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on Financial Development and Growth |
| By: | Crescenzi, Riccardo; Ganau, Roberto |
| Abstract: | This paper looks at inward foreign direct investment (FDI) and regional labour productivity in the aftermath of the Great Recession, exploring two FDI-induced effects. The first effect is linked with a capacity of FDI per se to trigger short-term productivity gains in response to a global shock. The second effect is associated with the degree of industrial diversification of these investment flows. The results suggest that it is not the amount of foreign investment received per se that matters for productivity recovery but its composition. A low degree of FDI diversification helped regions to gain productivity after the shock. The effect is stronger in regions with an industrial profile concentrated in a limited number of sectors, particularly in services. FDI can support regional recovery, but in the short run, it does so by matching and reinforcing existing regional specialisation profiles and to the benefit of services-oriented regions. |
| Keywords: | inward FDI; industrial profile; regional growth; European Union |
| JEL: | F20 R11 R12 |
| Date: | 2024–10–23 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:125406 |
| By: | MORITA, Hiroshi |
| Abstract: | Investigating the productivity of public capital is a long-standing issue in one strand of macroeconomic literature. This study develops a new approach to estimate the output elasticity of public capital using a vector autoregressive (VAR) model with identification restrictions derived from a theoretical model. Our empirical analysis of 22 OECD countries for the period 1960–2019 reveals that public capital accumulation has a positive effect on GDP in both the short- and longrun horizons in all countries, supporting both demand-stimulating and growthenhancing effects. Furthermore, the estimated output elasticity of public capital lies within a reasonable range, between 0 and 0.5, and, as in the literature, shows substantial differences across countries. Therefore, the proposed methodology is valid for studying public capital productivity. |
| Keywords: | Public capital, Hierarchical panel VAR model, Max share identification |
| JEL: | E62 H54 C32 C33 |
| Date: | 2024–10–30 |
| URL: | https://d.repec.org/n?u=RePEc:hit:hiasdp:hias-e-141 |
| By: | Harouna Kinda (CERDI - Centre d'Études et de Recherches sur le Développement International - IRD - Institut de Recherche pour le Développement - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne); Edouard Mien (FERDI - Fondation pour les Etudes et Recherches sur le Développement International) |
| Abstract: | The mismanagement of natural resources can compromise the efficiency of factors essential to economic development, commonly called the "resource curse". In addition to worsening the socio-economic situation, dependence on natural resources can hinder the emergence of an efficient financial system in countries with weak institutions. Conversely, good management of natural resources can enable low- and middle-income countries to improve their economic performance. We first describe the theoretical mechanisms underlying the existence of such a "resource curse" and then present empirical evidence of the potential mitigating effect fostered by implementing the Extractive Industries Transparency Initiative (EITI) standard. |
| Abstract: | La mauvaise gestion des ressources naturelles peut compromettre l'efficacité des facteurs essentiels au développement économique, un concept communément appelé la "malédiction des ressources". Outre la détérioration de la situation socio-économique, la dépendance aux ressources naturelles peut entraver l'émergence d'un système financier efficace dans les pays où les institutions sont faibles. A contrario, une bonne gestion des ressources naturelles peut permettre aux pays à revenu faible ou intermédiaire d'améliorer leurs performances économiques. Nous décrivons d'abord les mécanismes théoriques sous-jacents de l'existence d'une telle "malédiction financière des ressources", puis présentons des preuves empiriques de l'effet d'atténuation potentiel favorisé par la mise en oeuvre de la norme Initiative pour la transparence des industries extractives (ITIE). |
| Keywords: | Financial development, Resource curse, Natural resource, Transparency, Développement financier, Malédiction des ressources, Ressources naturelles, Transparence |
| Date: | 2024–04–25 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04746325 |
| By: | Riaz, Kainat; Siddique, Hafiz Muhammad Abubakar; Audi, Marc; Sumaira, Sumaira |
| Abstract: | With the expansion of trade policies in the 1980s, countries began prioritizing foreign trade in their economic strategies, recognizing financial development as a key component. Financial development significantly influences macroeconomic performance and enhances economic growth by positively impacting exports. This study explores the relationship between financial development and export performance in South Asian countries, using panel data from 1990 to 2022. The analysis employs OLS fixed-effects models, FMOLS, DMOLS, and Pedroni co-integration tests. Results from the pooled OLS and fixed-effects models indicate that financial development, foreign direct investment, GDP, and population are key drivers of export performance. The Pedroni co-integration test confirms a long-term relationship among these variables. The findings suggest that promoting appropriate financial development and expanding financial market access are crucial for supporting businesses and boosting export performance in the region. |
| Keywords: | Financial Development, FDI, Export Performance, South Asia |
| JEL: | E0 G0 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122474 |
| By: | Elisa Grugni; Giorgio Ricchiuti |
| Abstract: | Modern economies exhibit deeply integrated and synchronized networks among heterogeneous agents. This paper focuses on the trade network and seeks to unravel the mechanisms that underpin its emergence and evolution. To this end, we develop a multi-country general equilibrium model of trade that incorporates firms and countries heterogeneity as well as asymmetric information and financial frictions. Within this framework, the export decisions of firms give rise to an international trade network that mirrors the structure of real-world trade flows. Thus, the model, by encompassing both within and between country heterogeneity, facilitates the investigation of a range of stylized facts pertaining to firm exporting behavior and globalization. Once the network is established, the paper aims at capturing the effects of financial shocks on trade flows and their network-based spillovers. The introduction of a credit market in a trade model provides novel insights on the influence of monetary and financial factors on trade patterns. |
| Keywords: | trade, productivity, net worth, financial frictions, network analysis |
| JEL: | F11 F12 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:frz:wpaper:wp2024_26.rdf |
| By: | Charles Yuji Horioka (Center for Computational Social Science and Research Institute for Economics & Business Administration (RIEB), Kobe University, Asian Growth Research Institute, National Bureau of Economic Research, and Institute of Social and Economic Research, Osaka University, JAPAN) |
| Abstract: | The primary objective of this paper is to explore the determinants of the level of, and trends over time in, Japan's household saving rate, with emphasis on the impact of the age structure of the population, and to make projections about future trends therein. The paper finds that Japan's household saving rate has not always been high either absolutely or relative to other countries, contrary to popular belief, and that, if we confine ourselves to the postwar period, it was only during the 25-year period from 1961 to 1986 that it exceeded 15%. Past and future trends in Japan's household saving rate can largely be explained by changes in the age structure of her population, but declines in the saving rate of retired elderly households is a more important explanation for the recent decline in the household saving rate. However, it is likely that other factors such as the unavailability of consumer credit, the unavailability of social safety nets, high rates of economic (income) growth, tax breaks for saving, saving promotion policies, and high and rising land and housing prices are also partial explanations for why Japan's aggregate household saving rate was so high during the 1961-86 period and why it declined so much subsequently. As for future trends in Japan's aggregate household saving rate, it is likely to fall even further though not necessarily at a rapid rate. |
| Keywords: | Age structure of the population; Household consumption; Household saving; Japanese economy; Life-cycle hypothesis; Population ageing; Public pensions; Saving promotion; Social safety nets; Wealth accumulation |
| JEL: | D10 D11 D12 D14 D15 D64 E21 H55 J14 J26 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:kob:dpaper:dp2024-36 |
| By: | Arpita Mukherjee (Indian Council for Research on International Economic Relations (ICRIER)); Anupam Gaur |
| Abstract: | The objective of this study is to (a) examine the need and impact of ATMs in promoting and facilitating financial inclusion, (b) present the status of ATMs and other instruments of financial inclusion in India and globally, (c) identify the issues that hinder the effective utilisation of ATMs for financial inclusion purposes, and (d) recommend policies and measures to enhance the efficiency and effectiveness of ATM utilisation to foster financial inclusion so that a broader segment of the population gains access to the financial tools and services they need to improve their economic well-being. |
| Keywords: | ATM, financial inclusion, economic growth, National Strategy for Financial Inclusion, NSFI, RBI |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bdc:report:24-r-05 |
| By: | Giovanni Favara; Camelia Minoiu; Amber Perez-Orive |
| Abstract: | We show that U.S. banks do not engage in zombie lending to firms of deteriorating profitability, irrespective of capital levels and exposure to such firms. In contrast, unregulated financial intermediaries do, originating more and cheaper loans to these firms. We establish these results using supervisory data on firm-bank relationships, syndicated lending data for banks and nonbanks, and an empirical setting with quasi-random shocks to firm profitability. Although credit migrates from banks to nonbanks, zombie firms file for bankruptcy at an elevated rate, suggesting that nonbanks’ zombie lending does not enhance the survival rate of distressed and unprofitable firms. |
| Keywords: | zombie lending; zombie firms; banks; nonbanks |
| JEL: | G21 G32 G33 |
| Date: | 2024–08–15 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedawp:99033 |
| By: | Oksana Leukhina |
| Abstract: | Standards and terms for business loans ease during economic expansions and tighten during recessions. An analysis looks at why, and how these fluctuations are linked to productivity. |
| Keywords: | business lending; lending standards; lending terms; productivity |
| Date: | 2024–10–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:l00001:99028 |
| By: | Maxi Günnewig; Yuliyan Mitkov |
| Abstract: | Diamond and Rajan (2000, 2001) argue that banks create liquidity by issuing deposits to fund difficult, illiquid firms that otherwise cannot obtain funding. Since deposits may lead to bank runs, this resulting financial fragility is essential for liquidity creation. We revisit the Diamond-Rajan model of financial intermediation and show that a bank with an optimal financing structure is not subject to runs. Our contract rests on three simple notions. First, each bank creditor has the right to demand repayment at every instant. Second, the repayment is given by the value of a pre- specified fraction of the bank’s assets. Third, some creditors are more senior than others: their repayment demands are prioritized. In contrast to Diamond and Rajan, we find that financial fragility is detrimental to liquidity creation. |
| Keywords: | Liquidity, banking, financial fragility, optimal contracts, collateral. |
| JEL: | G21 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_605 |
| By: | Sebastian Doerr |
| Abstract: | The recent banking turmoil has renewed focus on banks' branch networks and deposit taking activity. This paper provides novel evidence that the geographic diversification of banks' deposit base enhances their funding stability. I establish that banks with greater diversification exhibit higher dispersion in deposit growth rates across their branches; and lower volatility in deposit growth rates over time. Subsequently, banks benefit from lower deposit rates, partly by shifting from time deposits to cheaper demand deposits. These patterns are consistent with diversification improving funding stability. I then show that deposit diversification spurs banks' liquidity creation and small business lending, with positive effects for real economic activity. The funding stability channel of geographic diversification is distinct from previous findings on banks' asset-side diversification. It also highlights benefits of branch networks for bank lending that go beyond local information acquisition. |
| Keywords: | bank diversification, deposits, funding stability, liquidity creation, risk |
| JEL: | G20 G21 G28 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1221 |
| By: | Liu, Liyuan; Wang, Xianshuang; Zhou, Zhen |
| Abstract: | This paper examines the consequences of Chinese regulators deviating from a long-standing full bailout policy in addressing the distress of a city-level commercial bank. This policy shift led to a persistent widening of credit spreads and a significant decline in funding ratios for negotiable certificates of deposit issued by small banks relative to large ones. Our empirical analysis reveals a novel contagion mechanism driven by reduced confidence in future bailouts (implicit non-guarantee), contributing to the subsequent collapse of other small banks. However, in the longer term, this policy shift improved price efficiency, credit allocation, and discouraged risk-taking among small banks. |
| Keywords: | Implicit guarantee, Bailout, Contagion, Price efficiency, Credit allocation, TBTF |
| JEL: | G14 G21 G28 H81 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofitp:305281 |
| By: | Andreas Haufler; Bernhard Kassner |
| Abstract: | We set up a simple theoretical model in which banks with varying degrees of government support are matched with CEOs that have different degrees of overconfidence. The channel through which the matching occurs is the share of bonus payments offered by banks in their profit-maximizing contracts. This yields a sequence of hypotheses: banks with more government support incentivize their CEOs more and this disproportionately attracts overconfident CEOs. In equilibrium this in turn leads to an assortative matching between overconfident managers and banks with a larger bailout probability. We then test the hypotheses derived from this model for U.S. data spanning both the Great Financial Crisis and the Covid Crisis. Our results confirm the hypotheses from our theoretical model for normal years, but not during crises and periods of enhanced regulation. In normal years, therefore, overconfident bankers are indeed matched with government-protected banks, with cumulative effects on the degree of risk-taking. |
| Keywords: | matching, overconfidence, incentive contracts |
| JEL: | G21 G28 H32 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11336 |
| By: | Florian Huber; Karin Klieber; Massimiliano Marcellino; Luca Onorante; Michael Pfarrhofer |
| Abstract: | This paper analyzes nonlinearities in the international transmission of financial shocks originating in the US. To do so, we develop a flexible nonlinear multi-country model. Our framework is capable of producing asymmetries in the responses to financial shocks for shock size and sign, and over time. We show that international reactions to US-based financial shocks are asymmetric along these dimensions. Particularly, we find that adverse shocks trigger stronger declines in output, inflation, and stock markets than benign shocks. Further, we investigate time variation in the estimated dynamic effects and characterize the responsiveness of three major central banks to financial shocks. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.16214 |
| By: | Tsiflikidou, Ioanna-Maria; METAXAS, THEODORE |
| Abstract: | This study aims to review major economic crises throughout the centuries, in order to see what valuable lessons can be learned from re-examining them. As the 20th century was marked by tremendous economic turmoils, that changed the world economy of today, we will focus on the Great Depression of 1929 and the Oil Crisis of 1973, comparing them also with the 21st century global crisis of 2008. Through a lens of historic and periodic analysis, content analysis, and comparative analysis, this study seeks to unravel the intricacies of these financial crises, their similarities, differences and what went wrong in each case and what role the Federal Reserve’s System played in in shaping economic outcomes. The findings underscore the significance of macroeconomic imbalances, poorly regulated financial markets, and inadequate risk management in amplifying the impact of economic events. Policymakers' responses and reforms after each crisis are examined, highlighting the recurring theme of claims of increased preparedness for future scenarios. The study concludes by urging a re-evaluation of the Federal Reserve's policies, emphasizing the need for a proactive and informed approach to address potential future crises and advocating for a better understanding of the global impact of national policies. |
| Keywords: | economic crises; 20th century, qualitative analysis, review and comparison |
| JEL: | G01 G18 G38 |
| Date: | 2023 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122466 |
| By: | Pauline Gandré; Margarita Rubio |
| Abstract: | Macroprudential policy is traditionally characterized by countercyclical rules responding to credit variables. In this paper, we augment macroprudential rules with additional indicators, including the credit spread. First, we empirically assess the validity of this extra variable by providing evidence on the correlation of a credit spread measure with credit booms. Then, we explicitly introduce this variable into a Dynamic Stochastic General Equilibrium (DSGE) model. We use our model to determine to which extent having countercyclical macroprudential measures also responding to credit spreads may be welfare improving, for both a capital requirement ratio (CRR) rule and a loan-to-value (LTV) rule. We find that the spread is a relevant indicator for credit-supply measures but not for borrower-based ones. For the latter, an additional response to house prices is more appropriate. We also find that the augmented rules deliver more financial stability, but at the expense of more inflation volatility, which reduces the welfare of the savers. Overall, the augmented rules improve welfare. |
| Keywords: | Credit spreads, financial stability, macroprudential policy. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:not:notcfc:2024/05 |
| By: | Xavier Gabaix; Ralph S J Koijen; Robert Richmond; Motohiro Yogo |
| Abstract: | Asset demand systems specify the demand of investors for financial assets and the supply of securities by firms. We discuss how realistic models of the asset demand system are essential to assess ex post, and predict ex ante, how central bank policy interventions impact asset prices, the distribution of wealth across households and institutions, and financial stability. Due to the improved availability of big holdings data and advances in modelling techniques, estimating asset demand systems is now a practical reality. We show how demand systems provide improved information for policy decisions (eg in the context of financial contagion, convenience yield or the strength of the dollar) or to design optimal policies (eg in the context of quantitative easing or designing climate stress tests). We discuss how recent AI methods can be used to improve models of the asset demand system by better measuring asset and investor similarity through so-called embeddings. These embeddings can for instance be used for policymaking by central banks to understand the rebalancing channel of asset purchase programs and to measure crowded trades. |
| Keywords: | asset prices, central bank policies, artificial intelligence, embeddings |
| JEL: | C5 G11 G12 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1222 |
| By: | Flores Zendejas, Juan; Nodari, Gianandrea; Dávalos, Jorge |
| Abstract: | What are the effects of political instability on the banking sector? This article examines the short-term impacts on banking activities in Mexico during the late 1920s, a decade marked by civil conflicts and political violence. Although political upheavals affected some regions more than others, banks and depositors were compelled to respond to a general atmosphere of political violence. Drawing on new qualitative and quantitative evidence, this article analyzes how banks and depositors behaved in the context of armed conflicts and assesses the consequences for the banking sector. Our results show a negative effect of political violence on bank deposits and banks' capitalization. We also account for the geographic proximity of violent regions to neighboring municipalities and observe that political instability promoted capital flight, particularly in the northern region of the country, where episodes of political violence were more severe. We conclude that political instability likely contributed to the lack of financial development in Mexico. |
| Keywords: | Political instability, Mexico, Banking fragility, Financial development, Political violence, Banking sector |
| JEL: | N16 N26 E58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:gnv:wpaper:unige:180827 |
| By: | Matteo Maggiori; Chris Clayton; Jesse Schreger |
| Abstract: | Hegemonic powers, like the United States and China, exert influence on other countries by threatening the suspension or alteration of financial and trade relationships. We show that the mechanisms that generate gains from integration, such as external economies of scale and specialization, also increase these countries' power to exert economic influence because in equilibrium they make other relationships poor substitutes for those with a global hegemon. Smaller countries can insulate themselves from geoeconomic pressure from hegemons by pursuing anti-coercion policy: shaping their economies in ways that insulate them from undue foreign pressure. This policy faces a tradeoff between gains from trade and economic security. We show that while an individual country can make itself better off, uncoordinated attempts by multiple countries to limit their dependency on the hegemon lead to unwinding of the global gains from integration and inefficient fragmentation of the global financial and trade system. We study a leading application focusing on financial services as both tools of coercion by the hegemon and an industry with strong strategic complementarities at the global level. We provide estimates of geoeconomic power for the US and China and show empirically that the geoeconomic power of the United States relies strongly on financial services while that of China loads more on manufacturing trade. |
| Keywords: | geoeconomics, geopolitics, economic security, economic statecraft, payment systems |
| JEL: | F02 F5 F12 F15 F33 F36 F38 P43 P45 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1224 |
| By: | Stylianos Asimakopoulos; James Malley; Apostolis Philippopoulos |
| Abstract: | This paper presents a novel study on the significance of corporate payout policy in shaping firms financial decision-making and, in turn, the macroeconomy. To this end, we add to the literature by allowing households and firms to choose share buybacks optimally. We then explore the implications of various shocks commonly facing them, such as dividend income, investment, and tax shocks. The latter include corporate income, capital gains, and dividend income taxes. We find that the model predictions cohere well with the data when applying the non-policy shocks. We also find that tax reform's aggregate and welfare e¤ects are overstated when share buybacks are not optimally chosen as assumed in the relevant literature. |
| Keywords: | dividends, share repurchases, tax reforms, payout exibility |
| JEL: | C68 E62 G30 G35 H25 H30 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:gla:glaewp:2024_13 |
| By: | Bonga-Bonga, Lumengo; Kirsten, Frederich |
| Abstract: | This paper adds to the existing body of research on the connection between renewable energy generation and financial market development. It does so by examining this relationship while differentiating between three types of financial market development: access, efficiency, and depth, and by categorizing renewable energy generation into three types: wind, solar, and hydroelectric energy. Additionally, the paper evaluates the mediating role of stock market capitalisation in the relationship between renewable energy and financial market development. Using panel two-stage least squares (2SLS) based on Lewbel's instrumental variable approach, the study concludes that wind energy generation is the most responsive to the various components of financial market development among European countries. The bootstrapping causal mediation analysis shows the significant mediating role of stock market capitalisation, particularly in the impact of financial market development on wind energy generation. These findings offer valuable insights for policymakers seeking to finance renewable energy projects in order to achieve Sustainable Development Goal 13. |
| Keywords: | renewable energy, financial market development, 2SLS, Lewbel, mediation |
| JEL: | C23 Q2 Q43 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122461 |