|
on Financial Development and Growth |
| By: | Nina Boyarchenko; Leonardo Elias |
| Abstract: | Using data on balance sheets of both financial and nonfinancial sectors of the economy, we use a “demand system” approach to study how lender composition and willingness to provide credit affect the relationship between credit expansions and real activity. A key advantage of jointly modeling the demand for and supply of credit is the ability to evaluate equilibrium elasticities of credit quantities with respect to variables of interest. We document that the sectoral composition of lenders financing a credit expansion is a key determinant for subsequent real activity and crisis probability. We show that banks and nonbanks respond differentially to changes in macroeconomic conditions, with bank credit more sensitive to economic downturns. Our results thus suggest that secular changes in the structure of the financial sector will affect the dynamics of credit boom-bust cycles. |
| Keywords: | intermediated credit; leverage cycles; corporate bonds |
| JEL: | G21 G22 G23 G32 |
| Date: | 2024–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:98623 |
| By: | Dioum, Sokhna Bousso |
| Abstract: | Problems of access to finance in developing countries can be decisive in generating poverty traps and persistent income inequalities. Unlike traditional finance which excluded vulnerable populations from participating in financial activities, microfinance institutions have made it easier for the poor to access financial services. This study applies the quantile technique on panel data to assess the macroeconomic effects of microfinance services on poverty in West African countries. Over the period [2000 – 2019], our estimation results reveal that the performance of microfinance institutions reduces on the one hand the number of people living below the national poverty line and accelerates the increase in the rate of economic growth, on the other hand. In other words, microfinance institutions remain the appropriate tools to significantly combat poverty and raise the level of economic development in West African countries. Also, a regularization mechanism must be developed in the Community in order to minimize income inequality which is a potential source of increasing poverty. |
| Keywords: | Poverty, Microfinance institution, Economic development, Income inequality |
| JEL: | G21 O11 |
| Date: | 2024–07–31 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121580 |
| By: | Florian Léon (FERDI - Fondation pour les Etudes et Recherches sur le Développement International); Sitraka Rabary (FERDI - Fondation pour les Etudes et Recherches sur le Développement International) |
| Abstract: | In the face of climate and social challenges, the financial sector can no longer limit itself to an approach focused solely on profitability. Two movements are converging. On the one hand, more and more players are calling for the extra-financial impact of investments to be taken into account in their strategy. International regulations, such as the ISSB and the CSRD, are putting increasing pressure on companies to do so. On the other hand, development financiers (governments, foundations, international financial institutions) are looking for innovative ways to accelerate growth in poor countries and contribute to global public goods through the private sector. |
| Keywords: | Africa, Firms, Impact investing |
| Date: | 2024–07–19 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04654027 |
| By: | Ubeda, Fernando; Mendez, Alvaro; Forcadell, Francisco Javier; López, Belén |
| Abstract: | This paper investigates the impact of multinational banks (MNBs) implementing socially sustainable practices on financial inclusion in developing countries. We argue that the specific characteristics of the MNBs, when combined with socially sustainable practices, contribute to building trust and reducing risks in developing countries where they operate. This positive externality causes improvements for the underprivileged in three dimensions of financial inclusion: their demand for bank accounts, their propensity to save, and their access to credit. A sample of 152 multinational banks in 32 developing countries and 37, 952 individuals proves the positive effect of sustainable practices. |
| Keywords: | ESG criteria; sustainable banking; financial inclusion; multinational banks; SDGs; social sustainability |
| JEL: | F3 G3 |
| Date: | 2024–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:124260 |
| By: | Debuque-Gonzales, Margarita; Corpus, John Paul P. |
| Abstract: | This paper examines financial inclusion in the Philippines, benchmarking it against other developing Asian economies using the latest supply-side and demand-side data. It uses probit regressions on Philippine microdata from the World Bank’s 2021 Global Findex Database, providing a comparative analysis with the country’s regional peers. The study finds the Philippines leading in creating an enabling environment but shows mixed performance in financial outreach and uptake and lagging outcomes in account ownership and usage. Probit regressions reveal positive associations between financial inclusion and individual characteristics like education, income, and employment, and a nonlinear relationship with age. The study uncovers a smaller gender gap in formal account ownership and use and emerging disparities in financial technology access across education and income levels, particularly mobile money. Barriers such as high cost, distance, and lack of trust in financial institutions significantly hinder lower-income households, with Filipinos more affected by these barriers than their Association of Southeast Asian Nations counterparts. |
| Keywords: | Financial inclusion |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:phd:pjdevt:pjd_2024_vol__48_no__1a |
| By: | Swetha Ramachandran |
| Abstract: | For decades now, Western development agencies and donors have been castigated for their colonial biases in providing aid to Africa. It is well established that donors provide considerably more foreign aid to their former colonies relative to other countries in the region. However, what happens over time to the influence of the former-colonizer-turned-donor within the aid recipient countries? Does their influence become stronger over time due to early and significant contributions, or does it decline with the emergence of other contemporary donors? |
| Keywords: | Colonialism, Foreign aid, Donors, Africa |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:unu:wpaper:wp-2024-47 |
| By: | Bakari, Sayef |
| Abstract: | This study explores the determinants of economic growth in 17 East Asia-Pacific countries from 2004 to 2023, analyzing the effects of capital, labor, digitalization, financial development, natural resources, and trade openness. Utilizing a suite of statistical and econometric techniques—including descriptive statistics, correlation analysis, Static Gravity Model, Generalized Method of Moments (GMM), and Two-Stage Least Squares (2SLS)—the research reveals significant insights into the region's economic dynamics. Descriptive statistics illustrate considerable variation in key economic indicators, with capital and financial development showing strong positive correlations with GDP. The Static Gravity Model and GMM results confirm the vital roles of capital, labor, financial development, and trade openness in driving economic performance, while digitalization and natural resources display limited or non-significant impacts. The 2SLS model further supports the robustness of these findings, highlighting the dominant influence of capital and labor despite the less pronounced effects of digitalization and natural resources. This study offers a comprehensive assessment of the factors shaping economic growth in the East Asia-Pacific region, providing valuable implications for policy and investment strategies. |
| Keywords: | Digitalization, Natural Resources, Trade Openness, Economic Growth, Panel Data Analysis, East Asia-Pacific Countries. |
| JEL: | D83 F10 F13 F14 L63 L86 L96 N55 N70 N75 O13 O24 O47 P28 P33 P45 P48 Q26 Q27 Q34 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121643 |
| By: | Audi, Marc |
| Abstract: | There is ongoing debate in empirical research regarding the impact of exchange rate volatility on exports and economic growth. While some studies argue that exchange rate volatility positively influences these economic variables, others suggest negative or negligible effects. This study seeks to clarify this debate by examining the specific impact of exchange rate volatility on the economic growth of Lebanon, utilizing annual time series data spanning from 1980 to 2023. In our investigation, we employed several econometric techniques to analyze the relationship between exchange rate volatility and economic growth. Notably, we utilized the autoregressive distributed lag model to explore both the short-term and long-term dynamics between these variables. Our results reveal a nuanced relationship: in the long run, exchange rate volatility exhibits a positive and significant effect on economic growth, while in the short run, this relationship is negative and insignificant. Further analysis identified that variables such as exchange rate volatility, investment volatility, agricultural value-added, and services value-added significantly impact economic growth in the long run. In contrast, inflation and exchange rates were found to have an insignificant effect on long-term economic growth. Specifically, inflation displayed a negative and insignificant relationship with economic growth, suggesting that while inflation can hamper growth, its impact is not statistically significant in this context. Given the inherent challenges in eliminating exchange rate volatility, our study recommends that the government of Lebanon adopt efficient macroeconomic policies aimed at mitigating the adverse effects of currency volatility. These policies should focus on enhancing economic stability and fostering a conducive environment for sustainable growth. Our findings contribute to the broader discourse on exchange rate volatility and its economic implications, offering specific insights relevant to Lebanon and potentially applicable to other economies with similar characteristics. Policymakers can leverage these insights to design strategies that balance the benefits of exchange rate flexibility with the need to protect the economy from excessive volatility. The evidence provided enhances our understanding of the long-term and short-term effects of exchange rate fluctuations, offering a foundation for informed policy-making that promotes economic resilience and growth. |
| Keywords: | Exchange Rate Volatility, Economic Growth, Lebanon |
| JEL: | F31 O16 O53 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121634 |
| By: | Sindala, Elvin; Musonda, Gabriel; Mumba, Matrina; Basila, Moono |
| Abstract: | Inflation, exchange rate and gross domestic product (GDP) are critical variables to macroeconomic stability. For a small economy like Zambia, it is imperative for central authorities to establish the size and degree of the exchange rate pass-through (ERPT) to domestic prices and output as they formulate monetary policies. This paper examines the effect of ERPT to domestic prices and local production using the vector error correction model (VECM) for the period 1995Q1 to 2019Q4. The study utilizes the baseline and alternative models for intra study comparisons. Results show that the ERPT to domestic prices is high, persistent, and incomplete in the baseline model while the alternative model depicts a low, persistent, and incomplete ERPT in the long run. Furthermore, the long run ERPT to local production was found to be high, persistent, and complete. Policy implications are that monetary and fiscal policies should be geared towards exchange rate measures that would contribute to both internal and external balances and nurture macroeconomic stability. The measures would include management of exchange rate volatility, effective debt sustainability strategies and reviving as well as broadening the manufacturing sector in Zambia to nurture an export-oriented economy. |
| Keywords: | Price; exchange rate; local production; VECM |
| JEL: | E0 E00 E01 E02 E03 E4 E42 E44 F1 F14 F4 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121533 |
| By: | Cajas Guijarro, John |
| Abstract: | This paper proposes two theoretical dynamic models (Models A and B) to analyze the interaction between distributive and financial cycles in capitalist economies. Model A assumes investment equals savings at the aggregate level but assumes a delay between capitalists saving their income and distributing it to firms for reinvestment, leading to credit demand from a rentier class. Model B extends and modifies Model A by representing capitalist incentives to invest through an investment function and accounting for the dynamic effect of non-zero excess demand. Analytical proofs for the existence of limit cycles in both models are provided using Hopf bifurcation theorems for four-dimensional and five-dimensional dynamical systems, and numerical simulations identify stable and limit cycles, unstable cycles, damped oscillations, and multiple relevant patterns. The results suggest that the stability of cycles is significantly influenced by the distribution of bargaining power between workers and capitalists, as well as the behavior of the central bank and the rentier class. Furthermore, the paper suggests two methods to identify financing regimes within capitalist cycles and concludes by providing insights for future analytical and empirical research. |
| Keywords: | Distributive cycles, Financial cycles, Hopf bifurcation, Bargaining power, Stability, Interest rate |
| JEL: | C61 E11 E12 E32 G01 |
| Date: | 2024–07–01 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121404 |
| By: | Charles Yuji Horioka (Center for Computational Social Science and Research Institute for Economics & Business Administration (RIEB), Kobe University, Asian Growth Research Institute, Institute of Social and Economic Research, Osaka University, and National Bureau of Economic Research, JAPAN); Luigi Ventura (Department of Economics and Law, Sapienza, University of Rome, ITALY) |
| Abstract: | In this paper, we analyze the saving motives of European households using micro-data from the Household Finance and Consumption Survey (HFCS), which is conducted by the European Central Bank. We find that the rank ordering of saving motives differs greatly depending on what criterion is used to rank them. For example, we find that the precautionary motive is the most important saving motive of European households when the proportion of households saving for each motive is used as the criterion to rank them but that the retirement motive is the most important saving motive of European households if the quantitative importance of each motive is taken into account. Moreover, the generosity of social safety nets seems to affect the importance of each saving motive, with saving for the retirement motive being less important in countries with generous public pension benefits and saving for the precautionary motive being less important in countries with generous health systems. These findings suggest that the retirement motive and the precautionary motive are the dominant motives for saving in Europe partly because social safety nets are not fully adequate. Our finding that saving motives that are consistent with the selfish life-cycle model as well as saving motives that are consistent with the altruism model are important in Europe implies that the two models coexist in Europe, as is the case in other parts of the world. However, our finding that the retirement motive, which is the saving motive that most exemplifies the selfish life-cycle model, is of dominant importance in Europe strongly suggests that this model is far more applicable in Europe than is the altruism model. Moreover, our finding that the intergenerational transfers motive, which is the saving motive that most exemplifies the altruism model, accounts for only about one-quarter of total household wealth in Europe provides further corroboration for this finding. |
| Keywords: | Altruism model; Bequests; European Central Bank; Household Finance and Consumption Survey; Households; Household saving; Household wealth; Inheritances; Inter vivos transfers; Intergenerational transfers; Precautionary saving; Retirement; Saving; Saving motives; Selfish life-cycle model; Wealth; Wealth-to-income ratio |
| JEL: | D12 D14 D15 D64 E21 J14 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:kob:dpaper:dp2024-26 |
| By: | Francesco D’Acunto; Michael Weber; Xiao Yin |
| Abstract: | Matched transaction-level, credit-registry, and survey-based data reveal that consumers on average form excessively high (low) income expectations relative to ex-post realizations after unexpected positive (negative) income shocks. These extrapolative income expectations lead consumers to increase current spending, accumulate more debt, and face more defaults when lower-than-expected incomes are realized. We assess the aggregate implications by estimating a consumption model with defaultable unsecured debt and diagnostic Kalman filtering whereby consumers over-extrapolate income shocks when forming expectations. Extrapolative income expectations help explain state-dependent household debt cycles qualitatively and quantitatively. |
| JEL: | D14 D84 E21 E71 G51 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32715 |
| By: | Georgescu, Oana-Maria; Ponte Marques, Aurea; Galow, Benjamin |
| Abstract: | We study the sensitivity of the realised LGD to macroeconomic conditions by exploring Global Credit’s confidential dataset on observed cash flows from defaulted loans. Given the prolonged duration of loan recovery, spanning several years, and the potential for macroeconomic fluctuations during this time frame, our study explores whether the sensitivity of realised LGD to macroeconomic conditions varies based on the timing of cash flows. We find that, regardless of the cash flow timing, the sensitivity of the LGD to macroeconomic conditions is higher for real-estate secured loans than for unsecured loans. The most relevant macroeconomic variables for the secured LGD are unemployment rate and stock returns, followed by house prices and the long-term interest rate. For unsecured loans, real GDP growth and stock returns are the most relevant predictors. These results may be relevant for both micro and macroprudential policymakers by informing on the procyclicality of risk parameters and bank capital requirements. JEL Classification: G21, G32, G33, E32 |
| Keywords: | bankruptcy, banks, business fluctuations, financial risk |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242954 |
| By: | Antonio Gil de Rubio Cruz; Steven A. Sharpe |
| Abstract: | This study scrutinizes the quality of “bottom-up” forecasts of near-term S&P 500 Composite earnings, derived by aggregating analysts’ forecasts for individual firm-level earnings. We examine whether forecasts are broadly consistent with current macroeconomic conditions reflected in economists’ near-term outlook and other available data. To the contrary, we find that a simple macroeconomic model of aggregate S&P 500 earnings, coupled with GDP forecasts from the Blue Chip Survey and recent dollar exchange rate movements, can predict large and statistically significant errors in equity analysts’ bottom-up forecasts for S&P 500 earnings in the current quarter and the quarter ahead. This finding is robust to the requirement that our econometric model is calibrated using only data available at the time of forecast. Moreover, the discrepancy between the macro-model-based earnings forecasts and analysts’ forecasts has notable predictive power for 3-month-ahead returns on the S&P500 stock index. |
| Keywords: | Bottom-up Forecast; Earnings Forecasts; Equity Analyst Bias; Forecast Efficiency; Predicting Returns |
| JEL: | E44 G14 G40 G12 |
| Date: | 2024–07–11 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-49 |
| By: | Yacine Aït-Sahalia; Chen Xu Li; Chenxu Li |
| Abstract: | This paper relates jumps in high frequency stock prices to firm-level, industry and macroeconomic news, in the form of machine-readable releases from Thomson Reuters News Analytics. We find that most relevant news, both idiosyncratic and systematic, lead quickly to price jumps, as market efficiency suggests they should. However, in the reverse direction, the vast majority of price jumps do not have identifiable public news that can explain them, in a departure from the ideal of a fair, orderly and efficient market. Microstructure-driven variables have only limited predictive power to help distinguish between jumps with and without news. |
| JEL: | G12 G14 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32746 |
| By: | Beckert, Jens; Arndt, H. Lukas R. |
| Abstract: | Between 2009 and 2015 Greece underwent a profound sovereign debt crisis that led to a serious political crisis in Europe and the restructuring of Greek debt. We argue that the prevalence of negative narratives about the future contributed to the changes in spreads of Greek bonds during the crisis. We support our argument by presenting results from text mining a corpus of 9, 435 articles from the Financial Times and the Wall Street Journal. Based on sentiments and a machine learning model predicting future reference, we identify newspaper articles which generate negative and uncertain outlooks for the future in the expert discourse. We provide evidence from time series regression analysis showing that these negative imagined futures have explanatory power in models estimating spread development of Greek vs. German sovereign bonds. We suggest that these findings provide good evidence for the relevance of "imagined futures" for investors' behavior, and give directions for an innovative contribution of sociology to understanding the microfoundations of financial crises. |
| Abstract: | Zwischen 2009 und 2015 durchlebte Griechenland eine tiefgreifende Staatsschuldenkrise, die zu einer schweren politischen Krise in Europa und zur Umstrukturierung der griechischen Schulden führte. Wir argumentieren, dass die Prävalenz negativer Narrative über die Zukunft zu den Veränderungen der Spreads griechischer Anleihen während der Krise beigetragen hat. Zur Untermauerung dieser These präsentieren wir die Ergebnisse der Textanalyse eines Korpus von 9.435 Artikeln aus der Financial Times und dem Wall Street Journal. Auf der Grundlage von Sentiments und einem maschinellen Lernmodell zur Erkennung von Zukunftsvorhersagen identifizieren wir Zeitungsartikel, die negative und unsichere Zukunftsaussichten im Expertendiskurs erzeugen. Wir zeigen anhand von Zeitreihen-Regressionsanalysen, dass diese negativen Zukunftsvorstellungen Erklärungskraft in Modellen zur Schätzung der Spread-Entwicklung von griechischen gegenüber deutschen Staatsanleihen haben. Diese Ergebnisse liefern Evidenz für die Relevanz imaginierter Zukünfte für das Verhalten von Anlegern und ermöglichen einen innovativen Beitrag der Soziologie zum Verständnis der Mikroebene von Finanzkrisen. |
| Keywords: | bond spreads, economic sociology, financial markets, Greek debt crisis, imagined futures, sentiment analysis, sovereign debt, valuation, Anleihen-Spreads, Bewertung, Finanzmärkte, griechische Schuldenkrise, imaginierte Zukünfte, Staatsverschuldung, Sentimentanalyse, Wirtschaftssoziologie |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:mpifgd:300665 |
| By: | Oliver Hülsewig; Armin Steinbach |
| Abstract: | Banking regulation invites banks to gamble when buying government bonds that regulators consider to be risk-free. The adverse effects on financial stability are known. In turn, this study shows that governments have an incentive to use banking regulation in order to enhance their fiscal leeway. We examine an unintended side-effect of banking regulation, namely the zero-risk weighting of sovereign bonds, which leads to lower costs of borrowing, encourages over-borrowing, and undermines constitutional fiscal rules. Our empirical analysis, by estimating local projections, examines the reaction of the fiscal balance in euro area periphery countries to a restrictive macroprudential capital regulation shock. We find that, unlike in the US, euro area banks’ share of domestic government bond holdings increases after the shock. This feeds into cheaper and more government borrowing laying bare the undesired interaction between banking regulation and constitutional rules. By comparing the US with the European Union, there is plausibility that the US implemented regulatory treatment and fiscal constitutional rules in a fashion that is better able to minimize the negative spillovers from banking regulation on sovereign borrowing. By contrast, the EU would benefit from more risk-based macroprudential regulation and a more credible constitutional no-bailout regime for sub-federal entities. |
| Keywords: | banking regulation, constitutional fiscal rules, sovereign-bank nexus |
| JEL: | C33 G28 H63 K33 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11190 |
| By: | Mr. Eugenio M Cerutti; Mr. Stijn Claessens |
| Abstract: | We quantify the importance of the Global Financial Cycle (GFCy) in domestic credit and various local asset prices and compare it with that in capital flows. Using 2000-2021 data for 76 economies and a simple methodology, we find that each respective series’ common factor and conventional US GFCy-drivers together typically explain about 30 percent of the variation in domestic credit, up to 40 percent in stock market returns, about 60 percent in house prices, and more than 75 percent in interest rates and government bond spreads. These median estimates much exceed the 25 percent for capital flows. Our findings help to put the existing literature into context and have important implications for economic and financial stability policies, notably for the usage of quantity tools (e.g., FX interventions) that impact asset prices. |
| Keywords: | global financial cycle; credit; asset prices; capital flows; financial conditions; comovements; empirical; data; center; country; panel; fit; equity; bonds; FDI; credit; policy measures; macroprudential; capital flow management policies |
| Date: | 2024–07–19 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/158 |
| By: | Bruch, Jan; Seitz, Franz; Vollmer, Uwe |
| Abstract: | We assess the impact of macroprudential measures on macroeconomic stability using a DSGE model in which firms can access both direct and indirect financing. The model is calibrated with data from the euro area. We compare two different macroprudential rules (time-invariant and counter-cyclical) in the presence of a monetary policy shock and a macroprudential policy shock. We find that the macroprudential rule has little impact on the adjustment dynamics to a monetary and macroprudential shock. Direct financing increases the impact of monetary shocks on the volatility of financial variables but not on output and inflation. Simultaneous monetary policy and macroprudential policy shocks do not alter the reaction of inflation compared to a monetary policy shock but cause permanent output losses. |
| Abstract: | Wir untersuchen die Auswirkungen makroprudenzieller Maßnahmen auf die makroökonomische Stabilität mit Hilfe eines DSGE-Modells, in dem Unternehmen sowohl Zugang zu direkter als auch zu indirekter Finanzierung haben. Das Modell wird mit Daten des Euroraums kalibriert. Wir vergleichen zwei verschiedene makroprudenzielle Regeln (zeitinvariant und antizyklisch) in Gegenwart eines geldpolitischen Schocks und eines makroprudenziellen Schocks. Wir stellen fest, dass die makroprudenzielle Regel kaum Auswirkungen auf die Anpassungsdynamik bei einem geldpolitischen und makroprudenziellen Schock hat. Die direkte Finanzierung erhöht die Auswirkungen von monetären Schocks auf die Volatilität der Finanzvariablen, nicht aber der Produktion und Inflation. Gleichzeitige geldpolitische und makroprudenzielle Schocks verändern die Reaktion der Inflation im Vergleich zu einem geldpolitischen Schock nicht, verursachen aber dauerhafte Produktionsverluste. |
| Keywords: | Monetary Policy, Macruprudential Policy, Inflation, Business Cycle, DSGE |
| JEL: | E12 E31 E32 E58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:hawdps:300658 |
| By: | Vinci, Francesca; Schang, Christopher |
| Abstract: | The European fiscal governance framework remains incomplete, hindering policy coordination during economic shocks and affecting the transmission of the single monetary policy. High public debt and low public investment worsen resilience across Member States. Many policymakers, institutions, and academics support establishing a central fiscal capacity (CFC) as a solution. Against this backdrop, we propose a framework to assess a CFC in the euro area, aimed at stabilizing the business cycle, promoting sovereign debt sustainability, and reducing procyclicality in public investment. Our two-region DSGE model with a permanent CFC allocates resources based on the relative output gap while earmarking funds for public investment and imposing fiscal adjustment requirements for the high-debt region. The CFC enhances business cycle stabilization for both regions and significantly reduces the welfare cost of fluctuations. We also explore European bond issuance and a supranational investment strategy to address investment needs through European Public Goods. JEL Classification: E12, E32, E62, F45 |
| Keywords: | EU governance, European public goods, macroeconomic stabilisation, public debt sustainability |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242962 |
| By: | Shi, Xiangyu; Liu, Yu |
| Abstract: | This paper establishes a novel argument that social networks among local politicians reduce spatial frictions of corporate investment. We leverage the replacement of city officials and the resulting exogenous variations of hometown ties among city party secretaries to examine their impact on intercity capital flows in China. The results provide strong evidence that such connections significantly enhance capital flows between cities. These social bonds appear to effectively lower entry barriers for businesses and offer sustained support to connected firms without negatively impacting unconnected ones. Our research indicates that the increase in hometown-related investments does not displace non-hometown-related investments. |
| Keywords: | hometown ties, capital flow, transaction costs, rent seeking, economic growth |
| JEL: | D2 D7 G1 O1 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121412 |
| By: | Liu, Jiancong; Auboin, Marc; Haile, Beliyou; Wang, Yu |
| Abstract: | We use panel data for listed firms from China for 2013-2021 to examine the association between their export earnings and trade finance, particularly those receiving trade loans. Results show that a percent increase in trade finance loan is associated with 0.067-0.083 percent increase in export earnings depending on the model. When we proxy trade finance by the sum of trade finance loans and export-adjusted notes receivable, elasticity estimates range between 0.18-0.31 depending on the sample of exporters. These estimates are comparable to single and multi-instrument trade finance instrument elasticities in the literature. Elasticity of export earnings is higher for smaller firms that may have relatively limited financing options from domestic capital markets. Given that listed firms represent the largest companies, we acknowledge that study findings may not be generalizable to the universe of highly heterogeneous Chinese traders. Nonetheless, our results suggest that well-functioning markets for trade finance are likely to enhance trade, while, by contrast, lack of affordable trade finance can be a barrier to trade, or a trade cost, in its own right. |
| Keywords: | Trade, empirical studies on trade, trade finance |
| JEL: | F10 G21 O16 F14 F19 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:wtowps:300859 |
| By: | Camilo Gómez; María Fernanda Meneses-González; Andrés Murcia; Carlos Quicazán-Moreno; Angie Rozada; Hernando Vargas-Herrera |
| Abstract: | After a protracted period of financial deepening following a financial crisis at the end of the 20th century, the ratio of corporate bank loans to GDP in Colombia stagnated between 2016 and 2019. In this paper, we explore if firms have substituted bank loans for other financial instruments or if there has been a deleveraging process. From a longer-term growth perspective, we also aim to investigate whether fast-growing firms differ from others in terms of their financial leverage. We find that the decline in the ratio of bank corporate loans to GDP is related to a substitution of funding sources and is not part of a firm’s balance sheet deleveraging process. We also find that the slowdown in financial liabilities coincided with a decrease in the investment-to-GDP ratio that was part of the macroeconomic adjustment to a sharp deterioration of terms of trade between 2014 and 2016. An exploration of granular firm data indicates that fast-sale-growing enterprises typically display greater total leverage ratios, but their relative reliance on financial liabilities is less clear. On the other hand, financial leverage is higher for firms that exhibit large CAPEX-to-asset ratios. Thus, the association between financial intermediation and investment seems stronger than between financial intermediation and sales growth. **** RESUMEN: Después de un prolongado período de profundización financiera tras la crisis de finales del siglo XX, la relación entre préstamos bancarios corporativos y PIB en Colombia se estancó entre 2016 y 2019. En este artículo, exploramos si las empresas han sustituido préstamos bancarios por otros instrumentos financieros o si ha habido un proceso de desapalancamiento. Desde una perspectiva de crecimiento a más largo plazo, también exploramos si las empresas de rápido crecimiento se diferencian de otras en términos de su apalancamiento financiero. Encontramos que la disminución en la razón de los préstamos bancarios corporativos a PIB está relacionada con una sustitución de fuentes de financiamiento y no es parte de un proceso de desapalancamiento del balance de las firmas. También encontramos que la desaceleración de los pasivos financieros coincidió con una disminución en la relación inversión/PIB que fue parte del ajuste macroeconómico derivado del fuerte deterioro de los términos de intercambio entre 2014 y 2016. Una exploración de datos de empresas desagregados indica que las empresas de alto crecimiento de ventas suelen mostrar mayores tasasde apalancamiento total, pero su dependencia relativa a los pasivos financieros es menos clara. Por otro lado, el apalancamiento financiero es mayor para las empresas que exhiben altas razones deCAPEX a activos. Por tanto, la relación entre intermediación financiera e inversión parece ser más fuerte que entre intermediación financiera y crecimiento de las ventas. |
| Keywords: | Financial deepening, Private corporate sector credit, Corporate finance, Profundización financiera, Crédito al sector corporativo privado, Financiación corporativa |
| JEL: | G32 G21 G30 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:bdr:borrec:1274 |
| By: | Geromichalos, Athanasios; Wang, Yijing |
| Abstract: | In monetary theory, money is typically introduced as an object that can help agents bypass frictions, such as anonymity and limited commitment. Consequently, common wisdom suggests that if agents had access to more unsecured credit these frictions would become less severe and welfare would improve. In similar spirit, common wisdom suggests that as societies get access to more alternative (to money) payment instruments, i.e., more ways to bypass the aforementioned frictions, welfare would also increase. We show that for a large variety of settings and market structures this common wisdom is not accurate. If the alternative means of payment is sufficient to cover all the liquidity needs of the economy, then indeed the economy will reach maximum welfare. However, if access to this alternative payment system is relatively low to begin with, increasing it can hurt the economy’s welfare, and we characterize in detail the set of parameters for which this result can arise. Our model offers a simple explanation to a recent empirical literature suggesting that increased access to credit is often followed by declined economic activity. |
| Keywords: | monetary-search models, over-the-counter markets, credit, liquidity, welfare |
| JEL: | E31 E43 E52 G12 |
| Date: | 2024–06–26 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121388 |
| By: | Benjamin Knox; Jakob Ahm Sørensen |
| Abstract: | We develop a theory that connects insurance prices, insurance companies’ investment behavior, and equilibrium asset prices. Consistent with the model’s predictions, we show empirically that (1) insurers with more stable insurance funding take more investment risk and, therefore, earn higher average investment returns; (2) insurers set lower prices on policies when expected investment returns are higher, both in the cross-section of insurance companies and in the time series. Our results hold for both life insurance and property and casualty insurance companies. The findings show that insurers’ asset allocation and product pricing decisions are more connected than previously thought. |
| Keywords: | Insurance pricing; Portfolio choice; Corporate bonds |
| JEL: | G11 G22 G12 |
| Date: | 2024–07–19 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-58 |
| By: | Siyu Chen; Qing Guo |
| Abstract: | Employing a comprehensive survey of micro and small enterprises (MSEs) and the Digital Financial Inclusion Index in China, this study investigates the influence of fintech on MSE innovation empirically. Our findings indicate that fintech advancement substantially enhances the likelihood of MSEs engaging in innovative endeavors and boosts both the investment and outcomes of their innovation processes. The underlying mechanisms are attributed to fintech's role in fostering long-term strategic incentives and investment in human capital. This includes the use of promotions and stock options as rewards, rather than traditional perks like gifts or trips, the attraction of a greater number of university graduates, and the increase in both training expenses and the remuneration of technical staff. Our heterogeneity analysis reveals that fintech exerts a more pronounced effect on MSEs situated in economically developed areas, those that are five years old or younger, and businesses with limited assets and workforce. Additionally, we uncover that fintech stimulates the innovation of MSEs' independent research and development (R\&D) efforts. This paper contributes to the understanding of the nuanced ways in which fintech impacts MSE innovation and offers policy insights aimed at unleashing the full potential of MSEs' innovative capabilities. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.17293 |
| By: | Mehmet Selman Colak; Mahmut Bora Deniz; Sumeyra Korkmaz; Muhammed Hasan Yýlmaz |
| Abstract: | This paper follows a holistic approach to analyze the concept of liquidity creation in the case of the Turkish banking industry. In the first part of our analysis, we implement a revised version of the novel method suggested by Berger and Bouwman (2009) to construct liquidity creation proxies with varying scope and content for a sample of 24 banks over the period 2003-2023. The second part of the paper attempts to test frequently cited hypotheses from the banking literature on an emerging market case. Our estimations show that capital adequacy, ownership structure and the level of competition stand out as paramount predictors of bank liquidity creation. Specifically, banks with stronger capitalization experience a lower level of liquidity creation, whereas state-owned banks tend to create more liquidity relative to non-state-owned peers. It is also found that improving competition among banks might boost the liquidity creation process. Moreover, our findings are informative concerning the potential implications of liquidity creation. We find that increasing liquidity creation co-exists with higher individual bank risk. In the last stage, we adopt a regional analysis to assess the effect of liquidity creation on economic growth. By using the branch network of sample banks as the instrument, we transform the bank-level data into a spatial representation of liquidity creation for 81 provinces of Türkiye. Our estimations imply that liquidity creation is positively related to provincial economic growth. |
| Keywords: | Liquidity creation, Bank capital, Competition, Ownership structure, Bank risk, Economic growth |
| JEL: | G21 G28 C33 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:tcb:wpaper:2409 |
| By: | Van Roosebeke, Bert; Defina, Ryan |
| Abstract: | Given renewed attention on the level of deposit insurance coverage and the risks associated with high shares of uninsured deposits, this paper provides context by analysing global trends in deposit insurance coverage ratios, and explores how they have evolved over time. The analysis is conducted both at the aggregate level and per income classification of jurisdictions covering approximately 80 deposit insurance systems. The current status of deposit insurance coverage globally: • As for the share of accounts or depositors fully insured by deposit insurance, we find no substantial difference in ratios across jurisdictions’ income classification. This confirms that deposit insurers across the world fully cover a very high share of accounts/depositors. • In almost half of jurisdictions, deposit insurance coverage levels are set at around twice the GDP/capita value (±1 point). Coverage levels are markedly higher (lower) in upper middle income (low income) jurisdictions. • Globally, slightly more than half the value of eligible deposits are not insured by deposit insurance. The same goes for slightly over 60% of total deposits. Coverage levels tend to increase with the affluence of economies. In high income jurisdictions, more than half of deposit value is insured on average. In lower middle-income jurisdictions, coverage ratios are distinctly lower for total deposits (26%). Since 2015 we have identified the following trends in global coverage: • Overall coverage of eligible deposits has decreased by 13%, almost double the decline in the coverage ratio of total deposits (7%). This trend is driven by declining coverage in high income and upper middle-income jurisdictions. Coverage in high income jurisdictions has fallen steadily since 2015. • Most of this decrease can be attributed to the year 2021. During this year, coverage ratios globally fell by 9.8%. The decline was particularly high in upper middle-income jurisdictions (-13.7%). • The upturn in inflation, limited numbers of deposit insurers that have increased nominal coverage levels in the past years, and fast-growing retail deposits during the COVID-19 pandemic may contribute to explaining this decline in coverage ratios. • The ranking of coverage ratios by jurisdiction income has been stable over the past eight years. With new global data on coverage ratios available by the end of 2023, it remains to be seen how declining coverage ratios have evolved more recently. In the recent past, the pandemic’s impact on deposit growth has likely been subdued, but elevated inflation may in part have counteracted this. |
| Keywords: | deposit insurance; bank resolution |
| JEL: | G21 G33 |
| Date: | 2023–10–15 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:118891 |
| By: | Dasol Kim; Luke Olson; Toan Phan |
| Abstract: | How does competition affect banks' adaptation to emergent risks for which there is limited supervisory oversight? The analysis matches detailed supervisory data on home equity lines of credit with high resolution flood projections to identify climate risks. Following Hurricane Harvey, banks updated their internal risk models to better reflect flood risk projections, even in areas unaffected by the disaster. These updates are only detected in banks with exposures to the disaster, indicating heterogeneous bank learning. We use this heterogeneity to identify how bank adaptation is affected by competition. Exposed banks reduce lending to areas with higher flood risks, but only in less competitive markets, suggesting that competition fosters risk-taking over risk mitigation. Additionally, banks are less likely to adapt in markets where competitors are also less likely to do so, suggesting a strategic complementarity in bank adaptation. More broadly, our paper sheds light on the role of competitive forces in how banks manage emerging risks and relevant supervisory challenges. |
| Keywords: | Banks; climate risk; real estate; natural disasters; competition; moral hazard. |
| JEL: | D14 E60 G21 Q54 |
| Date: | 2024–06–21 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedrwp:98617 |