to an increase in the cost of credit. Using a multi-sector Ricardian model, we show that welfare in E.U. countries declines due to a depreciation in terms of trade. Welfare in countries which import goods from the E.U. also declines. |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w202320&r=fdg |
| By: | Tim Kaiser; Annamaria Lusardi |
| Abstract: | This article provides a concise narrative overview of the rapidly growing empirical literature on financial literacy and financial education. We first discuss stylized facts on the demographic correlates of financial literacy. We next cover the evidence on the effects of financial literacy on financial behaviors and outcomes. Finally, we review the evidence on the causal effects of financial education programs focusing on randomized controlled trial evaluations. The article concludes with perspectives on future research priorities for both financial literacy and financial education. |
| Keywords: | financial education, financial literacy, financial behavior |
| JEL: | G53 D14 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_11070&r=fdg |
| By: | Francesca Carapella; Jin-Wook Chang; Sebastian Infante; Melissa Leistra; Arazi Lubis; Alexandros Vardoulakis |
| Abstract: | A Central Bank Digital Currency (CBDC) is a form of digital money that is denominated in the national unit of account, constitutes a direct liability of the central bank, and can be distinguished from other central bank liabilities. We examine the positive and negative implications for financial stability of a CBDC under different design options. We base our analysis on the lessons derived from historical case studies as well as on analytical frameworks useful to characterize the mechanisms through which a CBDC can affect financial stability. We further discuss various policy tools that can be employed to mitigate financial stability risks. |
| Keywords: | CBDC; Financial stability; Runs; Stablecoins; Central bank liabilities; Regulation |
| JEL: | E40 E50 G01 G21 G23 G28 |
| Date: | 2024–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2024-21&r=fdg |
| By: | Salzer, Tim |
| Abstract: | This chapter offers a concise overview of China's endeavors towards establishing a state-backed digital currency from the early 2000s to the present, culminating in the digital yuan. Drawing on the social scientific literature concerned with large technical systems, we assert two main arguments. First of all, while many commentators have considered that the new payment infrastructure could overhaul the existing institutional arrangements in the realm of payments and in particular weaken private financial entities, its evolution actually follows a much more incremental logic and relies on both private and public institutions. Secondly, many foreign observers have assumed that the digital yuan represents a long-planned attempt at challenging the international currency hierarchy and American international hegemony. Contrary to this line of thinking, we argue that initially, currency digitalization in the PRC was first and foremost motivated by domestic factors. The project assumed an openly international dimension only after other foreign countries began to initiate their own attempts at currency digitalization under the new slogan of developing "Central Bank Digital Currencies". |
| Date: | 2024–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:5yq4r&r=fdg |