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on Financial Development and Growth |
| By: | Bernadette Minton; Alvaro G. Taboada; Rohan Williamson |
| Abstract: | Our research examines the impact of dwindling community bank numbers on community investment and economic development. Initially, we confirm the vital role of community banks’ small business lending in local development. Contrary to popular belief, we find that a decrease in community banks positively affects community investment, through small business loan (SBL) originations. Key factors include the local presence of other community banks and the continuity of the consolidating bank's presence. Interestingly, the effect remains neutral in underserved or distressed counties and diminishes when a large bank acquires a community bank without maintaining a local presence. Post-consolidation, community banks emerge larger and more robust, capable of issuing larger SBLs, while larger banks and Fintech firms contribute by providing smaller SBLs. Overall, our findings reinforce the critical contribution of community banks to local development, suggesting that a reduction in their numbers leads to a stronger, more stable banking infrastructure in the small business lending landscape. |
| JEL: | G2 G20 G21 G28 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32521&r= |
| By: | Michele Cavallo; Juan M. Morelli; Rebecca Zarutskie |
| Abstract: | In this note, we examine the effects of bank credit supply shocks on real economic activity. First, we estimate how GDP and various aggregate demand sectors respond to such shocks. Second, based on the estimated responses, we compute how much those sectors contribute to the overall response of aggregate demand to bank credit supply shocks. |
| Date: | 2024–05–24 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-05-24-2&r= |
| By: | Sammy Kemboi Chepkilot |
| Abstract: | In Kenya, interest payments on external debt have been increasing from 2010 to 2015, while GDP growth experienced a slight decline over the same period. Policymakers are concerned that the rapid increase in external debt in developing countries such as Kenya has the potential to erode the country's sovereign rating, particularly if it is not supported by proportionate growth in the size of the economy. The purpose of this study was to investigate the effect of interest payments on external debt on economic growth in Kenya. The study utilized secondary data for 25 years, from 1991 to 2015, for GDP growth and interest payments on external debt. The results from the analysis of variance statistics indicate that the model was statistically significant. This implies that interest payments on external debt are good predictors of GDP growth. Regression coefficient results show that GDP growth and the logarithm of interest payments on external debt are negatively and significantly related. The study recommends that future government plans should ensure that external borrowings are taken at rates not higher than the interest rate payments. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.16193&r= |
| By: | Gorkem Bostanci; Guillermo Ordoñez |
| Abstract: | Stock markets play a dual role: help allocate capital by conveying information about firms’ fundamentals and provide liquidity by quickly turning stocks into cash. We propose a trading model in which these two roles are endogenously related: more intensive use of stocks for liquidity affects both the information and the noise about fundamentals contained in prices. We structurally estimate stock price informativeness for several countries and show that it sharply declines when the banking system has trouble providing liquidity. We incorporate this module into a dynamic general equilibrium model to study the real effects of this mechanism through capital misallocation across heterogeneous firms. Calibrating the model for the US, we show that, due to less informative stock markets, the output loss is 43% larger if recessions are accompanied by liquidity distress. |
| JEL: | D53 D82 E32 G11 G12 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32501&r= |
| By: | Martin Kornejew; Chen Lian; Yueran Ma; Pablo Ottonello; Diego J. Perez |
| Abstract: | We study how the macroeconomic dynamics following credit cycles vary with business bankruptcy institutions. Using data on bankruptcy efficiency and business credit around the world, we document that business credit booms are followed by severe declines in output, investment, and consumption in environments with poorly functioning business bankruptcy. On the contrary, in settings with well functioning business bankruptcy, the aftermath of credit booms is characterized by moderate changes in economic activities. We use a simple model to lay out how and when efficient bankruptcy systems can mitigate the negative consequences of credit booms. |
| JEL: | E60 G01 G3 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32556&r= |
| By: | Huremovic, Kenan; Jiménez, Gabriel; Moral Benito, Enrique; Peydró, José-Luis; Vega-Redondo, Fernando |
| Abstract: | We show that bank credit shocks to firms propagate upstream and downstream along the production network, with stronger effects for upstream than downstream propagation. Our identification strategy relies on: (i) administrative datasets from Spain on supplier-customer transactions and bank loans; (ii) a standard operationalization of bank credit-supply shocks during the Global Financial Crisis; and (iii) a general equilibrium model of an interfirm production network economy with financial frictions that is structurally estimated. Our results indicate that the network propagation leads to a 50% increase in the aggregate effects of bank credit supply shocks on GDP growth, with equally important first-order versus higher-order network effects. |
| Keywords: | Supply Chains; Shock Propagation; Credit Supply; Real Effects Of Finance. |
| Date: | 2024–06–06 |
| URL: | https://d.repec.org/n?u=RePEc:cte:werepe:43952&r= |
| By: | International Monetary Fund |
| Abstract: | The Japanese financial system has remained resilient through a series of shocks including the COVID-19 pandemic. Japan’s large and globally well-integrated financial system withstood the pandemic shock, aided by strong capital and liquidity buffers and extensive policy support. Credit provision to the private sector has remained robust since the pandemic, supporting a steady economic recovery. |
| Date: | 2024–05–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfscr:2024/111&r= |
| By: | Antoine Camous; Alejandro Van der Ghote |
| Abstract: | Classical accounts of financial crises emphasize the joint contribution of extrapolative beliefs and leveraged risk-taking to financial instability. This paper proposes a simple macro-finance framework to evaluate these views. We find a novel interplay between non-rational extrapolation and investment risk-taking that amplifies financial instability relative to a rational expectation benchmark. Furthermore, the analysis provides guidance on the design of cyclical policy intervention. Specifically, extrapolative expectations command tighter financial regulation, irrespective of the regulator's degree of non-rational extrapolation. |
| Keywords: | financial frictions, financial amplifications, diagnostic expectations, financial regulation |
| JEL: | E44 E60 E70 G20 G40 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2023_431v2&r= |
| By: | Rhys Bidder; Timothy Jackson; Matthias Rottner |
| Abstract: | We examine the impact of central bank digital currency (CBDC) on banks and the broader economy - drawing on novel survey evidence and using a structural macroeconomic model with endogenous bank runs. A substantial share of German respondents would include CBDCs in their portfolio in normal times - replacing, in part, commercial bank deposits. This is hypothetical evidence for `slow’ disintermediation of the banking system. During periods of banking distress, households' willingness to shift to CBDC is even larger, implying a risk of `fast’ disintermediation. Our structural model captures both phenomena and allows for policy prescriptions. We calibrate to the Euro area and then introduce CBDC, exploiting our survey to parameterize its demand. We find two contrasting effects of CBDC on financial stability. `Slow' disintermediation shrinks a run-prone banking system with positive welfare effects. But the ability of CBDC to offer safety at scale makes bank-runs more likely. For reasonable calibrations, this second `fast disintermediation' effect dominates and the introduction of CBDC decreases financial stability and welfare. However, complementing CBDC with a holding limit or pegging remuneration to policy rates can reverse these results such that CBDC is welfare improving. Such policies retain the gains of increased stability arising from `slow' disintermediation while limiting the downsides of `fast' disintermediation. |
| Keywords: | CBDC, Financial Crises, Disintermediation, Run, Banking System, Money |
| JEL: | E42 E44 E51 E52 G21 |
| Date: | 2024–04–30 |
| URL: | https://d.repec.org/n?u=RePEc:liv:livedp:202407&r= |
| By: | Elin Halvorsen; Joachim Hubmer; Serdar Ozkan; Sergio Salgado |
| Abstract: | CORRECT ORDER OF AUTHORS: Hubmer, Halvorsen, Salgado, Ozkan. We use 1993--2015 Norwegian administrative panel data on wealth and income to study lifecycle wealth dynamics. By employing a novel budget constraint approach, we show that at age 50 the excess wealth of the top 0.1%, relative to mid-wealth households, is accounted for by higher saving rates (38%), inheritances (34%), returns (23%), and labor income (5%). One-fourth of the wealthiest---the "New Money"---start with negative wealth but experience rapid wealth growth early in life. Relative to the "Old Money, " the New Money are characterized by even higher saving rates, returns, and labor income. We use these dynamic facts to test six commonly used models of wealth inequality. Although these models can generate the high concentration of wealth seen in the cross-section, they tend to put too much weight on (accidental) bequests and fail to capture the contribution of the New Money. A model with heterogeneous returns that decrease in wealth, and non-homothetic preferences is consistent with the new facts on the dynamics of wealth accumulation. |
| Keywords: | wealth inequality; lifecycle wealth dynamics; rate of return heterogeneity; bequests; saving rate heterogeneity |
| JEL: | D14 D15 E21 |
| Date: | 2024–06–08 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:98371&r= |
| By: | Kevin Bloodworth II; Victoria Gregory |
| Abstract: | This analysis examines the household wealth that baby boomers, Gen Xers and millennials each held at age 30, comparing these generations’ assets, debt and net worth. |
| Keywords: | household wealth; baby boomers; Gen X; millennials; assets; debt; net worth |
| Date: | 2024–05–24 |
| URL: | https://d.repec.org/n?u=RePEc:fip:l00001:98304&r= |
| By: | Christian Schmieder; Patrick A Imam |
| Abstract: | We analyze how aging populations in might affect the stability of banking systems through changes in the balance sheets and risk preferences of banks over the period 2000-2022. While the anticipated decline in maturity transformation due to aging hints at a possible reduction in risk exposure, an older population may propel banks towards yield-seeking behaviors, offsetting the diminishing prominence of conventional lending operations. Through a comprehensive examination of advanced economies over the past two decades, our findings reveal a general enhancement in bank stability correlating with the aging of populations. However, the adaptive responses of banks to these demographic changes are potentially introducing tail risks. Given the rapid global shift towards aging societies, our analysis highlights the critical need for policymakers to be proactive and vigilant. This is particularly pertinent considering historical precedents where periods of relative stability have often been harbingers of emerging risks. |
| Keywords: | aging, demographics, bank risk-taking, financial stability |
| JEL: | G21 J11 G01 G28 G32 B26 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1193&r= |
| By: | Paul Beaudry; Paolo Cavallino; Tim Willems |
| Abstract: | This paper adds life-cycle features to a New Keynesian model and shows how this places financial wealth at the center of consumption/saving decisions, thereby enriching the determinants of aggregate demand and affecting the transmission of monetary policy. As retirement preoccupations strengthen, the potency of conventional monetary policy declines and depends more on the response of asset prices (supporting central banks closely monitoring the impact of monetary policy on asset prices). Especially “low/high for long” policies are shown to often have only muted effects on economic activity due to offsetting income and substitution effects of interest rates, in a way that can be compounded by Quantitative Easing. We also show why the presence of life-cycle forces can favor a monetary policy strategy which stabilizes asset prices in response to financial shocks. Being explicit about the role of retirement savings in aggregate demand therefore offers new perspectives on several aspects of monetary interventions. |
| JEL: | E21 E43 E52 G51 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32511&r= |
| By: | Hans Gersbach; Jean-Charles Rochet; Ernst-Ludwig von Thadden |
| Abstract: | This paper characterizes optimal fiscal policy in a growth model with incomplete markets, heterogeneous agents (households and entrepreneurs), and idiosyncratic productivity risk. Entrepreneurs run risky production, which they cannot finance optimally because of an agency problem. In the second-best optimum, they issue continuously traded bonds. Households invest in private and public debt. The government has to finance an exogenous expenditure flow and maximizes a weighted sum of the welfare of entrepreneurs and households. We show that any constrained Pareto optimal allocation can be decentralized as a competitive equilibrium by issuing an appropriate amount of public debt, combined with suitable wealth taxation. Positive public expenditure shocks leave the optimal debt-to-GDP ratio unaffected and increase tax rates. Such shocks also determine whether r g in equilibrium, with different dynamics and fiscal sustainability in the two regimes. |
| Keywords: | Incomplete Financial Markets, Heterogeneous Agents, Debt, Taxes, Interest, Growth, Ponzi Games |
| JEL: | D31 D43 D52 D63 E21 E44 E62 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_544&r= |
| By: | Maureen Were |
| Abstract: | Sub-Saharan Africa (SSA)'s public debt burden remains a challenge to development. Key drivers of public debt include large-scale financing of infrastructure development, adverse impact of multiple shocks including COVID-19 pandemic, maturity mismatches, and high vulnerability to exchange rate and interest rate volatility. The tight financial conditions following interest rate hikes in advanced economies have exacerbated the debt burden and heightened debt sustainability risks. Half of the SSA low-income countries are either in debt distress or at high risk of it. |
| Keywords: | Public debt, Debt sustainability, Sub-Saharan Africa |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:unu:wpaper:wp-2024-36&r= |
| By: | Zhengyang Jiang |
| Abstract: | I propose a dynamic model of the reserve currency paradigm that centers on the liquidity demand for safe assets. In global recessions, the demand for the U.S. safe bond increases and raises its convenience yield, giving rise to a stronger dollar and a countercyclical seigniorage revenue. The seigniorage revenue raises the U.S. wealth and consumption shares in recessions, despite the U.S. suffering portfolio losses from its external positions. This asset demand channel also connects exchange rate dynamics to the marginal utility over bond holding, which provides new perspectives on exchange rate disconnect and on the relationship between exchange rates and capital flows. Under this safe-asset view, exorbitant privilege does not require exorbitant duty. |
| JEL: | E44 F32 G15 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32454&r= |
| By: | Accominotti, Olivier; Albers, Thilo; Oosterlinck, Kim |
| Abstract: | This paper explores how selective default expectations affect the pricing of sovereign bonds in a historical laboratory: the German default of the 1930s. We analyze yield differentials between identical government bonds traded across various creditor countries before and after bond market segmentation. We show that, when secondary debt markets are segmented, a large selective default probability can be priced in bond yield spreads. Selective default risk accounted for one third of the yield spread of German external bonds over the risk-free rate during the 1930s. Selective default expectations arose from differences in the creditor countries’ economic power over the debtor. |
| Keywords: | sovereign risk; debt default; secondary markets; creditor discrimination; The research leading to these results has received funding from the People Programme (Marie Curie Actions) of the European Union’s Seventh Framework Programme FP7/2007-2013/Under REA grant agreement 608129; OUP deal |
| JEL: | F34 G12 G15 H63 N24 N44 |
| Date: | 2023–12–04 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:120657&r= |
| By: | Francisco González (UNIVERSIDAD DE OVIEDO); José E. Gutiérrez (BANCO DE ESPAÑA); José María Serena (BANCO DE ESPAÑA) |
| Abstract: | This paper analyzes how lending relationships affect firms’ incentives to default, drawing on loan-level data in Spain. We provide new evidence showing that firms first default on loans from less important (“non-main”) banks to preserve their most valuable lending relationships. Our findings also indicate that banks integrate this borrower behavior into their credit risk management because the most important banks within a borrower’s set of lending relationships recognize lower discretionary loan impairments. The results are robust to alternative difference-in-difference (DID) analyses and control for potential bank forbearance, loan characteristics, and a variety of time-varying bank and firm fixed effects. |
| Keywords: | lending relationships, loan default, non-performing loans, loan-loss recognition, forbearance |
| JEL: | G21 G28 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2420&r= |