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on Financial Development and Growth |
| By: | Toni Ahnert; Sebastian Doerr; Nicola Pierri; Yannick Timmer |
| Abstract: | We study the importance of information technology (IT) in banking for entrepreneurship. Guided by a parsimonious model, we establish that job creation by young firms is stronger in US counties more exposed to banks with greater IT adoption. We present evidence consistent with banks’ IT adoption spurring entrepreneurship through a collateral channel: entrepreneurship increases by more in IT-exposed counties when house prices rise. Further analysis suggests that IT improves banks’ ability to determine collateral values, in particular when collateral appraisal is more complex. IT also reduces the time and cost of disbursing collateralized loans. |
| Keywords: | technology in banking, entrepreneurship, information technology, collateral, screening |
| JEL: | D82 G21 L26 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11284 |
| By: | Dario Pellegrino (Structural Economic Analysis Directorate, Economic History Division, Bank of Italy, Rome) |
| Abstract: | This paper studies the evolution of business dynamism in Italy (1903-1971), as measured by the share of investments made by new firms (a share which is arguably inversely related to barriers to entry). For this analysis, I reconstructed a series of tangible investments in the manufacturing sector based on joint-stock firm-level data. The analysis shows that until the late 1920s overall capital accumulation was largely driven by young firms. A substantial discontinuity emerged after the Great Depression, however, and was to last throughout the decades of the 'economic miracle' (1948-1973), with investments originating mostly from established firms. The paper presents and discusses suggestive evidence for two institutional explanations which could account for the latter finding. First, the demise of universal banking, associated with the 1926-1936 banking reform, may have constrained the external financing capacity of new firms. Second, a persistent reduction in product market competition resulted from the collusive practices which the Fascist government promoted during the 1930s. |
| Keywords: | manufacturing investments, business dynamism, barriers to entry, industrialization, collusion in Fascist Italy, banking reform |
| JEL: | N24 N64 O14 L43 L60 |
| Date: | 2023–10 |
| URL: | https://d.repec.org/n?u=RePEc:bdi:workqs:qse_53 |
| By: | Peters, Nils |
| Abstract: | The 2010s were an era of abundant capital for investors but limited opportunities to put it to profitable use. This paper traces the origins of dealing with the ‘problem’ of having to convert large accumulations of cash into appreciating assets. It puts venture capitalists in the US at the center of this history. Charting venture capital’s 1950s emergence, 1960s formalization, and 1970s institutionalization, I show how early venture capital investors built a financial infrastructure that safeguarded the appreciation of their assets. Venture capitalists’ influence increased as institutional investors (as funders) and startup employees (as investees) became enrolled in this infrastructure and oriented their actions toward its imperatives. I argue that in their handling of abundance, venture capitalists constructed and deepened asset-driven inequalities. Empirically, the paper makes a contribution by demonstrating that vast accumulations of (personal) wealth played a decisive role in this process and highlights the importance of stark inequality well before the neoliberal turn or quantitative easing. Conceptually, I show that venture capitalists’ solution to a personal problem became useful at a much larger scale. The paper argues that we should read this influence as conditioned on elite surplus and access to a financial infrastructure. |
| Keywords: | venture capital; financialization; infrastructure; asset economy; limited partnership; abundance |
| JEL: | J1 |
| Date: | 2024–11–04 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:125890 |
| By: | G. Spano |
| Abstract: | This paper examines the interplay between market power and financial frictions, highlighting the bidirectional relationship between firms' access to finance and competitive dynamics. We develop a theoretical model where firms invest in technology to enhance product quality, which increases their market power. In our model, firms with greater market power can invest more, thereby reinforcing and accumulating additional market power in subsequent periods. However, the general equilibrium effects of reducing financial frictions is not clear. Specifically, when financial frictions are relaxed, firms can invest more, enabling them to produce at higher margins. This results in an increase in aggregate average market power. On the other hand, a reduction in financial frictions could also facilitate the entry of new firms into the market, thereby increasing competitive pressure. Our results indicate that an increase in investment, driven by reduced financial frictions, does not necessarily enhance competition unless the entry of new firms accompanies it. Through empirical analysis, using data from publicly listed U.S. firms, we test that firms with more market power are subjected to less financial frictions pressures in the subsequential periods. Empirical evidence also suggests higher levels of market power in the earlier period are correlated with less financial constraints in later periods. |
| Keywords: | technology ladder;investment;financial frictions;Market power |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:cns:cnscwp:202422 |
| By: | Magdolna Sass (Institute of World Economics, HUN-REN Centre for Economic and Regional Studies) |
| Abstract: | Foreign Direct Investment played a crucial role in the economic transition of the post- socialist countries. EU membership prospects positively affected FDI inflows in the nineties and the integration process promoted FDI directly and indirectly as well, through enterprise restructuring, labour market impact, sectoral reforms, regulatory quality, rule of law, and specific aspects of the business environment. FDI flows added new, competitive capacities and technologies to the region, however, FDI-related benefits remained below the expectations. The Central and East-European countries could mainly offer their low wages in the intra-EU distribution of production and most of them lacked competitive local firms. These economies based their growth strategies on FDI and it still plays a determining role, especially in certain export-oriented sectors. |
| Keywords: | FDI, European Union, New Member States |
| JEL: | F2 P33 |
| URL: | https://d.repec.org/n?u=RePEc:iwe:workpr:277 |
| By: | Xiaoming Li; Zheng Liu; Yuchao Peng; Zhiwei Xu |
| Abstract: | We study how changes in the composition of Chinese local government debt influenced bank risk taking, credit allocation, and local productivity. Using confidential loan-level data and a difference-in-difference identification approach, we show that a debt-to-bond swap program for local governments implemented in 2015 significantly increased bank risk taking through a risk-weighting channel under Basel III capital regulations. The debt swap program converted bank holdings of municipal corporate debt to local government bonds, reducing banks’ risk-weighted assets. Banks responded by lowering credit spreads on loans to privately owned firms (POEs) relative to state-owned enterprises (SOEs), with significantly larger reductions in POE credit spreads in provinces with more outstanding government debt. Furthermore, the credit reallocation toward more productive private firms—a crowding in effect of the debt swap—significantly raised local productivity. |
| Keywords: | Local Government Debt; credit allocation; Bank Risk Taking; misallocation |
| JEL: | E52 G21 G28 |
| Date: | 2024–11–08 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:99080 |
| By: | Rabah Arezki; Youssouf Camara; Frederick van der Ploeg; Grégoire Rota-Graziosi; Rick van der Ploeg |
| Abstract: | This paper explores whether foreign aid is self-interested, exploiting the timing and size of major mineral discoveries. We first analyze the effect a resource discovery in a two-by-two donor-recipient model with conflict about natural resources, using a contest success function. We then estimate the effects of major discoveries using a gravity model for a large panel of countries. Our empirical estimates are consistent with the predictions of the theoretical model. Results show that recipient countries that experience major discoveries receive more, not less, bilateral aid, all else equal. Our benchmark result is that following a mineral discovery, a recipient country receives 36% more aid compared to a country without such a discovery. That is a paradox considering that major discoveries are associated with an effective relaxation of international borrowing constraints. |
| Keywords: | bilateral aid, self-interested donors, mineral discoveries, contests |
| JEL: | E00 F30 O10 O20 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11427 |
| By: | Kalliyil, Muneer (Indian Institute of Management Bangalore); Sahoo, Soham (Loughborough University) |
| Abstract: | This study examines how restricted access to microfinance by households affects children's learning outcomes, utilizing a unique natural experiment that halted all microfinance operations in Andhra Pradesh (AP), India, in 2010. The analysis exploits quasi-random variation in district-level exposure to the shock in states other than AP, as the regulation affected lenders' liquidity nationwide. Using difference-in-differences and event study designs, we find a significant and persistent decline in children's learning outcomes. The restoration of credit access does not fully reverse these effects, highlighting the long-term consequences of short-term financial disruptions. As plausible mechanisms, we find a shift in enrollment from private to government schools, lower household spending on education, reduced food expenditure impacting nutrition, and a decline in mothers' employment. Heterogeneity analysis reveals that the adverse effects were more prominent for girls and younger children. By focusing on the effects of regulatory restrictions rather than micro-finance service provision, this study complements existing literature and provides a more comprehensive understanding of the socioeconomic impacts of microfinance. |
| Keywords: | microfinance regulation, credit constraint, learning outcomes, schooling, education, India |
| JEL: | E51 G21 G28 I2 J16 R51 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17404 |
| By: | Menzie D. Chinn; Hiro Ito |
| Abstract: | We re‐examine the determinants of current account balances (CAB) and the saving-investment nexus with focus on emerging market and developing economies (EMDEs). We are in a new age in terms of facing not just economic challenges but also other non-economic challenges such as global climate changes, increasing natural disasters, and wars. We face the need to reexamine the determinants of CAB along with national saving and investment. We first take an event study approach, examining how these variables have evolved historically in the wake of wars, natural disasters, and pandemics. The second is a cross‐country panel investigation of CAB, national saving, and of investment. In the presence of global financial instability, EMDEs tend to experience an improvement in CAB due to a fall in investment. A rise in oil prices increases both national saving and investment, but the change in investment is greater than the change in national saving, which worsens CAB. Contractionary monetary policy by the U.S. Federal Reserve Board tends to lower both national saving and investment, but the impact on CAB is not statistically different from zero. The more frequently a country experiences wars, on average, its CAB tends to improve. When a climatological or geographical disaster occurs, its CAB, national saving, and investment tend to improve. A rise in the level of U.S. monetary policy uncertainty leads to an improvement in CAB, mainly due to a fall in investment. |
| JEL: | F32 F41 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33106 |
| By: | George A. Alessandria; Yan Bai; Soo Kyung Woo |
| Abstract: | We study the reasons for the large, coincident increases in unbalanced international trade and overall trade from 1970 to 2019. We show that these two salient features—a rise in net and gross international trade—are largely a consequence of a reduction in intratemporal trade barriers rather than a substantial reduction in the frictions on intertemporal trade or greater asymmetries in business cycles. Beyond explaining changes in the distribution of gross and net trade, the decline in intratemporal trade frictions is consistent with a fall in the dispersion across countries in other key macro time series, including the real exchange rate, terms of trade, export-import ratio, relative spending, and relative GDP. |
| JEL: | E3 F4 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33101 |
| By: | Anthony Roberts; Emma Casey; Baylee Hodges |
| Abstract: | Prior studies on emerging economies contend increasing returns to human capital has contributed to the growth of wage inequality over the last few decades. However, this explanation fails to account for an important dynamic of contemporary wage inequality: the growth of top labor incomes. Research on advanced economies show the emergence of a wage premium in the financial sector increased top labor incomes, but studies have yet to investigate whether a financial wage premium is contributing to the growth of top labor incomes in emerging economies. The present study addresses this theoretical and empirical gap by conceptualizing and measuring the financial wage premium across the distributions of labor income in the most important subset of emerging economies: Brazil, Russia, India, & China. Drawing on harmonized labor force data from the Luxembourg Income Study, we utilize unconditional quantile regression modeling and treatment effect estimation to examine the financial wage premium across the distributions of labor income in the BRIC before and after the Great Recession. Consistent with studies on advanced economies, we find a substantial wage premium among top earners in the financial sectors of the BRIC which has grew in the post-recession period. However, we find significant variation in size and growth of the financial wage premium because of the variegated nature of financialization across the BRIC. We conclude by suggesting subsequent studies should explore the heterogenous effects of subordinate and state financialization on wage dynamics in emerging economies. |
| Date: | 2023–09 |
| URL: | https://d.repec.org/n?u=RePEc:lis:liswps:865 |
| By: | Giovanazzi, Carmen; Victor, Vincent; Putscher, Dorothee |
| Abstract: | We examine the dynamics of corporate investment in Germany during the 2000s, a period marked by stagnant macroeconomic investment spending. Employing a mixed-methods approach, we explore investment trends across national accounts data, firm-level financials, and responses from financial executives through our financial strategy survey. We show that while tangible investment remains the most important investment category, both macroeconomic and firm-level data indicate a decline. This decrease is offset by rising intangible investment, reflecting the emergence of the intangible economy. Despite this shift, investment has lagged behind rising corporate saving, leading to an increased net lending position. Often interpreted as corporate financialization, we find only moderate and partial evidence to support this view from a firm-level perspective. Additionally, while we find an increasing importance of M&A at the firm level, this development is not fully captured in the national accounts due to missing goodwill data. Our results underscore the necessity of multifaceted analysis in understanding investment dynamics. |
| Keywords: | CFO Survey, Intangible Economy, Investment Strategy, Germany, M&A, Mixed Methods, Financialization |
| JEL: | C83 D22 E01 E22 G3 L2 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ifsowp:305260 |
| By: | Daube, Carl Heinz |
| Abstract: | This article analyses the potential impact of a takeover of Commerzbank by the Italian bank UniCredit on the European banking landscape and the development of the Capital Markets Union. It discusses the potential for increased profitability, structural efficiency and stability of the European banking sector as well as the challenges associated with the consolidation of banks. Finally, it examines how this takeover could contribute to achieving the objectives of the Capital Markets Union by improving the framework conditions for financing, particularly for SMEs. |
| Abstract: | Dieser Artikel analysiert die möglichen Auswirkungen einer Übernahme der Commerzbank durch die italienische Bank UniCredit auf die europäische Bankenlandschaft und die Entwicklung der Kapitalmarktunion. Er erörtert das Potenzial für eine höhere Rentabilität, strukturelle Effizienz und Stabilität des europäischen Bankensektors sowie die mit der Konsolidierung von Banken verbundenen Herausforderungen. Schließlich wird untersucht, wie diese Übernahme zur Erreichung der Ziele der Kapitalmarktunion beitragen könnte, indem sie die Rahmenbedingungen für die Finanzierung, insbesondere von KMU, verbessert. |
| Keywords: | UniCredit, Commerzbank, EU Capital Market Union, Next CMU |
| JEL: | G01 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:esprep:305808 |
| By: | L. Deidda; E. Panetti |
| Abstract: | We study how regulation shapes the interaction between financial fragility and bank liquidity management, and propose a rationale for the complementarity between bank recovery and resolution planning. To this end, we analyze an economy in which a benevolent resolution authority sets a bank resolution plan to suspend deposit withdrawals and create a "good bank" at a cost in the event of a depositors' run. In such a framework, banks maximize expected welfare if deciding ex ante how to manage liquidity during runs. However, this choice is time inconsistent. Therefore, regulators need to force banks to commit to it through recovery planning. |
| Keywords: | banks;Liquidity;financial fragility;financial regulation;resolution |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:cns:cnscwp:202420 |
| By: | Bell, Clive (Heidelberg University); Gersbach, Hans (ETH Zurich); Haller, Hans (Virginia Tech) |
| Abstract: | When formal insurance is unavailable, mutual insurance among households can serve as an alternative. This paper analyzes a game between economic agents facing uncertainty and maximizing discounted utility without enforceable contracts or access to capital markets. While autarky is always a possible outcome, under high discount factors, a mutually beneficial trigger-strategy equilibrium can be achieved. Full insurance is possible with strongly negatively correlated endowments, while partial insurance is generally feasible. The analysis highlights environments wherein varying levels of insurance can emerge, with applications to real-world institutional contexts. |
| Keywords: | mutual insurance, risk sharing, group formation |
| JEL: | C72 C73 D80 G20 O11 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17406 |
| By: | Kumhof, Michael (Bank of England); Salgado-Moreno, Mauricio (Bank of England) |
| Abstract: | We develop a DSGE model in which commercial banks interact with the central bank through the reserves market, with each other through reserves and interbank markets, and with the real economy through retail loan and deposit markets. Because banks disburse loans through deposit creation, they never face financing risks (being unable to fund new loans), only refinancing risks (being unable to settle net deposit withdrawals in reserves). Permanent quantitative tightening, while reducing the equilibrium real interest rate, has significant negative effects on financial and real variables, by increasing the cost at which reserves-scarce parts of the banking sector create money. Temporary net deposit withdrawals, which affect the funding cost and loan extension of one part of the banking sector at the expense of another part, have highly asymmetric financial and real effects. The quantity and distribution of central bank reserves, and the extent of frictions in the interbank and reserves markets, critically affect the size of these effects, and can matter even in a regime of ample aggregate reserves. Countercyclical reserve injections can help to smooth the business cycle. We find that countercyclical reserve quantity rules can make sizeable contributions to welfare that can reach a similar size to the Taylor rule. |
| Keywords: | Quantitative easing; quantitative tightening; monetary policy; central bank reserves; interbank loans; bank deposits; bank loans; money demand; money supply; credit creation |
| JEL: | E51 E52 E58 |
| Date: | 2024–08–09 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1090 |
| By: | Sebastiao OLIVEIRA (University of Illinois at Urbana-Champaign); Jay RAFI (University of Illinois at Urbana-Champaign); Pedro SIMON (University of Illinois at Urbana-Champaign) |
| Abstract: | We provide novel evidence that corporate debt maturity plays an important role in the transmission of United States (US) monetary policy to foreign firms. Using an identification strategy that explores the ex-ante maturity structure of long-term debt to predict firms’ financial positions in a given year, we show that the effect of US monetary policy shocks on foreign firms is amplified by financing constraints. After a contractionary shock, financial conditions in foreign countries become tighter, and firms with a high proportion of long-term debt maturing right after the shock significantly decrease investment and sales. We find that firms in emerging economies are much more affected by these shocks compared to those in advanced economies, and the amplification effect of US monetary policy shocks by financing constraints is present only in emerging economies. |
| Keywords: | Monetary policy, financial constraints, foreign firms |
| JEL: | E52 F30 G32 |
| Date: | 2024–09–26 |
| URL: | https://d.repec.org/n?u=RePEc:era:wpaper:dp-2024-27 |
| By: | Renzhi, Nuobu (Capital University of Economics and Business); Beirne, John (Asian Development Bank) |
| Abstract: | This paper empirically investigates how the level of peer-to-peer (P2P) lending affects monetary policy transmission in the People’s Republic of China (PRC). Using state-dependent local projection methods, we find that the macroeconomic effects of unanticipated changes in monetary policy are dampened during the boom phase of the P2P lending market. The impulse responses of industrial production and inflation are significantly negative in the non-boom state. In contrast, the responses of industrial production and inflation are muted in the boom state. Set against the context of stricter regulation on P2P lending since 2017, our results indicate that the significant scaling back of P2P lending activity and its gradual decline in the PRC could enhance the effectiveness of monetary policy transmission. Our paper also suggests that further work is needed to study the interaction between financial innovation and monetary policy |
| Keywords: | peer-to-peer lending; monetary policy transmission; fintech |
| JEL: | E44 E52 F33 F42 |
| Date: | 2024–11–05 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbewp:0749 |
| By: | Whelsy Boungou (PSB - Paris School of Business - HESAM - HESAM Université - Communauté d'universités et d'établissements Hautes écoles Sorbonne Arts et métiers université); Alhonita Yatié (BSE - Bordeaux sciences économiques - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | To the question of whether global stock market indices are sensitive to climate change, the answer is "Yes". Using weekly data from the stock market returns of 97 countries over the period from 31 August 2020 to 18 April 2022, we document a significant negative impact of climate change on the performance of global stock indices. |
| Keywords: | Climate change, Stocks, Google |
| Date: | 2022–12–30 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04745793 |
| By: | Beirne , John (Asian Development Bank); Park , Donghyun (Asian Development Bank); Saadaoui , Jamel (Université Paris 8); Uddin, Gazi Salah (Linköping University) |
| Abstract: | We analyze the relationship between climate risk and fiscal space in a systematic and rigorous way. To do so, we use panel local projections to examine the role of political stability and financial development in the relationship. For a sample of 199 economies in 1990–2022, we first empirically confirm that climate risks adversely affect fiscal space. We find that such effects are most pronounced for the economies that are most vulnerable to climate change. However, our evidence indicates that political stability and financial development can mitigate such effects. We also identify nonlinearities in the climate risk– fiscal space nexus. More specifically, the impact of climate risk on fiscal space is greater when fiscal space is most constrained—i.e., in the upper quantile of the distribution. While fiscal consolidation is the key to mitigating the adverse effect of climate risks on fiscal space, our results suggest both political stability and financial development can contribute as well. |
| Keywords: | climate risk; institutional quality; fiscal space; bond yields; sovereign ratings |
| JEL: | F32 F41 F62 |
| Date: | 2024–10–30 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbewp:0748 |