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on Financial Development and Growth |
| By: | Filippo Bontadini; Francesco Filippucci; Cecilia Jona-Lasinio; Giuseppe Nicoletti; Alessandro Saia |
| Abstract: | The paper presents novel indicators to measure financial sector digitalisation that cover 21 OECD countries over the 1995-2018 period, showing a significant increase in digital penetration though at different speeds and intensities across countries. The indicators are used to study the impact of financial sector digitalisation on economic activity, highlighting significant positive effects on the productivity of downstream industries. A 10% increase in financial sector digitalisation is associated with a 0.1 percentage point increase in productivity growth for the average industry, with a stronger impact in intangible-intensive industries. Digitalisation in finance is also associated with an easing of credit constraints, particularly benefiting intangible-intensive industries and SMEs, via an improvement in credit allocation and market conditions. Results suggest that policy actions aimed at supporting digital infrastructure, promoting competition in communications, fostering finance innovation, and encouraging high-level skill formation (especially in STEM fields) could sustain and enhance productivity growth through financial sector digitalisation. |
| Keywords: | Credit Allocation, Financial Sector Digitalisation, Intangibles, Productivity |
| JEL: | G00 O33 G38 |
| Date: | 2024–08–09 |
| URL: | https://d.repec.org/n?u=RePEc:oec:ecoaaa:1818-en |
| By: | Jon Danielsson; Andreas Uthemann |
| Abstract: | The rapid adoption of artificial intelligence (AI) is transforming the financial industry. AI will either increase systemic financial risk or act to stabilise the system, depending on endogenous responses, strategic complementarities, the severity of events it faces and the objectives it is given. AI's ability to master complexity and respond rapidly to shocks means future crises will likely be more intense than those we have seen so far. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.17048 |
| By: | Juan Imbet (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique); J. Anthony Cookson (Leeds School of Business [Boulder] - University of Colorado [Boulder]); Corbin Fox; Christoph Schiller; Javier Gil-Bazo |
| Abstract: | Social media fueled a bank run on Silicon Valley Bank (SVB), and the effects werefelt broadly in the U.S. banking industry. We employ comprehensive Twitter data toshow that preexisting exposure to social media predicts bank stock market losses inthe run period even after controlling for bank characteristics related to run risk (i.e., mark-to-market losses and uninsured deposits). Moreover, we show that social mediaamplifies these bank run risk factors. During the run period, we find the intensity ofTwitter conversation about a bank predicts stock market losses at the hourly frequency.This effect is stronger for banks with bank run risk factors. At even higher frequency, tweets in the run period with negative sentiment translate into immediate stock marketlosses. These high frequency effects are stronger when tweets are authored by membersof the Twitter startup community (who are likely depositors) and contain keywordsrelated to contagion. These results are consistent with depositors using Twitter tocommunicate in real time during the bank run. |
| Keywords: | Bank Runs, Social Media, Social Finance, FinTech |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04660083 |
| By: | Tufan Ekici; Martin Geiger; Marios Zachariadis |
| Abstract: | We study how poor hand-to-mouth and wealthy hand-to-mouth households form their expectations as compared to wealthy liquid households in the United States, using monthly microeconomic survey data for the period from 2005:2 to 2013:6. Utilizing a timeline of financial crisis events along with changes in stock-market values and uncertainty around those events, we assess the differential responses of these households’ expectations regarding inflation, unemployment, and the interest rate. Our estimates suggest substantial differences in the expectation responses of liquidity constrained households relative to unconstrained ones. |
| Keywords: | liquidity constraints, inflation expectations, unemployment expectations, interest rate expectations, financial shocks |
| JEL: | D84 E30 E70 G01 G51 |
| Date: | 2024–08–19 |
| URL: | https://d.repec.org/n?u=RePEc:ucy:cypeua:05-2024 |
| By: | Tomohiro Hirano |
| Abstract: | Throughout history, many countries have repeatedly experienced large swings in asset prices, which are usually accompanied by large fluctuations in macroeconomic activity. One of the characteristics of the period before major economic fluctuations is the emergence of new financial products; the situation prior to the 2008 financial crisis is a prominent example of this. During that period, a variety of structured bonds, including securitized products, appeared. Because of the high returns on such financial products, many economic agents were involved in them for speculative purposes, even if they were riskier, producing macro-scale effects. With this motivation, we present a simple macroeconomic model with financial speculation. Our model illustrates two points. First, stochastic fluctuations in asset prices and macroeconomic activity are driven by the repeated appearance and disappearance of risky financial assets, rather than expansions and contractions in credit availability. Second, in an economy with sufficient borrowing and lending, the appearance of risky financial assets leads to decreased productive capital, while in an economy with severely limited borrowing and lending, it leads to increased productive capital. |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2408.05047 |
| By: | Eguren-Martin, Fernando (SPX Capital); Kösem, Sevim (Bank of England); Maia, Guido (Centre for Macroeconomics and London School of Economics); Sokol, Andrej (Bloomberg LP) |
| Abstract: | We propose a novel approach to extract factors from large data sets that maximise covariation with the quantiles of a target distribution of interest. From the data underlying the Chicago Fed’s National Financial Conditions Index, we build targeted financial conditions indices for the quantiles of future US GDP growth. We show that our indices yield considerably better out-of-sample density forecasts than competing models, as well as insights on the importance of individual financial series for different quantiles. Notably, leverage indicators appear to co-move more with the median of the predictive distribution, while credit and risk indicators are more informative about downside risks. |
| Keywords: | Quantile regression; factor analysis; financial conditions indices; GDP-at-risk |
| JEL: | C32 C38 C53 C58 E37 E44 |
| Date: | 2024–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1084 |
| By: | Magnus Saß |
| Abstract: | The Basel credit-to-GDP gap is the single most popular measure of excessive credit growth and the financial cycle in general. It is based, however, on a purely statistical understanding of excessiveness: Growth is excessive if the credit-to-GDP ratio (i.e. the ratio of credit to nominal GDP) is significantly above its long-term trend. This paper presents an alternative approach where variation in the credit-to-GDP ratio is decomposed into its structural economic drivers. Some of these economic drivers are assumed to be non-excessive (aggregate demand and supply shocks), and others to be potentially excessive (all other shocks). Based on this identification, I construct a more structural credit gap measure that quantifies the impact of excessive drivers. In an early-warning exercise, I show that this gap measure performs particulary well in predicting financial crises at relatively short horizons. |
| Keywords: | financial cycles, conditional forecasting, time series, Bayesian VAR |
| JEL: | C11 C32 C53 C61 G01 G32 |
| Date: | 2024–08–19 |
| URL: | https://d.repec.org/n?u=RePEc:bdp:dpaper:0046 |
| By: | Covi, Giovanni (Bank of England); Huser, Anne-Caroline (Bank of England) |
| Abstract: | How do interdependent economic shocks impact the financial system and reverberate within it? To model the financial system, we start with a two-sector microstructural model of the financial system that includes banks and insurers. We develop a stress testing methodology that stochastically computes economic profits and losses at banks and insurers following correlated corporate default shocks. Taking into account the feedback and amplification of the initial shock though the financial system, we quantify its impact on firms’ capital positions. This methodology is applied to a very rich panel data set of UK banks and insurers. Our approach enables us to distil the contribution of initial economic shocks and the feedback and amplification mechanisms to extreme tail events. Overall, we find that, since the Covid pandemic (2020–21), the UK financial system has experienced an improvement in both profit expectations and tail losses. Comparing sectoral losses in an extreme stress scenario, we find that insurers are more affected than banks by economic credit and traded risk losses, while fire sale losses affect banks more than insurers. |
| Keywords: | Credit risk portfolio; systemic risk; financial contagion; financial network; system‑wide stress testing |
| JEL: | D85 G21 G32 L14 |
| Date: | 2024–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1081 |
| By: | Ferrando, Annalisa; Holton, Sarah; Parle, Conor |
| Abstract: | Using a novel dataset linking firm level data from the Survey on Access to Finance of Enterprises (SAFE) and bank level data from the Bank Lending Survey (BLS), we explore how changes in credit standards pass through to firms at a granular level. We find that tighter credit standards decrease loan availability reported by firms, increase the likelihood they report access to finance as the worst problem and decrease their investment. After controlling for country-sector-time fixed effects that capture cyclical macroeconomic conditions, effects only remain for firms that need finance. Moreover, we find that a more diversified funding base insulates firms from the negative impacts of tighter credit standards on availability of bank loans and access to finance, although there is little evidence of such an effect forinvestment. Effects are asymmetric, with stronger impacts recorded for a tightening than an easing. Our results underscore the importance of demand conditions when interpreting the credit conditions and we thus propose a new indicator of demand adjusted credit standards at a euro area level, which can be used to analyse broader credit dynamics. JEL Classification: D22, E22, E52 |
| Keywords: | credit conditions, finance, firm-bank relationships, surveys |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242975 |
| By: | Kris James Mitchener; Gary Richardson |
| Abstract: | Bank distress was a defining feature of the Great Depression in the United States. Most banks, however, weathered the storm and remained in operation throughout the contraction. We show that surviving banks cut lending when depositors withdrew funds en masse during panics. This panic-induced decline in lending explains about one-third of the reduction in aggregate commercial bank lending between 1929 and 1932, more than twice as much as attributed to the failure of banks. |
| JEL: | N1 N10 N12 N2 N22 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32783 |
| By: | Enrique G. Mendoza; Vincenzo Quadrini |
| Abstract: | Research has shown that the unilateral accumulation of international reserves by a country can improve its own macro-financial stability. However, we show that when many countries accumulate reserves, the induced general equilibrium effects weaken financial and macroeconomic stability, especially for countries that do not accumulate reserves. The issuance of public debt by advanced economies has the opposite effect. We derive these results from a two-region model where private defaultable debt has a productive use. Quantitative counterfactuals show that the surge in reserves (public debt) contributed to reduce (increase) world interest rates but also to increase (reduce) private leverage. This in turn increased (decreased) volatility in both emerging and advanced economies. |
| JEL: | F31 F41 F62 F65 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32810 |
| By: | JEONG, Young Sik (KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP)); Song, Yena (KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP)) |
| Abstract: | This study examines the influence of net international investment position (IIP) on financial stability and financial internationalization. We find a strong correlation between creditor status (IIP surplus) and resilience to financial crises. Net creditor countries appear to act as buffers, with foreign assets returning to the home country during potential crises, thus preventing deterioration in external sector soundness. Furthermore, our analysis reveals that external financial assets positively affect the revealed comparative advantage (RCA) of financial service. Specifically, the positive relationship between external financial assets and financial service RCA is more pronounced during periods of net IIP surplus compared to net IIP deficit periods. Our findings suggest that a net IIP surplus is beneficial for both financial stability and international competitiveness. |
| Keywords: | international investment position; Financial Stability; Internationalization; external financial assets; revealed comparative advantage |
| Date: | 2024–08–12 |
| URL: | https://d.repec.org/n?u=RePEc:ris:kiepwe:2024_026 |
| By: | Martin Hodula; Jan Janku; Simona Malovana; Ngoc Anh Ngo |
| Abstract: | In our paper, we provide a review of the literature to identify the main transmission channels through which geopolitical risks (GPR) influence macro-financial stability. We begin by analyzing the existing measures of geopolitical tensions and uncertainty, showing that GPR impacts economic and financial uncertainty episodically, with significant but transient spikes during major geopolitical events. The review then identifies the two principal channels through which GPR affects macro-financial stability: the financial channel, operating through increased uncertainty and heightened risk aversion, leading to shifts in investment portfolio allocations and cross-border capital flows; and the real economy channel, impacting global trade, supply chains, and commodity markets. Using data from the past two to three decades, we provide graphical analyses that confirm the findings in the literature, highlighting the episodic nature of the impact of GPR. These insights underscore the need for policymakers and financial institutions to adopt event-specific approaches to effectively mitigate the adverse effects of geopolitical risks on economic and financial systems. |
| Keywords: | Financial stability, geopolitical risk, global economy, macro-financial impact, uncertainty shocks |
| JEL: | D80 E32 F44 F51 G2 G15 H56 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cnb:wpaper:2024/8 |
| By: | International Monetary Fund |
| Abstract: | The financial system appears to be broadly resilient, has strong capital and liquidity buffers but remains relatively small and dominated by banks, especially few state-owned banks. Household and corporate indebtedness and public debt are low. The macroprudential policy framework features both financial stability and development objectives. The recently passed Financial Sector Omnibus Law (FSOL) will make notable reforms to the financial sector. |
| Date: | 2024–08–08 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfscr:2024/272 |
| By: | International Monetary Fund |
| Abstract: | Spain’s economy and its well-developed, bank-dominated financial system have shown resilience through the pandemic, rising global geo-political tensions and tighter financial conditions. The economy remains near potential and growth is projected to continue its robust performance in the coming quarters. The long running trend of deleveraging by households (HHs) and nonfinancial corporates (NFCs) continues, activity is cooling and very moderate overvaluation receding in the housing market, commercial real estate valuations remain below pre-pandemic levels, and foreign investments in the real estate market are on the rise. |
| Date: | 2024–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfscr:2024/259 |
| By: | Dr. Gabriel Züllig; Valentin Grob |
| Abstract: | We investigate how the level of corporate leverage affects firms' investment response to monetary policy shocks. Based on novel aggregate time series estimates, leverage acts amplifying, whereas in the cross section of firms, higher leverage predicts a muted response to monetary policy. We use a heterogeneous firm model to show that in general equilibrium, both empirical findings can be true at the same time: When the average firm has lower leverage and therefore reduces its investment demand more strongly after a contractionary shock, the price of capital declines sharply, which incentivizes all firms regardless of their leverage to invest relatively more, muting the aggregate decline of investment. We provide empirical evidence supporting this hypothesis. Overall, if there are general equilibrium adjustments to shocks, effects estimated by exploiting cross-sectional heterogeneity in micro data can differ substantially from the macroeconomic elasticities, in our example even in terms of their sign. |
| Keywords: | Firm heterogeneity, State dependence, Financial frictions, General equilibrium |
| JEL: | D22 E32 E44 E52 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbwpa:2024-08 |
| By: | Martínez, Jorge M.; Ruiz, Pablo |
| Date: | 2023–07–31 |
| URL: | https://d.repec.org/n?u=RePEc:ecr:col094:80461 |
| By: | Douglas Cumming; Randall Morck; Zhao Rong; Minjie Zhang |
| Abstract: | Because corporate limited liability protects founder’s personal assets, creditors often require founders of new, small and risky firms to contract around limited liability by pledging their personal assets as collateral for loans to their firms. This makes personal bankruptcy law (PBL) relevant to corporate finance. We find that pro-debtor PBL reforms increase the number of patents filed, citations to those patents, and début patents by firms with no previous patents. These reforms also redistribute innovation across industries in closer alignment to its distribution in the U.S., which we take to approximate industry innovative potential. These effects are driven by firms without histories of high-intensity patenting, and are damped in countries that impose minimum capital requirements on new firms. Firms with largescale legacy technology may avoid radical innovations that devalue that technology. Consequently, new, initially small and risky firms often develop the disruptive innovations that contribute most to economic growth. Consistent with this, we also find pro-debtor PBL reforms increasing value-added growth rates across all industries, and by larger margins in industries with more innovation potential. Our difference-in-differences regressions use patents and PBL reforms for 33 countries from 1990 to 2002, with subsequent years used to measure citations to patents in this period. |
| JEL: | G33 G5 K35 O3 O4 P1 P50 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32826 |
| By: | Jalles, João Tovar (University of Lisbon); Park , Donghyun (Asian Development Bank); Qureshi, Irfan (Asian Development Bank) |
| Abstract: | This paper analyzes the growth impact of public and private investment shocks based on a large sample of emerging and developing countries over the period 1980–2021 with a particular focus on the Asian region. We develop new measures of investment shocks based on cyclically adjusted investment data. Estimations using local projections suggest that public investment shocks play a much greater role in boosting economic growth in comparison with private investment shocks. In emerging market and developing economies (EMDEs) (including in Asia), the growth response to investment shocks is positive and much stronger in recessions relative to economic expansions. Finally, public investment shocks in EMDE and Asian samples crowd-in private investment and private consumption. |
| Keywords: | fiscal multipliers; public investment; private investment |
| JEL: | C33 E22 H30 H50 |
| Date: | 2024–08–13 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbewp:0737 |
| By: | Gita Gopinath; Josefin Meyer; Carmen Reinhart; Christoph Trebesch |
| Abstract: | Theory suggests that corporate and sovereign bonds are fundamentally different, also because sovereign debt has no bankruptcy mechanism and is hard to enforce. We show empirically that the two assets are more similar than you think, at least when it comes to high-yield bonds over the past 20 years. Based on rich new data we compare risky US corporate bonds (“junk” bonds) to risky emerging market sovereign bonds 2002-2021 (EMBI bonds). Investor experiences in these two asset classes were surprisingly aligned, with (i) similar average excess returns, (ii) similar average risk-return patterns (Sharpe ratios), (iii) a similar default frequency, and (iv) comparable haircuts. A notable difference is that the average default duration is higher for sovereigns. Furthermore, the time profile of bond returns and default events differs. One explanation is that the two markets co-move differently with domestic and global factors. US “junk” bond yields are more closely linked to US market conditions such as US stock market returns, US stock price volatility (VIX), US industrial production, or US monetary policy. |
| Keywords: | Sovereign debt and default, Default Risk, corporate bonds, corporate default, junkbonds, Chapter 11, crisis resolution |
| JEL: | G1 G3 H6 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2097 |
| By: | Clément Landormy |
| Abstract: | This study comprehensively analyses Bitcoin’s price dynamics amidst the volatility of 2017-2018, considering various influencing factors. Drawing from Fisher’s Equation of Exchange (1911), Keynes’ liquidity preference theory (1936), and prior research insights, we formulate an Equation of Bitcoin Exchange, setting the stage for empirical testing. Employing autoregressive distributed lag models in both linear (ARDL) and nonlinear (NARDL) frameworks, we scrutinise daily data from 2017 to 2018. Our findings underscore the predominant impact of internal factors, driven by market dynamics and technological advancements, on Bitcoin prices, with investment attractiveness following closely behind. Surprisingly, macroeconomic and financial variables demonstrate relatively less influence. While Bitcoin may not serve as a direct store of value like gold or offer complete hedging against US dollar fluctuations, its potential as a diversification tool in stock markets becomes apparent, barring short-term disruptions associated with Bitcoin price crashes. Moreover, factors related to investment attractiveness frequently exert downward pressure on Bitcoin prices, emphasising the speculative nature inherent in cryptocurrencies. Noteworthy is the positive short-term connection between Bitcoin prices and tether transactions, coupled with the positive long-term interaction between Bitcoin prices and crypto fundraising efforts at the peak of the ICO boom, signalling a pre-crash surge in 2017. Conversely, the long-term negative relationship between Bitcoin prices and Tether transactions suggests that Tether acts as a hedge against Bitcoin price crashes. |
| Keywords: | MBitcoin, NARDL, Market forces, Safe haven, Tether. |
| JEL: | E42 E44 G11 G12 G15 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ulp:sbbeta:2024-31 |
| By: | Wenting Ma |
| Abstract: | Large firms in the U.S. financial system achieve substantial economic gains. Their dominance sets them apart while also raising concerns about the suppression of worker earnings. Utilizing administrative data, this study reveals that the largest financial firms pay workers an average of 30.2% more than their smallest counterparts, significantly exceeding the 7.9% disparity in nonfinance sectors. This positive size-earnings relationship is consistently more pronounced in finance, even during the 2008 crisis or compared to the hightech sector. Evidence suggests that large financial firms� excessive gains, coupled with their workers� sought-after skills, explain this distinct relationship. |
| JEL: | G20 J31 J42 L11 L12 L13 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cen:wpaper:24-41 |
| By: | Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Anandamayee Majumdar (Department of Mathematics, San Francisco State University, California, USA); Christian Pierdzioch (Department of Economics, Helmut Schmidt University, Holstenhofweg 85, P.O.B. 700822, 22008 Hamburg, Germany.); Onur Polat (Department of Public Finance, Bilecik Seyh Edebali University, Bilecik, Turkiye) |
| Abstract: | Using data that cover the annual period from 1258 to 2023, we studied the link between real gold returns and climate risks. We document a positive contemporaneous link and a negative predictive link. Our findings further show that the predictive link gave rise historically to significant out-of-sample forecasting gains. The positive contemporaneous link is consistent with the view that investors viewed gold as a safe haven in times of elevated climate risks. The negative predictive link, in turn, is consistent with an overshooting scenario in which the real gold price overshoots in response to climate risks only to return subsequently to a lower value. Our findings carry important implications for investors and policymakers, given that our analyses covers the longest possible data sample involving the gold market, and hence, is independent of any sample-selection bias. |
| Keywords: | Gold prices, Climate risks, Predictions |
| JEL: | C22 C32 C53 Q31 Q54 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:pre:wpaper:202436 |