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on Financial Development and Growth |
| By: | Fakhri Hasanov; Abdulelah Darandary; Ryan Alyamani (King Abdullah Petroleum Studies and Research Center) |
| Abstract: | Saudi Vision 2030 (SV2030), the masterplan for the socioeconomic development of the Kingdom, places considerable emphasis on the development of the private sector in the diversification of the economy. This plan aims to have the private sector account for 65% of the total GDP of the Kingdom by 2030. As part of SV2030, the Financial Sector Development Program (FSDP), a program for the realization of targets and initiatives, was launched, aiming to enable and support financial institutions to promote the development of the private sector. Against this backdrop, we investigate the role of financial development (FD) in personal economic growth. We conduct a multivariate cointegration analysis using data from almost half a century in the extended production function framework. |
| Keywords: | Agent Based modeling, Analytics, Applied Research, Autometrics |
| Date: | 2023–12–11 |
| URL: | https://d.repec.org/n?u=RePEc:prc:dpaper:ks--2023-dp33 |
| By: | Arogundade, Sodiq; Ngarachu, Maria; Bandele, Olayinka |
| Abstract: | In achieving the African Union Agenda 2063 – The Africa We Want – and financing SDGs, African economies will require an unprecedented mobilization of resources. This study examines the role of financial development on the nexus between domestic resource mobilization (DRM) and inclusive growth using an unbalanced panel of 31 African countries from 1990-2022. The study finds that: (1) in the presence of a sound financial sector, DRM contributes positively to inclusive growth; (2) African countries with higher inclusive growth benefit more from the positive impact of tax revenue than those with lower growth; (3) regional characteristics differ in terms of the impact of DRM on inclusive growth; and (4) countries must maintain an annual threshold of DRM and financial development to harness the benefits of DRM. The empirical results are robust to different measures of DRM and estimators (two-step system GMM, Machado and Silva quantile regression, and the dynamic panel threshold model). In leveraging the benefits of DRM, the study recommends that African governments should improve their financial sector, and they can learn from the success story of the South African Financial Sector Development and Reform Program. |
| Keywords: | Inclusive Growth, Domestic Resource Mobilization, Financial development, System GMM, Machado and Silva quantile regression, Dynamic Panel Threshold. |
| JEL: | D6 D60 H60 |
| Date: | 2024–09–13 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122041 |
| By: | Sommer, Christoph |
| Abstract: | SMEs are key to development, as they provide livelihoods and jobs for the majority of people in LMICs. Yet, their development is often hampered by constrained access to finance. SMEs mostly depend on bank loans for external finance. However, these have been insufficient to overcome SMEs' financing constraints, especially in LMICs, such that it seems pertinent to explore other financing sources. The World Bank and OECD have repeatedly pointed to capital markets (e.g. Thompson et al., 2018; World Bank, 2020a). Hence, this policy brief explores the role of capital markets for SME finance in LMICs. Numerous challenges, both on the supply and demand sides, impede SMEs' involvement with capital markets. SMEs struggle with the costs of issuing securities, reporting and corporate governance requirements and, in the case of equity, with concerns about dilution of ownership. Investors on the demand side are discouraged by imperfect information and limited exit options. Consequently, SMEs hardly use equity or market-based debt, especially in LMICs. However, capital markets can have an indirect positive effect on SME finance: Several financial instruments (e.g. securitisation, equity capital for banks) exploit the respective comparative advantages of banks (information-related activities) and markets (liquidity), and create interactions with benefit flows from markets to banks and vice versa, which result in their complementarity and co-evolution. Specifically, capital market development is associated with increases in bank lending, in particular to smaller and riskier firms (Sommer, 2024; Song & Thakor, 2010). Yet, this is not necessarily the first-best option to mitigate SMEs' financing constraints, since it often takes decade-long reforms to create suitable conditions for capital markets. This has the following implications for policymaking: Policymakers need to tailor their decisions to the most promising ways of fostering SME finance to local contexts. While SME promotion may involve capital market development in some middle-income countries, this is still way off for many LMICs, as it may take strenuous institutional and structural reforms over a prolonged period to create an environment for thriving capital markets. Policymakers should foster non-traditional instruments to provide SMEs with direct access to capital market financing. Receivables and lending platforms are especially promising for LMICs and can be promoted through specialised regulatory frameworks, information and capacity-building, as well as co-investments and tax incentives. Policymakers should scale up policies to improve SMEs' access to loans; this serves both as an immediate response to SMEs' financing constraints and as a complement to policies to ensure that banks' increased lending activities (spillovers from capital market development) can (also) be channelled towards SMEs. Depending on country-specific bottlenecks, this may include addressing well-known problems in SME lending through the establishment of credit bureaus and registries as well as moveable asset registries; strengthening contract enforcement and insolvency laws; and implementing a regulatory framework conducive to digitalisation. |
| Keywords: | structural change, economic development and employment, SMEs, capital markets |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:idospb:302799 |
| By: | Daniel Grimaldi; Jose Renato Haas Ornelas |
| Abstract: | This paper explores a unique event that abruptly and unexpectedly increased the subsidy levels associated with a traditional earmarked credit line in Brazil. Using a local difference-in-differences approach, we find strikingly different results depending on firms’ size. For mid-large firms, despite an increase in subsidy intake of almost 90%, there were no relevant effects on employment or debt, suggesting they mostly used new loans to replace older (more expensive) debt. For smaller firms, we observed a similar increase in the dosage of subsidies, but we also saw an increase in earmarked debt (roughly 75%) and employment (around 6% in the number of employees and 10% in the payroll). However, all labor-related effects were short-lived and vanished after two years. A cost-effectiveness analysis for a two-year window shows that monthly credit subsidies were higher than the increase in the affected firm’s monthly payroll by BRL 393 for micro and small firms and by BRL 165, 685 for mid-large firms. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:599 |
| By: | Mahmood, Asif; Ali, Ringchan |
| Abstract: | Emerging literature after the global financial crisis of 2007-08 have highlighted the important role of financial conditions as they provide a comprehensive snapshot of the overall economic health and stability. Following this, many academic researchers, central banks and international organizations developed several composite indices, commonly known as Financial Condition Index (indices) or FCIs. In this this study, we attempt to construct the monthly financial conditions index for Pakistan using high-frequency indicators from domestic and external markets. Our results show that much of the post GFC period in Pakistan’s financial system was characterized by accommodative financial conditions, with three but higher intensity phases of tighter financial conditions. Based on the constructed FCI, we also observed that current ongoing episode of tightening is on average longer than previous two phases. In terms of drivers, our estimations reveal the increasing role of interest rates in determining the financial conditions in Pakistan during the sample period. Moreover, the preliminary analysis does indicate some underlying qualities in our constructed FCI to forecast near-term growth with reasonable precision. |
| Keywords: | Financial Conditions Index, Principal Component Analysis, Forecasting |
| JEL: | C43 C53 E44 E52 |
| Date: | 2024–09–06 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121952 |
| By: | Francesco Marchionne (Indiana University, Kelley School of Business); Noemi Giampaoli (Polytechnic University of Marche, Department of Economics and Social Sciences,); Matteo Renghini (LUISS "Guido Carli" University, Department of Economics and Finance) |
| Abstract: | This paper examines how institutional quality affects the probability of banking and twin crises using a panel of 138 countries from 1996 to 2017. We find that better institutions mitigate the probability of financial distress. Such a shielding effect occurs unambiguously only when a synthetic index is extracted from different proxies of institutional quality aspects. On the contrary, specific measures of institutional quality show some heterogeneities. In particular, dimensions more closely related to regulatory quality and corruption mitigation decrease the probability of financial instability, while measures oriented toward social capital may have null or perverse effects. Financial structure, cultural differences, and international agreements do not affect our findings. Results are robust to several econometric exercises. |
| Keywords: | crises, banks, institutions, governance |
| JEL: | G01 G21 G28 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:anc:wmofir:187 |
| By: | Dawit Z. Assefa (Hult International Business School, London, UK); Alfonsina Iona (School of Economics and Finance, Queen Mary University of London); Leone Leonida (King’s Business School, King’s College) |
| Abstract: | This paper examines the relationship between political competition and financial development across a global sample of 127 countries, with a particular focus on developed and democratic OECD countries. Building on the theoretical frameworks of Acemoglu and Robinson (2006) and Besley et al. (2010), we explore whether political competition impacts financial development in a non-monotonic or monotonic manner. Using robust measures of financial development that capture both the depth and efficiency of the financial sector, we find a U-shaped relationship between political competition and financial development in the full sample, consistent with the political replacement effect of Acemoglu and Robinson. This result suggests that financial development is promoted when political competition is either very low or very high, but hindered at intermediate levels of competition. In contrast, we observe an S-shaped relationship in OECD countries, indicating that political competition at intermediate levels is particularly conducive to financial development in developed democracies. These findings provide new insights into the nuanced role political competition plays in shaping financial systems, challenging the assumption that more political competition always leads to greater financial development. Our results are robust to a range of estimation techniques and alternative measures of political competition and financial development. |
| Keywords: | Financial Development, Institutions, Democracy, Political Competition |
| JEL: | F36 O17 O43 |
| Date: | 2024–09–23 |
| URL: | https://d.repec.org/n?u=RePEc:qmw:qmwecw:981 |
| By: | Gonzalo Bohorquez; John Cartlidge |
| Abstract: | We propose that a tree-like hierarchical structure represents a simple and effective way to model the emergent behaviour of financial markets, especially markets where there exists a pronounced intersection between social media influences and investor behaviour. To explore this hypothesis, we introduce an agent-based model of financial markets, where trading agents are embedded in a hierarchical network of communities, and communities influence the strategies and opinions of traders. Empirical analysis of the model shows that its behaviour conforms to several stylized facts observed in real financial markets; and the model is able to realistically simulate the effects that social media-driven phenomena, such as echo chambers and pump-and-dump schemes, have on financial markets. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.00742 |
| By: | Sergio A. Correia; Stephan Luck; Emil Verner |
| Abstract: | Why do banks fail? We create a panel covering most commercial banks from 1865 through 2023 to study the history of failing banks in the United States. Failing banks are characterized by rising asset losses, deteriorating solvency, and an increasing reliance on expensive non-core funding. Commonalities across failing banks imply that failures are highly predictable using simple accounting metrics from publicly available financial statements. Predictability is high even in the absence of deposit insurance, when depositor runs were common. Bank-level fundamentals also forecast aggregate waves of bank failures during systemic banking crises. Altogether, our evidence suggests that the ultimate cause of bank failures and banking crises is almost always and everywhere a deterioration of bank fundamentals. Bank runs can be rejected as a plausible cause of failure for most failures in the history of the U.S. and are most commonly a consequence of imminent failure. Depositors tend to be slow to react to an increased risk of bank failure, even in the absence of deposit insurance. |
| Keywords: | bank runs; bank failures; financial |
| JEL: | G01 G21 N20 N24 |
| Date: | 2024–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:98773 |
| By: | Deniz Anginer (Beedie Business School at Simon Fraser University); Asli Demirguc-Kunt (Center for Global Development) |
| Abstract: | Deposit insurance is a widely adopted policy to promote financial stability in the banking sector. Deposit insurance helps ensure depositor confidence in the financial system and prevents contagious bank runs, but it also comes with an unintended consequence of encouraging banks to take on excessive risk. Recent failures of Silicon Valley Bank and First Republic Bank has rekindled the debate on the impact of deposit insurance on risk-taking and how deposit insurance should be designed and implemented. In this paper, we review the economic costs and benefits of deposit insurance and highlight the importance of institutions and specific design features on how well deposit insurance schemes work in practice. |
| Date: | 2024–09–09 |
| URL: | https://d.repec.org/n?u=RePEc:cgd:wpaper:703 |
| By: | Soner Baskaya (UNIVERSITY OF GLASGOW); José E. Gutiérrez (BANCO DE ESPAÑA); José María Serena (BANCO DE ESPAÑA); Serafeim Tsoukas (UNIVERSITY OF GLASGOW) |
| Abstract: | This paper studies whether supervisory actions, namely provisioning guidelines on non-performing loans (NPLs), affect banks’ NPL cleansing and lending behaviour, as well as the real economy. Using the supervisory intervention announced by the European Central Bank in the first quarter of 2018 as a quasi-natural experiment, we show that banks disposed of old NPLs at a higher rate after the policy shift. Banks that were more heavily exposed to the policy tightened their lending standards, especially for risky firms. Furthermore, banks with stronger fundamentals were more keen on disposing NPLs and less restrained on lending. We also find that firms borrowing from banks affected by the supervisory actions experienced a decline in the growth rates of their total assets, investment, employment and sales. Our results highlight the importance of supervisory actions on NPL management, and potential beneficial effects on credit allocation. |
| Keywords: | non-performing loans, loan loss provisioning rules, NPL resolution, credit supply, firm outcomes |
| JEL: | E51 E58 G13 G21 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2428 |
| By: | Miguel García-Posada (BANCO DE ESPAÑA); Peter Paz (BANCO DE ESPAÑA) |
| Abstract: | We present empirical evidence on the transmission of monetary policy to banks’ credit standards (i.e. loan approval criteria) in loans granted to non-financial corporations (NFCs) in the euro area. To this end, we use a confidential survey in which banks are asked about developments in their respective credit markets, coupled with banks’ balance sheets and high-frequency monetary policy shocks. First, we find that poorly capitalized banks are more likely to tighten their credit standards in loans to NFCs. Second, these banks have tended to tighten their credit standards more in loans to SMEs than in loans to large firms during the current restrictive monetary phase. Third, the transmission of monetary policy to credit standards in loans to NFCs is stronger in poorly capitalized banks. Fourth, the relationship between monetary policy and credit standards is driven by large contractionary monetary policy shocks, which reveals important asymmetries in the bank lending channel. Finally, a tightening of the monetary policy stance also increases rejection rates in loans to NFCs, to a greater extent in poorly capitalized banks. |
| Keywords: | monetary policy, bank capital, credit supply, bank lending channel |
| JEL: | E51 E52 G21 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2430 |
| By: | Andrea Boitani (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Lorenzo Di Domenico (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Giorgio Ricchiuti |
| Abstract: | In this paper, we study the impact of contractionary monetary policies on income and wealth inequality. By developing an Agent Based – Stock Flow Consistent model, we show that both the sign and magnitude of monetary policy impacts depend on the heterogeneity characterizing income sources across the population, the composition of households wealth and portfolio preferences, the value of the labor share, and the size of unemployment benefits. Monetary policy can affect inequality through four main transmission channels: saving remuneration, asset prices, aggregate demand and cost-push channels. The paper delivers five main results: i) the impact of monetary policy on income inequality is non-linear and is a function of the degree of symmetry in the distribution of firms and bank shares, markup, and unemployment benefits; ii) the magnitude of the impact is not independent of the inequality measure considered; iii) the short-run effects on wealth inequality due to capital gains and losses (CGL) on long-term bonds are positively correlated with the degree of heterogeneity in the portfolio preferences of households. In the long-run, such effect vanishes. The short-run effect is null in the case of zero heterogeneity; iv) If the monetary shock has an asymmetric impact on portfolio decisions, monetary policy can have a long-lasting impact on wealth inequality through the CGLs in the stock market. In the presence of symmetric shocks, CGLs in the stock market have no effect, neither in the short nor in the long term; v) the higher the labor share, the greater the impact of monetary policy on inequality. Finally, we adopt the income factor decomposition to disentangle how income heterogeneity affect the transmission channels of monetary policies. |
| Keywords: | Monetary policies; income inequality; Agent-Based models; Stock-Flow Consistent models. |
| JEL: | E4 E52 E53 D31 D63 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:ctc:serie1:def133 |
| By: | Joshua Aizenman; Jamel Saadaoui |
| Abstract: | We investigate the resilience of CESEE countries during ECB monetary cycles after the entrance of ten countries to the EU in 2004. Undeniably, these countries have experienced a ‘miracle’ growth during the 2000s decade. However, several obstacles appeared following the global financial crisis and the euro crisis. In many CESEE countries, the quality of institutions has stalled, or even worse, has known a deterioration. Our investigation examines how fundamental and institutional variables influence cross-country resilience regarding exchange rates, interest rates, stock prices, inflation, and growth during the subsequent monetary cycles. Specifically, we focus on five ECB tightening and easing cycles observed during 2005-2023. Cross-sectional regressions reveal that limiting inflation, active management of precautionary buffers of international reserves, current account surpluses, better financial development, and institution quality are important predictors of resilience in the next cycle. The panel regressions show that the US shadow rate strongly influences resilience during the ECB monetary cycles. Besides, various asymmetries are discovered for current account balances, international reserves, and fuel import shares during tightening cycles. Panel quantile regressions detect asymmetries along the distribution of the dependent variables for financial development, central bank independence, and the inflation rate preceding the cycles. These findings may provide guidelines that are useful for returning to the trajectory observed before the euro crisis by identifying the main fundamental and institutional variables that enhance the resilience of CESEE. |
| JEL: | E50 F32 F36 F42 F65 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32957 |
| By: | Mirza, Harun; Salleo, Carmelo; Trachana, Zoe |
| Abstract: | This study assesses euro area banks’ profitability using granular stress test data from three EU-wide exercises, coordinated by the European Banking Authority, that took place in 2016, 2018, and 2021. We propose a credit portfolio-level risk-adjusted return on assets for the euro area as a whole and for individual countries to assess the profitability of lending activities among euro area banks. Using banks’ own projections under the adverse scenarios of the stress test exercises for a consistent sample of euro area banks, we aim to uncover the effect of severe macroeconomic and financial conditions on the profitability of the various portfolios. We investigate how many country portfolios switch from profitable to loss-making under adverse conditions and show that this number peaks in the 2018 stress test exercise, while the 2021 exercise yields the lowest overall profitability. Overall, around 30% of exposures become unprofitable under stress conditions across the latest two exercises (compared to 20% for the 2016 exercise), mostly concentrated in the non-financial corporations (NFC) segment and, to a lesser extent, in the financial and mortgage portfolios. We also show in a regression analysis that the yield curve is an important determinant of portfolio-level profitability in a stress test setting, while the unemployment rate seems to be relevant in determining portfolio switches and GDP growth seems to influence the change in profitability. The results also point to some portfolio heterogeneity. |
| Keywords: | Bank profitability, cost of risk, net interest income, portfolio analysis, scenario analysis, stress testing |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2024356 |
| By: | Bálint Szőke; Francisco Vazquez-Grande; Inês Xavier |
| Abstract: | The natural rate of interest, or r*, corresponds to the short-term real interest rate that is consistent with full employment and price stability, after all temporary shocks have abated. The most popular framework to estimate r* is Laubach and Williams (2003) and Holston, Laubach, and Williams (2017, 2023) (henceforth HLW). |
| Date: | 2024–09–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-09-03-1 |
| By: | Vatansever, Berra |
| Abstract: | The rapidly growing literature on informality has demonstrated its effects on various aspects of countries' economies. This paper aims to build upon the existing literature on banknote denominations and informality by examining the relation between the value of the largest banknote denominations in countries (expressed in US dollars) and their GDP per capita, inflation rate, percentage of people using credit cards, and central bank independence index using cross-country data from 104 countries. This paper uses different methodologies such as plain correlation and least squares regression in order to find the correlation between the aforementioned variables. The results indicate a negative correlation between informal sector size and the value of the largest banknote denomination, suggesting that countries with larger informal sectors tend to have lower-value banknotes. In conclusion, this paper suggests that the informal sector is one of the underlying factors that explain why governments are averse to new larger banknote denominations and how this is related to the correlation between the informal sector percentage and the value of the largest banknote denomination in USD. Adding onto this, the paper also compares and contrasts the results of the observations obtained with the current literature on informality and banknote denominations. |
| Keywords: | informality; banknote denominations; credit card usage; GDP Per Capita; Inflation Rate |
| JEL: | E40 O17 O57 |
| Date: | 2024–09–08 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121957 |
| By: | Matheus C. Sampaio; Jose Renato Haas Ornelas |
| Abstract: | In this paper, we employ an instrument and individual-level banking data in Brazil to examine the effects of a novel payment technology, Pix, on the utilization of other payment technologies and its impact on the banking sector. We find evidence that Pix increases the usage of the four most common payment technologies in Brazil among individuals and firms. Furthermore, our empirical evidence suggests that Pix contributes to an increase in the number of bank accounts, their usage, and access to credit, benefiting different types of banks. The findings indicate that the implementation of new payment technologies yields advantages not only for firms and individuals but also for the broader banking and payment industry. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:600 |
| By: | Youming Liu; Francisco Rivadeneyra; Edona Reshidi; Oleksandr Shcherbakov; André Stenzel |
| Abstract: | For an intermediated central bank digital currency (CBDC) to be successful, central banks will need to develop sustainable economic models where intermediaries and end users derive value and central banks achieve their policy goals. This note presents a framework for analyzing different economic models of CBDC ecosystems. We analyze the trade-offs of three main CBDC ecosystem models, each with different levels of central bank involvement in activities of the ecosystem and the usage of different policy levers. The policy levers considered in the framework are control over intermediary access to the CBDC network, prices and quality standards. Our analysis suggests that a central bank provision of network infrastructure enables direct control over intermediary access requirements, prices and quality standards upstream. Providing a central bank digital wallet increases development costs but allows the central bank to set quality standards downstream and to promote competition. Delegating the network service to a regulated entity reduces costs for the central bank but may limit its strategic autonomy to control upstream pricing and intermediary access. Our analysis also suggests several areas of future research: central bank pricing models, intermediary revenue models, and quality and privacy standards. |
| Keywords: | Central bank research; Digital currencies and fintech; Financial services |
| JEL: | E5 E58 E6 E61 L5 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocadp:24-13 |
| By: | Toyo A. M. Dossou (University of Abomey-Calavi in Benin); Dossou K. Pascal (Gbégamey-Cotonou, Benin); Emmanuelle N. Kambaye (Wenjiang District, Chengdu, China); Simplice A. Asongu (Yaoundé, Cameroon); Alastaire S. Alinsato (Gbégamey-Cotonou, Benin) |
| Abstract: | Although the impact of financial development on renewable energy consumption has been extensively examined in recent years, the study regarding the moderation of governance quality on the financial development on renewable energy consumption nexus is sparse. By filling the gap in the energy economics literature, this study investigates the moderating effect of governance quality on the relationship between financial development on renewable energy consumption for a panel of 33 African countries over the period 2000-2020. The fully modified ordinary least square (FMOLS) estimation techniques has been used to account for the cointegration and cross-sectional dependence, respectively. The results unveil that the impact of governance quality and financial development on renewable energy consumption is negative and statistically significant. Moreover, the results reveal that the FD-governance quality interactions are significant and negative. Governance quality thresholds at which the negative incidence of financial development on renewable energy consumption is completely nullified are 0.825; 2.15; 2.86; 3.52;3.36; and 0, 1, respectively. |
| Keywords: | Financial development, renewable energy consumption, governance quality, Africa |
| Date: | 2024–01 |
| URL: | https://d.repec.org/n?u=RePEc:agd:wpaper:24/020 |