nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2024‒07‒22
twenty-two papers chosen by
Georg Man,


  1. Financial Inclusion Dynamics: A Cross-Country Examination of Bank Concentration and Policy Strategies By Sulehri, Fiaz Ahmad; Ali, Amjad
  2. Energy Consumption and Inclusive Growth in Sub-Saharan Africa: Does Foreign Direct Investment Make a Difference? By Jinapor, John Abdulai; Abor, Joshua Yindenaba; Graham, Michael
  3. Assessing the Pathways of Sustainable Development: A Structural Equation Modeling Investigation of Regulatory Framework, Innovation, and Economic Indicators By Sulehri, Fiaz Ahmad; Ali, Amjad
  4. Climate change and the macroeconomics of bank capital regulation By Giovanardi, Francesco; Kaldorf, Matthias
  5. Insurance, Weather, and Financial Stability By Charles M. Kahn; Ahyan Panjwani; João A. C. Santos
  6. Nonbanks Are Growing but Their Growth Is Heavily Supported by Banks By Viral V. Acharya; Nicola Cetorelli; Bruce Tuckman
  7. The Growing Risk of Spillovers and Spillbacks in the Bank‑NBFI Nexus By Viral V. Acharya; Nicola Cetorelli; Bruce Tuckman
  8. Banks or Fintechs? A Roadmap for Regulation By Francisco Jesús Guerrero López; Paula Margaretic; Lucía Quesada; Federico Sturzenegger
  9. The role of fiscal policy rating variables on economic growth in the LDCs By António Afonso; M. Carmen Blanco-Arana
  10. Assessing the Growth-Enhancing Effect of State Contingent Debt Instruments By Sarah Nandnaba; Rangan Gupta
  11. How much Debt is Optimal for the Major Indian States? Economic Growth vs. Debt Sustainability. By Bhattacharya, Rudrani; C. Prasanth; Rao, R. Kavita
  12. Interest rate risk in Kenya: The banking sector stability and fiscal risks nexus By Talam, Camilla; Kiemo, Samuel
  13. The Social Costs of Sovereign Default By Juan P. Farah-Yacoub; Clemens M. Graf von Luckner; Carmen M. Reinhart
  14. Implications of macroeconomic stabilization policies on financial intermediation By Kimani, Stephanie
  15. Financial frictions, common ownership and firms' market power in a general equilibrium model By G. Spano
  16. Horizon bias and the term structure of equity returns By Cassella, Stefano; Golez, Benjamin; Gulen, H.; Kelly, Peter
  17. Firms' Perceived Cost of Capital By Niels Joachim Gormsen; Kilian Huber
  18. Credit Supply, Firms, and Earnings Inequality By Christian Moser; Farzad Saidi; Benjamin Wirth; Stefanie Wolter
  19. Intergenerational Mobility and Student Loans By Ryota Nakano
  20. Unveiling the drivers of portfolio equity and bond investment in the European Union: The interplay of tax havens and gravity factors By Mariam Camarero; Alejandro Muñoz; Cecilio Tamarit
  21. How do geopolitical interests affect financial markets reaction to international institution projects? By Hugo Oriola; Jamel Saadaoui
  22. Exchange Rate Disconnect Revisited By Ryan Chahrour; Vito Cormun; Pierre De Leo; Pablo A. Guerrón-Quintana; Rosen Valchev

  1. By: Sulehri, Fiaz Ahmad; Ali, Amjad
    Abstract: Financial inclusion, ensuring access to affordable financial products and services, is vital for economic development and poverty reduction. This study investigates the relationship between bank concentration, policy mix, and financial inclusion dynamics in developed and developing nations across 2014, 2017, and 2021. Utilizing financial inclusion as the dependent variable, factors such as bank concentration, fiscal freedom, monetary freedom, globalization, education, and urbanization are examined as independent determinants. Separate analyses for each country group enable cross-country comparisons and policy insights. The findings reveal a consistent hindrance to financial inclusion due to high bank concentration across all years and in both developing and developed countries, highlighting the critical need to diversify financial institutions for enhanced access. The impact of fiscal freedom shows shaded patterns, with a modestly negative effect in 2017 for developing nations, underscoring the necessity for tailored fiscal policies to actively promote inclusion. Monetary freedom positively influences financial inclusion in 2014 and 2017, diminishing by 2021. Globalization consistently fosters financial inclusion, though its significance fades in developed countries in 2021. Education emerges as a key driver, displaying a robust positive relationship across all years and countries. Urbanization's impact varies, with significant positive effects in 2017 but diminishing significance by 2021. Policymakers are urged to diversify financial institutions, tailor fiscal policies, and ensure monetary stability. Fostering globalization and strategic investments in education are identified as effective strategies for enhancing financial inclusion, with a call for adaptable, context-specific approaches to ensure inclusive economic growth.
    Keywords: Financial Inclusion, Bank Concentration, Monetary and Fiscal Freedom, Globalization
    JEL: E44 G21 O15
    Date: 2024
    URL: https://d.repec.org/n?u=RePEc:pra:mprapa:121284&r=
  2. By: Jinapor, John Abdulai; Abor, Joshua Yindenaba; Graham, Michael
    Abstract: This paper examines the potential impact of energy consumption and foreign direct investment (FDI) on inclusive growth in 32 Sub-Saharan Africa (SSA) countries from 2000 to 2019. The results from the 2-stage system generalised method of moment (GMM), reveal that energy consumption induces inclusive growth. The results also show a substantial impact of non-renewable energy, relative to renewable energy, on inclusive growth. Additionally, the results further reveal that FDI has a non-linear relationship with inclusive growth, where FDI dampens inclusive growth to a certain point and begins to induce it after that point. Moreover, FDI effectively forms synergies with energy consumption towards promoting inclusive growth in SSA. The interactive term results revealed that FDI forms synergies with both renewable and non-renewable energy to promote inclusive growth in SSA. We recommend that African leaders focus on attracting FDIs towards financing their energy needs, particularly in the area of low-carbon or renewable energy sources, by leveraging private sector capital investments to achieve inclusive growth whilst attaining sustainable development.
    Keywords: SSA; Renewable Energy Consumption; Non-Renewable Energy Consumption; FDI; Inclusive Growth
    JEL: F20 O20 Q4
    Date: 2024
    URL: https://d.repec.org/n?u=RePEc:pra:mprapa:121143&r=
  3. By: Sulehri, Fiaz Ahmad; Ali, Amjad
    Abstract: The concept of sustainable development holds significant importance for both current and future generations. This research examines the different pathways and relationships among sustainable development, stock market performance, foreign direct investment, regulatory framework, and innovation. The structural equation modeling technique used and analysis have been conducted using a sample of 24 countries that contribute around 65% of global greenhouse gas emissions over the period from 2000 to 2019. The empirical analysis, based on direct effects, confirms that innovation enhances stock market performance and necessitates stringent regulations. Conversely, innovation reduces foreign direct investment. Similarly, a set of regulations and stock market performance have an adverse impact on sustainable development. Additionally, the empirics of indirect effects reveal that innovation and stock market performance encourage foreign direct investment by using regulations as mediators. Moreover, innovation reduces sustainable development indirectly, considering stock market performance and foreign direct investment as mediators.
    Keywords: Stock Market Performance, Innovation, Foreign Direct Investment, Regulatory Framework, Sustainable Development, Structural Equation Model
    JEL: F21 G18 Q56
    Date: 2024
    URL: https://d.repec.org/n?u=RePEc:pra:mprapa:121286&r=
  4. By: Giovanardi, Francesco; Kaldorf, Matthias
    Abstract: This paper proposes a quantitative multi-sector DSGE model with bank failure and firm default to study the interactions between bank regulation and climate policy. Households value the liquidity of deposits, which are protected by deposit insurance. Banks collect deposits and issue equity to extend defaultable loans to clean and fossil energy firms. Bank capital regulation affects liquidity provision to households, bank risk-taking, and loan supply across sectors. Using a calibrated version of the model, we obtain four results: first, fossil penalizing capital requirements can be discarded as climate policy instrument, since their effect on sector-specific investment is quantitatively negligible in general equilibrium. Second, Ramsey-optimal capital requirements in response to a tax-induced clean transition decline to counteract negative loan demand effects. Third, differentiated capital requirements are only necessary if banks are not perfectly diversified across sectors. Fourth, nominal rigidities induce a temporary tightening of capital requirements if the transition is inflationary and, thus, spurs a boom on the loan market.
    Keywords: Bank Regulation, Liquidity Provision, Risk-Taking, ClimatePolicy, Clean Transition, Multi-Sector Model
    JEL: E44 G21 G28 Q58
    Date: 2024
    URL: https://d.repec.org/n?u=RePEc:zbw:bubdps:298857&r=
  5. By: Charles M. Kahn; Ahyan Panjwani; João A. C. Santos
    Abstract: In this paper, we introduce a model to study the interaction between insurance and banking. We build on the Federal Crop Insurance Act of 1980, which significantly expanded and restructured the decades-old federal crop insurance program and adverse weather shocks – over-exposure of crops to heat and acute weather events – to investigate some insights from our model. Banks increased lending to the agricultural sector in counties with higher insurance coverage after 1980, even when affected by adverse weather shocks. Further, while they increased risky lending, they were sufficiently compensated by insurance such that their overall risk did not increase meaningfully. We discuss the implications of our results in the light of potential changes to insurance availability as a consequence of global warming.
    Keywords: climate risks; insurance; bank lending; financial stability
    JEL: Q54 G22 G21 G28
    Date: 2024–05–01
    URL: https://d.repec.org/n?u=RePEc:fip:fednsr:98387&r=
  6. By: Viral V. Acharya; Nicola Cetorelli; Bruce Tuckman
    Abstract: Traditional approaches to financial sector regulation view banks and nonbank financial institutions (NBFIs) as substitutes, one inside and the other outside the perimeter of prudential regulation, with the growth of one implying the shrinking of the other. In this post, we argue instead that banks and NBFIs are better described as intimately interconnected, with NBFIs being especially dependent on banks both for term loans and lines of credit.
    Keywords: non-bank financial intermediaries; funding; credit lines
    JEL: G01 G21 G23 G28
    Date: 2024–06–17
    URL: https://d.repec.org/n?u=RePEc:fip:fednls:98393&r=
  7. By: Viral V. Acharya; Nicola Cetorelli; Bruce Tuckman
    Abstract: Nonbank financial institutions (NBFIs) are growing, but banks support that growth via funding and liquidity insurance. The transformation of activities and risks from banks to a bank-NBFI nexus may have benefits in normal states of the world, as it may result in overall growth in (especially, credit) markets and widen access to a wide range of financial services, but the system may be disproportionately exposed to financial and economic instability when aggregate tail risk materializes. In this post, we consider the systemic implications of the observed build-up of bank-NBFI connections associated with the growth of NBFIs.
    Keywords: nonbank financial institutions (NBFIs); non-bank financial intermediaries; nonbanks; systemic risk; spillovers; bank regulation
    JEL: G01 G21 G23 G28
    Date: 2024–06–20
    URL: https://d.repec.org/n?u=RePEc:fip:fednls:98461&r=
  8. By: Francisco Jesús Guerrero López (Universidad de San Andrés); Paula Margaretic (Universidad de Chile); Lucía Quesada (Universidad de San Andrés); Federico Sturzenegger (Universidad de San Andrés)
    Abstract: In recent years, traditional banks have faced increasing competition from digital banks, fintechs, and big tech companies. This paper builds a framework to discuss optimal regulation within this more complex competitive landscape. To achieve this, we establish a model where banks compete with a single fintech. All players choose the degree of specialization. Banks hold a geographical advantage for some customers, while the fintech reaches all customers equally. Due to fixed costs, the market operates under imperfect competition, leading to parameter values where the regulator may seek to exclude non-bank intermediaries and others where the regulator may prefer to exclude banks, shifting intermediation exclusively to big tech companies. These distinct patterns align with observed competition in financial markets, where competition with big tech companies is intense in the customer business and less so in corporate lending. Our model contributes to the argument that, for certain types of lending, banking regulation tends to be overly restrictive towards non-bank intermediaries, resulting in significant welfare losses.
    Date: 2024–06
    URL: https://d.repec.org/n?u=RePEc:aoz:wpaper:327&r=
  9. By: António Afonso; M. Carmen Blanco-Arana
    Abstract: We assess empirically the role of the World Bank’s Country Policy so-called fiscal policy rating variables (fiscal rating, debt rating and revenue rating) on economic growth in the 46 Least Developed Countries (LDCs) in the world, during the period 1990-2022. We also investigate the role of key fiscal variables on economic growth (government debt, expenditure and tax revenue). The empirical evidence suggests that better fiscal policy rating strongly and positively affects economic growth. We also find that the influence of government debt and tax revenue can contribute to influence economic growth. Results are robust by applying a fixed effects model and GMM model.
    Keywords: economic growth, LDCs, fiscal policy, fixed effects model.
    JEL: C23 G10 O10 O43
    Date: 2024–06
    URL: https://d.repec.org/n?u=RePEc:ise:remwps:wp03312024&r=
  10. By: Sarah Nandnaba (Department of Economics, Ecole normale superieure (ENS) Paris-Saclay, 91190 Gif-sur-Yvette, France); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa)
    Abstract: This paper assesses the growth-enhancing effect of State Contingent Debt Instruments (SCDIs) and uses a panel data set of 7 countries from 1991 to 2021. Exploring this relationship empirically for the first time contributes to understanding SCDIs' impact on debt management and growth promotion. SCDIs' present value exerts a pro-cyclical effect and alleviates the debt burden, significantly promoting Gross Domestic Product (GDP) growth and improving fiscal balance. The share of SCDIs on external debt shows a positive and significant impact on economic growth, suggesting that linking the principal to economic performance can enhance growth. The decrease in SCDIs' present value increases the fiscal surplus, implying that SCDIs contribute to improving fiscal balance.
    Keywords: State Contingent Debt Instruments, Fiscal Balance, Present Value, Public debt, Debt burden
    JEL: C26 C23 E44 E62 F34 H6
    Date: 2024–06
    URL: https://d.repec.org/n?u=RePEc:pre:wpaper:202426&r=
  11. By: Bhattacharya, Rudrani (National Institute of Public Finance and Policy); C. Prasanth (National Institute of Public Finance and Policy); Rao, R. Kavita (National Institute of Public Finance and Policy)
    Date: 2024–06
    URL: https://d.repec.org/n?u=RePEc:npf:wpaper:24/411&r=
  12. By: Talam, Camilla; Kiemo, Samuel
    Abstract: The study sought to examine the effect interest rate risks on banking sector stability through disentangling the effect of interest rate risk on both fiscal and banking sector stability conditions in Kenya. We applied annual macroeconomic and bank-level data for the period 2001 - 2022 across 37 banks. The study also developed a banking sector stability index to examine evolution of banking sector stability , undertook sensitivity analysis on interest rate sensitive assets k and applied panel fixed effects model to examine the effect of interest rate and fiscal policy risks on banking sector stability . The study found that overall, the banking sector has remained resilient over the study periods, despite experiencing some periods of financial instability. The study also found monetary policy stance has implications on fiscal and banking sector stability whereby contractionary monetary policy raises fiscal and banking sector stability risks when public debt is elevated due to a tight sovereign-bank nexus. Increases in interest rate and credit risks were found to lower banking sector stability while bank capital accumulation strengthened banking sector stability . A high sovereign-bank nexus increases banking sector stability through repricing risks reflected via interest rate and liquidity risks. On other hand banks' portfolio diversification and trading strategies help to mitigate and lower repricing risks from market and interest rate changes. The paper proposes tracking of sovereign-bank nexus overtime to cover multiple business cycles to enhance understanding of sovereign-bank nexus dynamics towards coordinating monetary, fiscal and macroprudential policies.
    Keywords: Banking sector stability, Fiscal Risks, Monetary policy
    Date: 2024
    URL: https://d.repec.org/n?u=RePEc:zbw:kbawps:297989&r=
  13. By: Juan P. Farah-Yacoub; Clemens M. Graf von Luckner; Carmen M. Reinhart
    Abstract: This paper investigates the economic and social consequences of sovereign default on external debt. We focus on the crises’ impact on real per capita GDP, infant mortality, life expectancy, poverty headcounts, and calorie supply per capita. After methodological exclusions, the sample covers 221 default episodes over 1815-2020. The analysis adopts an eclectic empirical strategy that relies on an augmented synthetic control method and local projections. Our findings suggest that sovereign defaults lead to significant adverse economic outcomes, with defaulting economies falling behind their counterparts by a cumulative 8.5 percent of GDP per capita within three years of default. Moreover, output per capita remains nearly 20 percent below that of non-defaulting peers after a decade. Based on the trajectory of the health, nutrition, and poverty indicators we study, we assess that the social costs of sovereign default are significant, broad-based, and long-lived.
    JEL: F0 H0 I0 O10
    Date: 2024–06
    URL: https://d.repec.org/n?u=RePEc:nbr:nberwo:32600&r=
  14. By: Kimani, Stephanie
    Abstract: Effective policies to stabilize macroeconomic conditions are essential for economic growth. In the context of this study, policymakers pursue these macroeconomic stability objectives by adjusting fiscal and monetary policy. The study used impulse response functions (IRFs) derived from vector autoregressive (VAR) models to analyze how these policy changes affected credit allocation. Results show that monetary policy changes through CRR and CBR manipulation have a longer lasting impact on private sector credit compared to fiscal policy changes. Due to its direct impact on bank liquidity, CRR changes impact private sector credit more directly compared to variations in CBR. This implies that when macroeconomic stabilization is urgent, adjusting the CRR to influence private sector credit would be more useful. Meanwhile, fiscal policy, as illustrated through total government spending and revenues, tends to impact the quantum of private sector credit instantaneously. However, the impact is short-lived given the evolving nature of the sovereign's wallet. Further, the results show that prudent fiscal consolidation (raising government revenues or reducing government spending or a combination of both) support lending to the private sector.
    Date: 2024
    URL: https://d.repec.org/n?u=RePEc:zbw:kbawps:297991&r=
  15. By: G. Spano
    Abstract: We analyze the real effects of market power induced by ownership concentration in the presence of bankruptcy costs due to costly state verification. We find that, for an economy where the probability of bankruptcy and associated costs are sufficiently low, greater concentration of common ownership, which increases market power, reduces the cost of business credit, thereby positively affecting output. However, this positive effect is more than offset by the reduction in output and consumer surplus typically induced by market power. Conversely, in an economy where the probability of bankruptcy and associated costs are high, greater market power associated with increased ownership concentration can be beneficial in terms of welfare. This is because reducing the cost of credit also reduces aggregate bankruptcy costs, leading to a positive effect. Under these circumstances, there is an optimal level of common ownership that maximizes aggregate welfare. Comparing this with the U.S. economy, we find that this optimal level exists, but the actual level documented in the literature is higher, resulting in the observed negative effects.
    Keywords: Market power;financial friction;general equilibrium
    Date: 2024
    URL: https://d.repec.org/n?u=RePEc:cns:cnscwp:202410&r=
  16. By: Cassella, Stefano (Tilburg University, School of Economics and Management); Golez, Benjamin; Gulen, H.; Kelly, Peter
    Date: 2023
    URL: https://d.repec.org/n?u=RePEc:tiu:tiutis:2e72bbd4-bdc8-434c-a55c-e83cbef96399&r=
  17. By: Niels Joachim Gormsen; Kilian Huber
    Abstract: We study hand-collected data on firms’ perceptions of their cost of capital. Firms with higher perceived cost of capital earn higher returns on invested capital and invest less, suggesting that the perceived cost of capital shapes long-run capital allocation. The perceived cost of capital is partially related to the true cost of capital, which is determined by risk premia and interest rates, but there are also large deviations between the perceived and true cost of capital. Only 20% of the variation in the perceived cost of capital is justified by variation in the true cost of capital. The remaining 80% reflects deviations that are consistent with managers making mistakes. These deviations lead to misallocation of capital that lowers long-run aggregate productivity by 5% in a benchmark model. Forcing all firms to apply the same cost of capital would improve the allocation of capital relative to current corporate practice. The deviations in the perceived cost of capital challenge standard models, in particular the production-based asset pricing paradigm, and lead us to reject the “Investment CAPM.” We describe actionable methods that allow firms to improve their perceptions and capital allocation.
    JEL: E44 G1 G3 G4 O47
    Date: 2024–06
    URL: https://d.repec.org/n?u=RePEc:nbr:nberwo:32611&r=
  18. By: Christian Moser; Farzad Saidi; Benjamin Wirth; Stefanie Wolter
    Abstract: We study the distributional consequences of monetary policy-induced credit supply in the German labor market. Firms in relationships with banks that are more exposed to the introduction of negative interest rates in 2014 experience a relative contraction in credit supply, associated with lower average wages and employment. Within firms, initially lower-paid workers are more likely to leave employment, while initially higher-paid workers see a relative decline in wages. Between firms, wages fall by more at initially higher-paying employers. Our results suggest that credit affects the distribution of pay and employment both within and between firms.
    Keywords: Wages, Employment, Worker and Firm Heterogeneity, Credit Supply, Monetary Policy
    JEL: J31 E24 J23 E51
    Date: 2024–06
    URL: https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_558&r=
  19. By: Ryota Nakano
    Abstract: The decision of whether and how much to borrow from the credit market in order to finance education costs depends crucially on parental investment in education. This study constructs a simple two-period overlapping generations model incorporating both educational investment from parents and educational borrowing. The analysis shows that in the case where educational investment from parents and educational borrowing are substitutive, the relaxation of the borrowing constraint improves intergenerational mobility. In the complementary case, the relaxation of the borrowing constraint may impair intergenerational mobility. Implications differ depending on whether the relationship between parental investments and borrowings is substitutive or complementary.
    Date: 2024–07
    URL: https://d.repec.org/n?u=RePEc:dpr:wpaper:1248&r=
  20. By: Mariam Camarero ((University Jaume I and INTECO); Alejandro Muñoz (University of València); Cecilio Tamarit (University of València and INTECO)
    Abstract: This paper examines the determinants of portfolio equity and bond investment in the European Union. We estimate the impact of different drivers typical of the gravity model developed by Okawa and van Wincoop (2012). A notable aspect of our study is that it accounts for the effects of tax havens through the recent database of Coppola et al. (2021). Another distinctive trait of our paper is that we model bilateral and multilateral resistance measured as financial restrictions between the country pair (bilateral) and relative to the rest of the world (multilateral). Our findings suggest that gravity variables (distance, economic size, and resistance), as well as historical links and global risk, explain portfolio holdings allocation. Our extended gravity model also captures the positive effect of government quality and financial development on portfolio equity and bonds. Given the differences in nature and risk between assets, we also compare the results for portfolio equity and bonds; we find that while portfolio equity is more mobile, portfolio debt tends to be invested in neighboring countries; more specifically, EU debt tends to remain in the EU. Our results also suggest that portfolio equity is more affected by global risk and multilateral financial restrictions. Finally, our comparative analysis using the IMF CPIS database (constructed under the residence principle) shows that not accounting for tax havens underestimates the gravity and fundamental factors explaining portfolio equity and bonds holdings investment.
    Keywords: Gravity, cross-border asset holdings, global frictions, international finance
    JEL: G
    Date: 2024
    URL: https://d.repec.org/n?u=RePEc:inf:wpaper:2024.7&r=
  21. By: Hugo Oriola; Jamel Saadaoui
    Abstract: This research investigates the intricate dynamics between the catalytic effect of projects financed by international institutions and geopolitical interests. Through the construction of a monthly database, we first examine the impact of the approval of a project financed by one out of five international institutions on the global macroeconomic situation on non-permanent members of the United Nations Security Council (UNSC). More precisely, we study the potential catalytic effect of the International Monetary Fund, the World Bank, the Asian Development Bank, the European Investment Bank and the Asian Infrastructure Investment Bank. We underline the existence of a catalytic effect in non-permanent members of the UNSC that can significantly impact national macroeconomic situations in a positive or negative way. Second, we contribute to the literature by emphasizing the importance of the country’s geopolitical preferences in the existence and nature of the catalytic effect. We measure these geopolitical preferences through the distance between one country’s ideal point in the United Nations General Assembly and the ideal points of UNSC permanent members session after session.
    Keywords: International institutions, United Nations, Geopolitical preferences, Catalytic effect, Finance.
    JEL: D78 F30 F42
    Date: 2024
    URL: https://d.repec.org/n?u=RePEc:ulp:sbbeta:2024-25&r=
  22. By: Ryan Chahrour; Vito Cormun; Pierre De Leo; Pablo A. Guerrón-Quintana; Rosen Valchev
    Abstract: We find that variation in expected U.S. productivity explains over half of U.S. dollar/G7 exchange rate fluctuations. Both correctly-anticipated changes in productivity and expectational noise, which influences the expectation of productivity but not its eventual realization, have large effects. This “noisy news” is primarily related to medium-to-long-run TFP growth, and transmits to the exchange rate by causing significant deviations from uncovered interest parity. Together, these disturbances generate many well-known exchange puzzles, including predictable excess returns, low Backus-Smith correlations, and excess volatility. Our findings suggest these puzzles have a common origin, linked to productivity expectations.
    JEL: D8 F3 G1
    Date: 2024–06
    URL: https://d.repec.org/n?u=RePEc:nbr:nberwo:32596&r=

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