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on Financial Development and Growth |
| By: | Motta Café, Renata |
| Abstract: | Limited access to credit has been identified as a major constraint to sustainable municipal development, but empirical evidence on the effectiveness of credit operations remains inconclusive. This paper evaluates the impact of federal government guaranteed loans on public expenditures. Using data from Brazilian municipalities and a regression discontinuity design that leverages a discontinuity in the eligibility criteria for federal government guarantees, I show that the loans have a positive impact on the quality of local expenditure and social outcome indicators. This impact is characterized by a significant increase in investment while keeping personnel expenditures stable. |
| Keywords: | State capacity;Access to credit;public expenditure;municipal development |
| JEL: | H71 H75 R51 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:13819 |
| By: | Mr. Rajan Govil; Khyati Chauhan |
| Abstract: | Lack of convergence in per capita income across Indian states requires greater resources for lower-income states for investment and improved public services. Central and state governments need to raise revenue (both tax and non-tax), dismantle the administered pricing mechanism, reduce subsidies, and reorient expenditure toward national and state-level priorities. This is essential to ensure India remains on a sustainable fiscal path with higher growth, given the high public debt at the centre and state level. The observed wide differences in fiscal parameters across states require a tailored policy for each state. The large stock of debt of several states puts at risk the adequate financing of growth-enchancing expenditures. |
| Keywords: | India; Growth Convergence; Central and State Public Finances |
| Date: | 2024–11–15 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/235 |
| By: | Marina Azzimonti-Renzo; Nirvana Mitra |
| Abstract: | We examine how the post-pandemic trajectory of risk-free rates—from historically low levels in 2020 to a steep rise in 2022—affects sovereign debt management and default risk in emerging markets (EMs). Using a dynamic political economy model, we show that weak institutional environments with political incentives to engage in corruption spending lead to over-borrowing and increased default risk, especially during low-rate periods. As rates rise, EMs face high risks of default or the need for austerity programs, depending on the severity of productivity shocks. While International Financial Institution (IFI) lending provides short-term relief, it can fuel moral hazard and corruption. Making IFI loans contingent on anti-corruption efforts reduces default risk. However, even full monitoring cannot eliminate the incentives for fiscal mismanagement, as governments may still over-borrow during favorable periods without addressing sustainability. We also find that Quantitative Performance Criteria (QPC), such as a debt-ceiling rule, are less effective as they leave room for corruption that creates default risk and can generate welfare losses relative to a scenario without IFI debt. |
| Keywords: | Sovereign Debt Crises; Institutions; Corruption; Sovereign Default; IFI loans; Emerging Markets |
| JEL: | D72 E43 F34 E62 F41 |
| Date: | 2024–10–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedrwp:99074 |
| By: | Juan Jose Battaglia |
| Abstract: | This paper investigates the relationship between sovereign spreads and external assets and liabilities. To address potential endogeneity concerns, we employ a panel VAR model within a generalized method of moments (GMM) framework on a sample of 59 countries, encompassing 18 advanced economies and 41 emerging markets, over the period from 1996 to 2021. The findings reveal that a positive shock to international reserves (IIRR) assets (measured as a ratio to GDP) leads to a significant decrease in sovereign spreads. Conversely, a positive shock to the external debt to GDP ratio leads to a significant increase in sovereign spreads. Both effects are stronger in emerging markets. The responses of spreads to shocks in foreign direct investment (FDI) liabilities are less clear, highlighting that not all foreign liabilities have the same effect on the cost of international credit. We corroborate the robustness of the results using the local projection method and a variety of additional tests. |
| Keywords: | Sovereign spread; External asset and liabilities; Panel VAR. |
| JEL: | E44 G15 H63 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp03552024 |
| By: | Toby C. Monsod (School of Economics, University of the Philippines Diliman); Aleli D. Kraft (School of Economics, University of the Philippines Diliman); Cielo Magno (School of Economics, University of the Philippines Diliman); Jan Carlo Punongbayan (School of Economics, University of the Philippines Diliman); Orville Jose C. Solon (School of Economics, University of the Philippines Diliman); Elizabeth Tan (School of Economics, University of the Philippines Diliman); Agustin L. Arcenas (College of Public Affairs and Development, University of the Philippines Los Baños); Florian Alburo (School of Economics, University of the Philippines Diliman); Emmanuel S. de Dios (School of Economics, University of the Philippines Diliman) |
| Abstract: | This paper provides a review of the empirical evidence cited in the current public discussions on removing the remaining constitutional restrictions on foreign-equity ownership in certain economic sectors. A fuller appreciation of the given evidence shows that lifting equity restrictions is not a necessary condition for explaining the inward stocks of foreign direct investment (FDI) in the cited countries, including the Philippines. While restrictive equity rules may represent a hindrance to FDI, their potential effects are small and sometimes insignificant in comparison to other explanatory variables such as the ease of doing business, physical infrastructure, and perceived corruption. The paper cautions against an uncritical mindset towards FDI, discussing how consistent empirical evidence of the positive effects of FDI on host economies has proved elusive and that knowledge and technological spillovers from FDI are highly context-specific, not unconditional, and not without cost. Instead, a more discriminating approach, focusing on the quality of multinational enterprises and its activities, rather than simply on the volume of FDI, is recommended. Finally, the paper warns that the push for legislative flexibility, while attractive on the surface, can be self-defeating since it also has the potential of increasing investment uncertainty, particularly given the idiosyncrasies of Philippine political economy. |
| Keywords: | foreign direct investment; multinational enterprises; foreign equity restrictions, constitutional change, empirical models of investment distribution; influences on the distribution of direct foreign investments; rules versus discretion |
| JEL: | F14 F21 F23 F60 |
| Date: | 2024–04 |
| URL: | https://d.repec.org/n?u=RePEc:phs:dpaper:202401 |
| By: | Toby C. Monsod (School of Economics, University of the Philippines Diliman); Aleli D. Kraft (School of Economics, University of the Philippines Diliman); Cielo Magno (School of Economics, University of the Philippines Diliman); Jan Carlo Punongbayan (School of Economics, University of the Philippines Diliman); Orville Jose C. Solon (School of Economics, University of the Philippines Diliman); Elizabeth Tan (School of Economics, University of the Philippines Diliman); Agustin L. Arcenas (College of Public Affairs and Development, University of the Philippines Los Baños); Florian Alburo (School of Economics, University of the Philippines Diliman); Emmanuel S. de Dios (School of Economics, University of the Philippines Diliman) |
| Abstract: | We are pleased to note that the discussion paper we wrote (“How to change a constitution by handwaving”*) has attracted some interest from the public and observers of economic policy. Among the more thoughtful responses the paper has received is that from the Foundation for Economic Freedom (FEF). Indeed, their response concedes the main point of our paper, which is that compared with lifting foreign-equity restrictions: “Corruption and infrastructure gaps may well be more significant turnoffs for foreign investors.” Notwithstanding this, the FEF response incongruously then insists that “removing the restrictions is a necessary condition”. To insist on their conclusion, the FEF challenges our interpretation of the quantitative evidence as well as presents illustrative anecdotes or events meant to repair what they perceive as our paper’s being “ahistorical and devoid of historical context”. Here, we set the record straight on both FEF’s appreciation of the econometric evidence and on the anecdotes they recount. |
| Keywords: | foreign direct investment; multinational enterprises; foreign equity restrictions, constitutional change, empirical models of investment distribution; influences on the distribution of direct foreign investments; rules versus discretion |
| JEL: | F14 F21 F23 F60 |
| Date: | 2024–04 |
| URL: | https://d.repec.org/n?u=RePEc:phs:dpaper:202401b |
| By: | Arth Mishra |
| Abstract: | The widening financing gaps for the Sustainable Development Goals (SDGs) and the Green Energy Transition in developing countries have established an impetus to mobilise foreign private resources for infrastructure. By developing a novel theoretical framework and leveraging a large dataset of infrastructure projects in developing countries from 1989-2022, this analysis investigates the role of Development Finance Institutions (DFIs) in indirectly mobilising private finance. Theoretical analysis demonstrates that DFI participation in a particular country-sector can catalyse private finance by specifically reducing the perceived risks of financing. Empirical analysis assessing the presence and magnitude of mobilisation effects at the extensive margin is consistent with theory on mobilisation. DFI participation is strongly correlated with an increase in the number of commercial foreign banks, total project activity, and the number of projects with at least one commercial foreign bank. Evidence suggests that this effect is amplified by DFI participation induced private financing acting as an independent signal for further private financing. However, the mobilisation effect does not seem to spill over across countries and sectors and does not extend to projects that are entirely financed by commercial foreign financiers. These findings suggest that DFI capital should target infrastructure segments with high growth potential, through project structures that resemble the conditions for private financing and contribute towards creating a pipeline of investable projects in those country-sectors. Immediate policy implications include improving data reporting on current and future projects to bolster demonstration effects and facilitate research on intensive margin mobilisation effects. |
| Date: | 2023 |
| URL: | https://d.repec.org/n?u=RePEc:csa:wpaper:2023-13 |
| By: | Ayadi, Rym; Ronco, Sara |
| Abstract: | Development aid is considered a policy area where the EU is particularly influential. This CEPS In-Depth Analysis report provides an overview of the evolution of global and European governance in development policy and relations with the African continent. Exploring the period 1995-2021, the research highlights how global governance in development aid and relations with Africa have evolved in terms of both the tools used and the actors involved during the last decades. As supported by the EU, another important pattern is the shift from traditional official development assistance (ODA) to public-private financial frameworks, and from financing development projects to financing investment for infrastructure development. Assessing the dimensions of the EU’s actorness over time reveals an increasing trend, notably concerning its authority, autonomy and cohesion. However, more external dimensions of actorness (such as the opportunity to act and recognition) show a decreasing trend over the time period studied. The need for coherence is one of the main challenges facing the EU if it is to increase its actorness and effectiveness in development policy and its relations with Africa. Future EU policies on migration issues will also play a critical role in the EU’s actorness vis-à-vis Africa. Another challenge will be for the EU to maintain its key role as a development actor, better coordinating its development agencies and financial institutions (both national and international) to implement and coordinate public-private partnerships, co-guarantee schemes and collaborative blended finance platforms. This report is part of a series drawing on the outcomes of the EU-funded TRIGGER (Trends in Global Governance and Europe’s Role) project that ran from 2018 to 2022. Using the conceptual framework developed as part of TRIGGER, the report moves beyond observing the characteristics of the EU as an actor to explore its actorness/effectiveness over time in a specific policy domain – in this case, development policy. |
| Date: | 2023–04 |
| URL: | https://d.repec.org/n?u=RePEc:eps:cepswp:39494 |
| By: | Dang, Hai-Anh H.; Deininger, Klaus; Cuong Viet Nguyen |
| Abstract: | We investigate the impact of a large-scale poverty alleviation program targeted at 62 poorest districts in Vietnam, analyzing multiple datasets spanning the past 20 years with a regression discontinuity design with district fixed effects. While we do not find significant program effects on household welfare (as measured by per capita income and poverty) and local economic development (as measured by nighttime light intensity and establishment of new firms), we find that the program facilitates a shift from farm to nonfarm employment and significantly increases the share of nonfarm income for rural households. One possible explanation for the positive effects on nonfarm employment is the improved access to credit that the program provides to participating households. We also find that the program increases household access to electricity, public transfer, educational subsidies for students residing in the program districts, and healthcare utilization, possibly through improving availability of commune healthcare centers. |
| Keywords: | poverty, targeting, household surveys, Vietnam |
| JEL: | C15 D31 I31 O10 O57 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:glodps:1519 |
| By: | Kim, Hyun-Seok (Korea Institute for Industrial Economics and Trade) |
| Abstract: | In recent years, global financial markets have experienced unprecedented volatility due to a confluence of factors, including the COVID-19 crisis, the Russian-Ukraine war, the US-China rivalry and strategic economic decoupling, conflict in the Middle East, and severe supply chain disruptions. Central banks responded to the inflationary pressures caused by these and other factors with aggressive monetary policy, which has in effect meant a sharp increase in interest rates across the globe. Lingering uncertainties in financial markets have also contributed to high lending rates, as greater risks drive financial institutions and investors in corporate financing markets to demand higher returns on their investments. And rates seem unlikely to fall in the long term, as ongoing changes to the structure of the global economy — the evolving dynamics of globalization, falling birth rates, and an aging population — exert upward pressure on inflation, anchoring interest rates at current levels. As a consequence, many firms have struggled to access funding through direct finance channels (equity sales and bond issuance) and instead rely mostly on indirect finance (loans). This owes partially to the fact that, as rates grew in 2022 and stayed high in 2023, corporate debt burdens ballooned, raising the risk of widespread bankruptcies. In this study, I examine how greater uncertainties in financial markets affect corporate borrowing costs. In Korea, the two key capital markets with an influence on corporate finance are the loan market, where banks play a central role, and the corporate bond market, where firms issue bonds to raise funds. |
| Keywords: | corporate debt; corporate financing; capital financing; corporate lending; corporate bond market; capital markets; Korea; KIET |
| JEL: | G30 G31 G32 G34 G38 O16 |
| Date: | 2024–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:ris:kieter:2024_025 |
| By: | Matteo Crosignani; Thomas M. Eisenbach; Fulvia Fringuellotti |
| Abstract: | After a period of relative stability, a series of bank failures in 2023 renewed questions about the fragility of the banking system. As in previous years, we provide in this post an update of four analytical models aimed at capturing different aspects of the vulnerability of the U.S. banking system using data through 2024:Q2 and discuss how these measures have changed since last year. |
| Keywords: | banking system vulnerability; bank capital; fire-sale risk; liquidity risk; run risk |
| JEL: | G01 G21 |
| Date: | 2024–11–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99056 |
| By: | Buchak, Greg (Stanford U); Matvos, Gregor (Northwestern U); Piskorski, Tomasz (Columbia U); Seru, Amit (Stanford U) |
| Abstract: | The traditional model of bank-led financial intermediation, where banks issue demandable deposits to savers and make informationally sensitive loans to borrowers, has seen a dramatic decline since 1970s. Instead, private credit is increasingly intermediated through arms-length transactions, such as securitization. This paper documents these trends, explores their causes, and discusses their implications for the financial system and regulation. We document that the balance sheet share of overall private lending has declined from 60% in 1970 to 35% in 2023, while the deposit share of savings has declined from 22% to 13%. Additionally, the share of loans as a percentage of bank assets has fallen from 70%to 55%. We develop a structural model to explore whether technological improvements in securitization, shifts in saver preferences away from deposits, and changes in implicit subsidies and costs of bank activities can explain these shifts. Declines in securitization cost account for changes in aggregate lending quantities. Savers, rather than borrowers, are the main drivers of bank balance sheet size. Implicit banks’ costs and subsidies explain shifting bank balance sheet composition. Together, these forces explain the fall in the overall share of informationally sensitive bank lending in credit intermediation. We conclude by examining how these shifts impact the financial sector’s sensitivity to macroprudential regulation. While raising capital requirements or liquidity requirements decreases lending in both early (1960s) and recent (2020s) scenarios, the effect is less pronounced in the later period due to the reduced role of bank balance sheets in credit intermediation. The substitution of bank balance sheet loans with debt securities in response to these policies explains why we observe only a fairly modest decline in aggregate lending despite a large contraction of bank balance sheet lending. Overall, we find that the intermediation sector has undergone significant transformation, with implications for macroprudential policy and financial regulation. |
| JEL: | E50 G20 G21 G22 G23 G24 G28 |
| Date: | 2024–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecl:stabus:4181 |
| By: | Granja, Joao (U of Chicago); Jiang, Erica Xuewei (U of Southern California); Matvos, Gregor (Northwestern U); Piskorski, Tomasz (Columbia U); Seru, Amit (Stanford U) |
| Abstract: | In the face of rising interest rates in 2022, banks mitigated interest rate exposure of the accounting value of their assets but left the vast majority of their long-duration assets exposed to interest rate risk. Data from call reports and SEC filings shows that only 6% of U.S. banking assets used derivatives to hedge their interest rate risk, and even heavy users of derivatives left most assets unhedged. The banks most vulnerable to asset declines and solvency runs decreased existing hedges, focusing on short-term gains but risking further losses if rates rose. Instead of hedging the market value risk of bank asset declines, banks used accounting reclassification to diminish the impact of interest rate increases on book capital. Banks reclassified $1 trillion in securities as held-to-maturity (HTM) which insulated these assets book values from interest rate fluctuations. More vulnerable banks were more likely to reclassify. Extending Jiang et al.’s (2023) solvency bank run model, we show that capital regulation could address run risk by encouraging capital raising, but its effectiveness depends on the regulatory capital definitions and can by eroded by the use of HTM accounting. Including deposit franchise value in regulatory capital calculations without considering run risk could weaken capital regulation’s ability to prevent runs. Our findings have implications for regulatory capital accounting and risk management practices in the banking sector. |
| JEL: | G20 G21 G28 |
| Date: | 2024–04 |
| URL: | https://d.repec.org/n?u=RePEc:ecl:stabus:4182 |
| By: | Arnal, Judith; Lannoo, Karel; Lastra, Rosa |
| Abstract: | After the end of the euro area sovereign debt crisis and the sovereign-bank feedback loop receded, EU Member States’ appetite for progress in the Banking Union significantly decreased. Against the background of lessons learnt from several resolution and liquidation cases during the first few years of the Banking Union, the European Commission tabled a proposal in April 2023 to reform the Crisis Management and Deposit Insurance (CMDI) framework. While this proposal has its merits, it falls short of the real pending issues for completing the Banking Union, namely the third pillar (EDIS or the European Deposit Insurance Scheme), a mechanism for liquidity provision in resolution, and the ‘missing pillar’ regarding the provision of Emergency Liquidity Assistance (ELA). In this CEPS Policy Brief, we make three key recommendations on how to improve the CMDI proposal, namely: 1. Full harmonisation, or at least the harmonisation of the most relevant aspects of liquidation procedures; 2. Updating and aligning the Banking Communication with the BRRD/SRMR; and 3. Further facilitating access to industry funds. Finally, we strongly discourage ‘a piecemeal approach’ during the ongoing negotiations over the CMDI reform. |
| Date: | 2024–02 |
| URL: | https://d.repec.org/n?u=RePEc:eps:cepswp:42127 |
| By: | Tomohiro Hirano; Alexis Akira Toda |
| Abstract: | A rational bubble is a situation in which the asset price exceeds its fundamental value defined by the present value of dividends in a rational equilibrium model. We discuss the recent development of the theory of rational bubbles attached to real assets, emphasizing the following three points. (i) There exist plausible economic models in which bubbles inevitably emerge in the sense that all equilibria are bubbly. (ii) Such models are necessarily nonstationary but their long-run behavior can be analyzed using the local stable manifold theorem. (iii) Bubbles attached to real assets can naturally and necessarily arise with economic development. Finally, we present a model with stocks and land, and show that bubbles in aggregate stock and land prices necessarily emerge. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.17425 |
| By: | Peter Andre (Leibniz Institute for Financial Research SAFE); Philipp Schirmer (University of Bonn); Johannes Wohlfart (University of Cologne) |
| Abstract: | Investors’ return expectations are pivotal in stock markets, but the reasoning behind these expectations is not well understood. This paper sheds light on economic agents’ mental models – their subjective understanding – of the stock market. We conduct surveys with the general population, retail investors, financial professionals, and academic experts. Respondents forecast and explain how future returns respond to stale news about the future earnings streams of companies. We document four main results. First, while academic experts view stale news as irrelevant, households and professionals often believe that stale good news leads to persistently higher expected future returns. Second, academic experts refer to market efficiency to explain their forecasts, whereas households and many professionals directly equate higher future earnings with higher future returns, neglecting the offsetting effects of endogenous price adjustments. Third, additional experiments with households demonstrate that this neglect of equilibrium pricing does not reflect inattention to trading or price responses or ignorance about how returns are calculated. Instead, it reflects a gap in respondents’ mental models: they are unfamiliar with the concept of equilibrium pricing. Lastly, we illustrate the potential consequences of neglecting equilibrium pricing. We use panel data on household expectations to show that this neglect predicts previously documented belief anomalies such as return extrapolation and pro-cyclicality. |
| Keywords: | Mental models, Return expectations |
| JEL: | D83 D84 G11 G12 G41 G51 G53 |
| Date: | 2024–11–13 |
| URL: | https://d.repec.org/n?u=RePEc:kud:kucebi:2307 |
| By: | John Muellbauer |
| Abstract: | Housing has been heavily implicated in many financial crises, e.g. in the Global Financial Crisis of 2008-9. Since the GFC, new macroprudential frameworks have been introduced across the globe, with housing-related tools prominent. This paper explains how the housing-related financial accelerator operates, and discusses institutional differences affecting the transmission and amplification of house price and credit shocks and therefore risks to the financial system and to the resilience of households. The objectives of housing-related macroprudential policy are discussed and research on diagnosing potential housing risk critically reviewed. Limitations of the literature on the effectiveness of housing-related macroprudential tools in international panel studies are examined, including from the neglect of country-heterogeneity, except in fixed effects. How aggregate cost-benefit analyses of the consequences of macroprudential policies has benefitted from the development of the Growth-at-Risk framework is explained. Research is reviewed on the distributional implications, often negative in the short-run, for example, on access to credit of lower income and first-time buyer households, but beneficial in the longer run. The importance of a general equilibrium approach integrating micro and macro data is emphasised, and developments in the agent-based modelling approach are discussed. The need to coordinate macroprudential policies with other housing-related policies is highlighted. |
| Date: | 2024–11–12 |
| URL: | https://d.repec.org/n?u=RePEc:oxf:wpaper:1056 |
| By: | Robert J R Elliott (University of Birmingham); Fabio Gatti (University of Bern); Eric Strobl (University of Bern & University of Birmingham) |
| Abstract: | This paper quantifies the impact of the 1630-1631 Italian plague on the business activities of the Florentine merchant-bank Saminiati & Guasconi. Employing AI for handwriting recognition on over 6, 000 bank letters we show that letters and goods transactions decreased by two-thirds when a merchant lived in an infected town although this negative effect was halved when the correspondent also resided in an infected town. Mentions of precious coins however increased reflecting a flight to the safety of hard currency. The plague also shifted the bank’s merchant network towards Southern and Eastern Europe and away from the Atlantic Coast. |
| Keywords: | merchants, plague, trade |
| JEL: | N00 N73 N83 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:hes:wpaper:0271 |
| By: | Zubin Deyal |
| Abstract: | This paper investigates the impact of natural disasters on remittances in developing countries, which are particularly vulnerable to the immediate and long-term effects of such events. In addition to damaging economic capacity, natural disasters are large exogenous shocks which result in capital flight that exacerbates the immediate deficit that developing countries face in their aftermath. Though remittances have proven vital in addressing financing gaps for these countries, their immediate response to natural disasters has not been thoroughly studied. This paper expands the literature by offering a comprehensive analysis of the influence of natural disasters on monthly remittances across 30 developing countries for the 30-year period of 1993 to 2022. In utilising a dynamic fixed effects model on data sourced from respective Central Banks, I find an immediate rise in remittances post-disasters, notably in Asia, Central America, and South America, and specifically in response to hydrological and meteorological disasters. The rise in remittances is typically highest in the month after the disaster, with more intense disasters eliciting a larger increase in remittances. I also find evidence of remittance smoothing, as migrants seem to adjust allocations intertemporally. I further establish a countercyclical relationship between remittances and GDP growth, with inflation, nominal exchange rate depreciations, net migration, and disaster aid negatively impacting remittances. The finding that remittances increase after disasters is robust to different specifications, including System GMM, different periods, dependent variables, and monthly, yearly, and regional fixed effects.Creation-Date: 2023 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:csa:wpaper:2024-01 |