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on Financial Development and Growth |
| By: | Ozili, Peterson K |
| Abstract: | Economic growth is reflected in SDG8 of the sustainable development goals. Financial stability has been identified as a factor promoting economic growth. However, there is little evidence on the effect of financial stability on economic growth in Nigeria. This study empirically examines the effect of financial stability on economic growth in Nigeria from 1993 to 2017. The results show a positive relationship between financial stability and economic growth in Nigeria. Specifically, the result shows that a high ZSCORE, which reflects low insolvency risk, has a positive effect on economic growth. Similarly, fewer nonperforming loans improve economic growth in Nigeria. In contrast, capital adequacy was found to have a negative effect on economic growth in Nigeria. |
| Keywords: | financial stability, ZSCORE, economic growth, Nigeria |
| JEL: | G20 G21 G23 G28 G29 O43 O47 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120776&r= |
| By: | Nouhaila Mchachti Abekhti (ENCGS - Ecole Nationale de Commerce et de Gestion de SETTAT); Bamousse Zineb (ENCGS - Ecole Nationale de Commerce et de Gestion de SETTAT) |
| Abstract: | This study empirically analyzes the relationship between real economic evolution, stock market capitalization, and bank credit in Morocco. It is structured into two distinct parts: the first examines the impact of the real economy on the stock market, while the second explores the influence of the stock market on the real economy. Using the Ordinary Least Squares (OLS) approach, we estimated three models. Each model was estimated using OLS regression to analyze the relationships between these variables in the context of the Moroccan financial market and economy. The results highlight that private investment plays a predominant role as the primary determinant of market size—market capitalization—and economic growth. However, bank credit—i.e., credit to the private sector—and stock market capitalization show negative effects or statistically insignificant effects. These findings suggest that the stock market and the financial sector are not fully developed or integrated into the real economy in Morocco. This study thus makes a significant contribution to the literature on the interaction between the real economy and stock markets in emerging countries and offers important implications for guiding economic and financial policies in Morocco. |
| Abstract: | Cette étude analyse empiriquement la relation entre l'évolution économique réelle, la capitalisation boursière et le crédit bancaire au Maroc. Elle est structurée en deux parties distinctes : la première examine l'impact de l'économie réelle sur le marché boursier, tandis que la seconde explore l'influence du marché boursier sur l'économie réelle. En utilisant l'approche des moindres carrés ordinaires (OLS), nous avons estimé trois modèles. Chacun a été conçu pour analyser les relations entre un ensemble de variables dans le contexte complexe du marché financier et de l'économie marocaine. Les résultats mettent en évidence que l'investissement privé joue un rôle prédominant en tant que déterminant principal de la taille du marché— capitalisation boursière—et de la croissance économique. Cependant, le crédit bancaire—c'est-à-dire le crédit au secteur privé—et la capitalisation boursière montrent des effets négatifs ou des effets statistiquement non significatifs. Ces conclusions suggèrent que le marché boursier et le secteur financier ne sont pas pleinement développés ou intégrés dans l'économie réelle au Maroc. Cette étude apporte ainsi une contribution significative à la littérature sur l'interaction entre l'économie réelle et les marchés boursiers dans les pays émergents et offre d'importantes implications pour orienter les politiques économiques et financières au Maroc. |
| Keywords: | Marché boursier, Economie réelle, Développement financier, Estimation économétrique, Maroc |
| Date: | 2024–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04556003&r= |
| By: | Yoshiki Ando (University of Pennsylvania) |
| Abstract: | The role that venture capital (VC) plays in helping promising startups achieve high growth is examined. Three facts are documented from administrative US Census data and proprietary VC datasets. First, VC-backed firms achieve substantial growth in employment and payroll compared to non-VC-backed firms. Second, VC-backed firms typically raise funding more than 10 times their revenue at age 0 and intensively invest in research and development. Third, venture capitalists acquire around 3.3% extra equity stakes relative to Angel investors. Based on the evidence, I develop a firm dynamics model with endogenous firm productivity and choice of financing from VC, Angel (non-VC-equity) investors, and banks. Venture capitalists provide equity-based funding and managerial advice, but they are in limited supply. The model shows the benefit of VC and Angel financing over bank financing for high-potential firms because of their large investment in innovation, which creates a debt repayment issue with bank financing when innovation is unsuccessful. VC-backed firms achieve substantial growth as a result of endogenous sorting, equity-based funding, and managerial advice. The calibrated model implies that venture capitalists’ advice accounts for around 24% of the growth of VC-backed firms. Finally, policy experiments predict that subsidies to innovation expenditures or equity investments enhance aggregate output and consumption in the steady state in contrast to bank loan subsidies. |
| Keywords: | Venture capital, firm dynamics, innovation, upfront investment, equity, debt, default, endogenous sorting |
| JEL: | D22 D25 E22 G24 G30 O32 |
| Date: | 2024–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:24-012&r= |
| By: | Bibi, Samuele; Valdecantos, Sebastián |
| Abstract: | In the period 2000-2019, Peru enjoyed sustained GDP growth and a long period of macroeconomic stability; as a result, poverty was reduced markedly in comparison to the 1980s and early 1990s, when the country faced severe recessions and hyperinflation. This positive economic performance coincided with the implementation of a mainstream macroeconomic framework which, alongside favourable external conditions, allowed for continuous external financing of current account deficits, mainly through foreign direct investment (FDI). Against the background of current debates regarding the resurgence of debt crises and the advocacy of FDI as a way to avoid such crises, this article uses balance of payments and international investment position statistics to assess whether Peru's acquired macroeconomic stability can be deemed sustainable. Drawing on the contributions of the Latin American structuralist school and more recent analyses that have raised concerns, the article shows that Peru's external position has taken on a Ponzi profile, casting doubt on the idea that FDI is a superior way of external financing compared to external debt. It concludes with a discussion of the social and environmental implications of Peru's widely praised macroeconomic framework, highlighting the limits that peripheral economies face when their growth relies excessively on external financing. |
| Keywords: | Macroeconomía; Estabilidad Económica; Inversiones Extranjeras; Perú; |
| Date: | 2023–09–24 |
| URL: | http://d.repec.org/n?u=RePEc:nmp:nuland:4078&r= |
| By: | Yicheng LIN (University of Exeter) |
| Abstract: | The study aims to analyse the short and long-run effect of financial development on the gender unemployment differential within the ASEAN4 (Thailand, Malaysia, the Philippines, and Indonesia) economies. The panel regression analysis includes a short-run period from 2009 to 2019 and a long-run period from 1980 to 2019. The results depicted a negative effect on financial development in the long run. In addition, inflation affects the unemployment differential negatively in the short and long run, while HCI depicts a positive effect. |
| Keywords: | Financial Development, Gender unemployment differential, Human Capital Index |
| JEL: | E44 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iefpro:14116018&r= |
| By: | Porcellacchia, Davide; Sheedy, Kevin D. |
| Abstract: | In financial crises, the premium on liquid assets such as US Treasuries increases alongside credit spreads. This paper explains the link between the liquidity premium and spreads. We present a theory of endogenous bank fragility arising from a coordination friction among bank creditors. The theory’s implications reduce to a single constraint on banks, which is embedded in a quantitative macroeconomic model to investigate the transmission of shocks to spreads and economic activity. Shocks that reduce bank net worth exacerbate the coordination friction. In response, banks lend less and demand more liquid assets. This drives up both credit spreads and the liquidity premium. By mitigating the coordination friction, expansions of public liquidity reduce spreads and boost the economy. Empirically, we identify high-frequency exogenous variation in liquidity by exploiting the time lag between auction and issuance of US Treasuries. We find a causal effect on spreads in line with the calibrated model. JEL Classification: E41, E44, E51, G01, G21 |
| Keywords: | bank-lending channel, bank runs, liquid assets |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242939&r= |
| By: | Budnik, Katarzyna; Ponte Marques, Aurea; Giglio, Carla; Grassi, Alberto; Durrani, Agha; Figueres, Juan Manuel; Konietschke, Paul; Le Grand, Catherine; Metzler, Julian; Población García, Francisco Javier; Shaw, Frances; Groß, Johannes; Sydow, Matthias; Franch, Fabio; Georgescu, Oana-Maria; Ortl, Aljosa; Trachana, Zoe; Chalf, Yasmine |
| Abstract: | This paper provides an overview of stress-testing methodologies in Europe, with a focus on the advancements made by the European Central Bank’s Financial Stability Committee Working Group on Stress Testing (WGST). Over a four-year period, the WGST played a pivotal role in refining stress-testing practices, promoting collaboration among central banks and supervisory authorities and addressing challenges in the evolving financial landscape. The paper discusses the development and application of various stress-testing models, including top-down models, macro-micro models and system-wide models. It highlights the integration of new datasets and model validation efforts as well as the expanded use of stress-testing methodologies in risk and policy evaluation and in communication. The collaborative efforts of the WGST have demystified stress-testing methodologies and fostered trust among stakeholders. The paper concludes by outlining the future agenda for continued improvements in stress-testing practices. JEL Classification: G21, G28, C58, G01, G18 |
| Keywords: | Basel III, communication, COVID-19 mitigation, economic activity, financial system model, impact assessment, lending, macro-financial scenarios, prudential policies, stress testing, uncertainty, Working Group on Stress Testing |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2024348&r= |
| By: | Altavilla, Carlo; Burlon, Lorenzo; Hünnekes, Franziska; Begenau, Juliane |
| Abstract: | We construct a novel measure of bank performance, investigate its determinants, and show that it affects bank resilience, lending behaviour and real outcomes. Using confidential and granular data, we measure performance against a market-based benchmark portfolio that mimics individual banks’ interest rate and credit risk exposure. From 2015 to mid-2022, euro area banks underperformed market benchmarks by around e160 billion per year, amid substantial heterogeneity. Structural factors, such as cost inefficiencies, rather than monetary or regulatory measures, were the main driver of bank underperformance. We also show that higher edge banks are less reliant on government support measures and less likely to experience the materialisation of interest rate or credit risk when hit by shocks. Using the euro area credit register and the pandemic shock for identification, we find that higher edge banks originate more credit, direct it towards more productive firms, and support more firm investment. JEL Classification: E52, G12, G21, G28 |
| Keywords: | banking, credit supply, maturity transformation, replicating portfolio |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242937&r= |
| By: | Pablo D. Azar; Adrian Casillas; Maryam Farboodi |
| Abstract: | The decentralized nature of blockchain markets has given rise to a complex and highly heterogeneous market structure, gaining increasing importance as traditional and decentralized (DeFi) finance become more interconnected. This paper introduces the DeFi intermediation chain and provides theoretical and empirical evidence for private information as a key determinant of intermediation rents. We propose a repeated bargaining model that predicts that profit share of Ethereum market participants is positively correlated with their private information, and employ a novel instrumental variable approach to show that a 1 percent increase in the value of intermediaries’ private information leads to a 1.4 percent increase in their profit share. |
| Keywords: | financial intermediation; oligopoly; blockchain; decentralized finance; cybersecurity |
| JEL: | G23 D82 L14 L22 G14 D43 |
| Date: | 2024–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:98219&r= |
| By: | Ozili, Peterson K |
| Abstract: | Central banks are considering the issuance of a central bank digital currency to serve as a payment tool to support economic activities. A central bank digital currency can also serve secondary purposes that are related or unrelated to the statutory objectives of a central bank which is monetary and price stability. Many central banks are thinking too fast about central bank digital currencies – they are very optimistic about the potential benefits of central bank digital currencies. While such optimism is good, central banks also need to think slowly about central bank digital currency by paying serious attention to known risks and whether there is a unique use case for CBDC. This calls for cautious optimism and a need for central banks to think fast and slow about central bank digital currencies. |
| Keywords: | CBDC, central bank digital currency, cryptocurrency, digital payment, thinking fast and slow |
| JEL: | E40 E42 E49 E50 E52 E58 E59 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120774&r= |
| By: | Petry, Johannes |
| Abstract: | The chapter analysis the role of exchanges as infrastructure providers in capital markets. While traditionally regarded as mere marketplaces, neutral spaces facilitating financial transactions, exchanges have evolved into powerful actors in their own right. Over time, exchanges have become complex organisations that enable the functioning of capital markets. While financial markets are used by investors to allocate financial assets, provide corporate financing and facilitate economic growth, certain infrastructural arrangements must exist to enable these transactions: from market data, indices, financial products, trading platforms to clearing, exchanges shape the infrastructures that underpin global capital markets. This chapter explores the commonalities and differences among exchanges, investigating their common role in the provision of financial infrastructures but also emphasizing their embeddedness within institutional environments and hierarchical positioning within the global financial system. Moreover, it addresses emerging challenges and potential contestations, particularly with the rise of exchanges in emerging markets, amidst an increasingly fragmented global economy. |
| Date: | 2024–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:osf:osfxxx:5gwte&r= |
| By: | Baqir, Reza; Diwan, Ishac; Rodrik, Dani |
| Abstract: | Badly hurt by a series of negative shocks and increasingly shut-off from capital markets, many developing countries are at risk of falling into a debt crisis. The current global financial architecture reacts through the negotiation of complex packages that include the debtor country, international financial institutions (IFIs), and external creditors. The debtor must promise to “adjust†; the IFIs must put up new loans and enforce conditionality; and creditors must accept some amount of debt and debt service reduction. In this paper, we discuss how the diverse aspects of such adjustment-cum-debt restructuring packages can be evaluated in a coherent fashion. A unified treatment of such packages allows us to highlight important questions that tend to be less evident when studying them in isolation. |
| Keywords: | Debt overhang, development and growth, debt restructuring, policy conditionality, multilateral development banks |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:notfdl:2301&r= |
| By: | Nikhil Patel; Mr. Adrian Peralta Alva |
| Abstract: | Public debt-to-GDP ratios have undergone substantial fluctuations over both the short and long term. Most recently, global debt-to-GDP ratios peaked at 100% on average in 2020 due to COVID-19, retracting substantially by 2022. To understand what drives these movements, we propose a structural approach to debt decompositions based on a SVAR identified with narrative sign restrictions. We find that GDP growth shocks and the corresponding comovements of macroeconomic variables are the key drivers of debt to GDP, accounting for 40% of the observed yearly variation in 17 advanced economies since the 1980s. Discretionary fiscal policy changes, in turn, account for less than 20% of the observed changes. The analysis also finds the primary balance multiplier on GDP to be very small. We reconcile our results with the literature, underscoring the importance of accurate shock identification and accounting for cross-country heterogeneity. |
| Keywords: | Public Debt; Fiscal Consolidation; Structural Vector Autoregression. |
| Date: | 2024–04–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/087&r= |
| By: | Valérie Mignon; Cécile Couharde; Carl Grekou; Florian Morvillier |
| Abstract: | This paper provides an in-depth analysis of the link between exchange rate misalignments and economic growth for a large sample of 170 countries over the 1973-2019 period. We rely on new cross-country data on multilateral currency misalignments and cross-quantile regressions to demonstrate that the seemingly divergent views of the Washington Consensus and the export-led growth theory on the role of currency undervaluations in promoting economic growth can be reconciled. Although any significant departures from the equilibrium exchange rate levels are found undesirable, we show that undervaluations are more likely to stimulate economic growth in developing countries. However, this positive impact is observed only up to certain thresholds of development level and currency undervaluation. Consequently, strategies in the poorest countries that systematically undervalue currencies in real terms to foster growth should be carefully tailored, as they raise the risk for these economies of switching from a positive to a less favorable growth regime, depending on both their specific wealth level and the extent of their currency undervaluation. |
| Keywords: | Cross-quantile regressions; economic growth; multilateral currency misalignments; undervaluations. |
| JEL: | F31 O47 C32 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2024-14&r= |