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on Financial Development and Growth |
| By: | KOUAKOU, Thiédjé Gaudens-Omer; KAMALAN, Angbonon Eugène |
| Abstract: | This study assesses the effect of financial development on income inequality in Côte d'Ivoire, using a multidimensional indicator of financial development that incorporates financial inclusion. We use ARDL and quantile regression methods to regress income inequality (measured by the Gini index) on the indicator of financial development and various control variables over the period 1986-2018. The results show that the financial development indicator only reduces income inequality in the short term. In the long term, it increases them at all quantiles, with a more accentuated effect in the upper quantiles than in the lower quantiles. This counter-intuitive result is explained by the lesser orientation of financial inclusion towards income-generating activities. The study recommends the following measures: link financial inclusion and income-generating activities and strengthen platforms aimed at reducing information asymmetry between borrowers and lenders. |
| Keywords: | Financial development; income inequality; ARDL model; quantile regression. |
| JEL: | C32 D63 G10 |
| Date: | 2025–02–09 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123616 |
| By: | Gregory Phelan; David Love |
| Abstract: | This research will help policymakers understand how economic growth, risk, and the financial sector influence sustainability objectives. It provides a useful theoretical framework useful to help assess what policies related to growth and financial depth are likely to affect sustainability (Working Paper no. 23-05). |
| Date: | 2023–05–16 |
| URL: | https://d.repec.org/n?u=RePEc:ofr:wpaper:23-05 |
| By: | João, Igor Custodio; Calice, Pietro; Lucas, Andre; Schaumburg, Julia |
| Abstract: | This paper explores the potential correlations between financial development and state fragility, using a sample of 137 countries observed over the period from 1998–2019. The countries are grouped into clusters that capture the different joint states of financial development and fragility. The paper introduces a new switching methodology to further allow for a qualification of the evolution of countries in terms. of fragility scores with and without controlling for other variables. Irrespective of the precise methodology and state fragility measure as used in this paper, the findings indicate a negative correlation between financial development and state fragility, after controlling for several forms of observed and unobserved heterogeneity. |
| Date: | 2024–07–15 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10850 |
| By: | Calice, Pietro; Demekas, Dimitri G. |
| Abstract: | Financial sector reforms are part of the strategies that countries follow to exit from fragility, but the content and focus of these reforms and the priority they are given relative to other policies vary from country to country. Based on an archival search of publicly available World Bank and the International Monetary Fund country documents, this paper investigates and compares the experiences of seven countries (Armenia, Benin, Cambodia, the Dominican Republic, Rwanda, Senegal, and Viet Nam) that successfully and sustainably exited fragility during the 1980s and 1990s, focusing on the financial sector reforms that were implemented around the time of the exit. The review suggests a few broad patterns. Regardless of the original causes of fragility, successful exit strategies always included financial sector reforms, which invariably focused on short-term goals: stopping bank losses, establishing monetary control, and re-starting the engine of financial intermediation and the flow of credit to the economy. Longer-term financial development goals, such as financial deepening, were recognized as important, but the requisite policy interventions came later, after the financial sector had been restored to health and was able to discharge its basic functions. Crucially, substantial, hands-on, long-term technical assistance and capacity building were in all cases necessary to ensure the long-term success of these reforms. |
| Date: | 2024–07–16 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10853 |
| By: | Cull, Robert J.; Gill, Indermit S.; Pedraza Morales, Alvaro Enrique; Ruiz Ortega, Claudia; Zeni, Federica |
| Abstract: | This paper summarizes evidence on financial instruments and regulatory approaches to spur private investment in pursuit of the 2030 Sustainable Developments Goals. Starting from a theoretical framework demonstrating that raising the marginal product of capital is the key to crowding in private investment, it uses Robert Merton’s functional approach to financial intermediation to assess the track record and prospects for five types of instruments/regulatory approaches: guarantees, public-private partnerships, syndicated loans, sustainable financial contracts, and climate and banking regulations and policies. Despite considerable gains in the amount of private investment mobilized by these vehicles, the volumes still fall short of the trillions of dollars estimated to be necessary to achieve the Sustainable Developments Goals. Efforts to share relevant data, encourage more academic research, and publicize and demonstrate the effectiveness of these approaches, much of which is already being undertaken by the World Bank and other multilateral development banks, could be crucial to scale up private capital mobilization. |
| Date: | 2024–07–02 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10838 |
| By: | Lisa Chauvet (UP1 - Université Paris 1 Panthéon-Sorbonne, FERDI - Fondation pour les Etudes et Recherches sur le Développement International, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Marin Ferry (Université Gustave Eiffel) |
| Abstract: | Dans la perspective des Objectifs du Développement Durable et à l'aune du Sommet pour un nouveau pacte financier mondial organisé en juin prochain à l'initiative de la présidence française, la question de l'efficacité de l'aide revient plus que jamais sur le devant de la scène. L'augmentation des besoins financiers nécessaires au développement économique et social dans un contexte de menaces climatiques croissantes et de fortes contraintes budgétaires dans les pays du Nord invite les décideurs politiques à faire en sorte que chaque dollar, euro, ou yuan dépensé impacte son destinataire. Si la communauté scientifique a, depuis les indépendances et jusqu'à la fin des années 2000, tenté d'alimenter les débats autour de l'efficacité de l'aide, force est de constater que les conclusions restent encore fragiles. Néanmoins, depuis une vingtaine d'années et en s'appuyant sur cette expérience mitigée, la science s'est adaptée et renouvelée afin de surpasser les entraves méthodologiques des études passées et apporter un nouveau regard sur ces questions. Qu'a-t-elle ajouté à ce débat supposé sans fin ? Cet article tente d'y répondre en décortiquant les contributions récentes de la littérature sur l'efficacité de l'aide. |
| Date: | 2023–06–19 |
| URL: | https://d.repec.org/n?u=RePEc:hal:cesptp:hal-04141543 |
| By: | Janus, Heiner; Röthel, Tim |
| Abstract: | Kontroverse mediale Diskussionen über den Nutzen einzelner Entwicklungsprojekte und der Entwicklungspolitik insgesamt werden anhand detaillierter Projektinformationen aus sogenannten Transparenzportalen der "Geberländer" geführt. In den letzten Jahren haben alle bilateralen Geberorganisationen digitale Transparenzportale eingeführt, um einerseits internationale Standards für eine wirksamere Entwicklungspolitik einzuhalten und andererseits die Öffentlichkeit im eigenen Land zu informieren. Wir untersuchen anhand theoretisch hergeleiteter Mechanismen, inwiefern diese Ziele durch Transparenz erreicht werden. Zunächst vergleichen wir die Transparenzportale der zehn größten bilateralen Geberländer miteinander und werten anschließend die öffentliche Debatte in vier Geberländern aus: Deutschland, Frankreich, Großbritannien und den USA. Unsere Analyse ergibt, dass die Transparenz nach den Standards der globalen Wirksamkeitsagenda stärker für die Kommunikation mit der Öffentlichkeit in Geberländern übersetzt wird, ohne dabei die Einhaltung der internationalen Standards zu untergraben. Dazu stellen wir fest, dass die große Bevölkerungsgruppe der moderaten, aber möglicherweise uninformierten und desinteressierten Öffentlichkeit bei der Anpassung der Transparenzportale stärker berücksichtigt werden sollte. |
| Keywords: | Transparenzinitiativen, Entwicklungszusammenarbeit, Entwicklungspolitik, Öffentliche Meinung, Öffentliche Zustimmung |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:diedps:311821 |
| By: | Ana Maria Santacreu; Ashley Stewart |
| Abstract: | FDI in major economies such as China has grown steadily while FDI in tax havens has stabilized or declined amid a global rise in investment abroad. |
| Keywords: | foreign direct investment; tax havens; China |
| Date: | 2025–02–11 |
| URL: | https://d.repec.org/n?u=RePEc:fip:l00001:99539 |
| By: | Oyun Erdene Adilbish; Mr. Diego A. Cerdeiro; Mr. Romain A Duval; Mr. Gee Hee Hong; Luca Mazzone; Lorenzo Rotunno; Hasan H Toprak; Maryam Vaziri |
| Abstract: | Europe faces a well-known productivity malaise, with a large and widening aggregate productivity gap relative to the U.S. In this paper, we provide a novel diagnosis of the firm-level roots of Europe’s productivity growth slowdown through an analysis of data covering the universe of firms in Europe and the U.S over their life cycles. Compared to their U.S. counterparts, we identify critical performance gaps among both Europe’s frontier firms and young high-growth firms. Our firm-level analyses reveal that smaller markets and limited market-based financing are key bottlenecks for frontier European firms, while skill shortages and insufficient risk capital, such as venture capital, hinder the formation and subsequent growth of young firms in Europe. These findings suggest that removing remaining intra-Europe barriers to accelerate factor and product markets integration, alongside national reforms to facilitate swifter resource reallocation and enhance human capital, could help revive Europe’s productivity growth. |
| Keywords: | Firm-level productivity; business dynamism. |
| Date: | 2025–02–14 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/040 |
| By: | Andrew Atkeson; Jonathan Heathcote; Fabrizio Perri |
| Abstract: | We examine how to quantitatively reconcile the high volatility of market valuations of U.S. corporations with the relative stability of macroeconomic quantities since 1929. Macroeconomic and financial variables are measured in a consistent fashion using the Integrated Macroeconomic Accounts (IMA) of the United States. We first use a finance- style valuation model that builds on Campbell and Shiller (1987) to interpret fluctuations in the market value of U.S. corporations from 1929 to 2023, using these IMA data. We find that fluctuations in expected cash flows to firm owners have been the dominant driver of those fluctuations in value; fluctuations in expected rates of return have played a smaller role. We then develop a stochastic growth model, extended to incorporate factorless income, which we use to decompose corporate cash flows and associated valuations into income and value due to physical capital and factorless income. Finally, we ask whether expected returns to investing in capital in our macroeconomic model are consistent with the series for expected returns estimated from our finance-style valuation model. We find that they are. In this sense, we reconcile volatile market valuations and stable capital output ratios. |
| JEL: | E0 E01 G0 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33459 |
| By: | Yan Bai; Patrick J. Kehoe; Pierlauro Lopez; Fabrizio Perri |
| Abstract: | Emerging markets face large and persistent fluctuations in sovereign spreads. To what extent are these fluctuations driven by local shocks versus financial conditions in advanced economies? To answer this question, we develop a neoclassical business cycle model of a world economy with an advanced country, the North, and many emerging market economies, the South. Northern households invest in domestic stocks, domestic defaultable bonds, and international sovereign debt. Over the 2008-2016 period, the global cycle phase, the North accounts for 68% of Southern spreads’ fluctuations. Over the whole 1994-2024 period, however, Northern shocks account for less than 20% of these fluctuations. |
| JEL: | F34 F41 F44 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33441 |
| By: | Swapan-Kumar Pradhan; Viktors Stebunovs; Előd Takáts; Judit Temesvary |
| Abstract: | We use bilateral cross-border bank claims by nationality to assess the effects of geopolitics on cross-border bank flows. We show that a rise in geopolitical tensions between countries — disagreements in UN voting, broad sanctions, or sentiments captured by geopolitical risk indices — significantly dampens cross-border bank lending. Elevated geopolitical tensions also amplify the international transmission of monetary policies of major central banks, especially when geopolitical tensions coincide with monetary policy tightening. Overall, our results suggest that geopolitics is roughly as important as monetary policy in driving cross-border lending. |
| Keywords: | Monetary policy; Geopolitical tensions; Cross-border claims; Diff-in-diff estimations |
| JEL: | E52 F34 F42 F51 F53 G21 |
| Date: | 2025–02–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1403 |
| By: | Michele Modugno; Berardino Palazzo |
| Abstract: | The equity market’s reaction to macroeconomic news is consistent with the propagation of news into the real economy. We embody all the macro news in an activity news index and a price news index that together explain 34% of the quarterly stock price returns variation. When those indexes capture a stream of favorable macroeconomic surprises, publicly traded firms experience increases in revenues, profitability, financing, and investment activities. The firm-level resultslead up to an expansion of the real side of the whole U.S. economy. Our findings, taken together, show that stock prices’ reactions to macro news have a strong association with firm-level and economy-wide growth. |
| Keywords: | Macroeconomic News; Equity Markets; Real Activity |
| JEL: | E44 E47 G14 |
| Date: | 2025–01–17 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-07 |
| By: | William Chen; Gregory Phelan |
| Abstract: | Digital currencies provide a potential form of liquidity competing with bank deposits. We introduce digital currency into a macro model with a financial sector in which financial frictions generate endogenous systemic risk and instability. In the model, digital currency is fully integrated into the financial system and depresses bank deposit spreads, particularly during crises, which limits banks’ ability to recapitalize following losses. The probability of the banking sector being in crisis states can grow significantly with the introduction of digital currency. While banking-sector stability suffers, household welfare can improve significantly. Financial frictions may limit the potential benefits of digital currencies (Working Paper no. 23-01). |
| Date: | 2023–03–22 |
| URL: | https://d.repec.org/n?u=RePEc:ofr:wpaper:23-01 |
| By: | Hemingway, Benjamin (Bank of England) |
| Abstract: | The introduction of an unremunerated retail central bank digital currency (CBDC) is currently under consideration by several central banks. Motivated by the decline in transactional cash usage and the increase in online sales in the UK, this paper provides a theoretical framework to study the underlying drivers of these trends and the welfare implications of introducing an unremunerated retail CBDC. I develop a cash credit model with physical and digital retail sectors, endogenous entry of firms and directed consumer search. Calibrating to UK data between 2010 and 2022 the model suggests that there are positive welfare gains from introducing an unremunerated retail CBDC, but these have likely declined over time. |
| Keywords: | CBDC; credit; digital currency; money |
| JEL: | E41 E42 E58 |
| Date: | 2024–12–13 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1101 |
| By: | Garriga, Ana Carolina |
| Abstract: | How has central bank independence (CBI) changed over time and across countries? This paper introduces the most comprehensive dataset on de jure CBI, including country-year observations covering 192 countries between 1970 and 2023. The dataset identifies statutory reforms affecting CBI, their direction, and codes four dimensions of CBI (personnel independence, central bank’s objectives, policy formulation, and limits on lending). It includes two CBI indices and a regional diffusion variable. The broader coverage of this dataset has important implications. First, although this dataset coding decisions are generally consistent with previous research, countries included only in this dataset tend to have lower CBI and differ in other dimensions with those previously coded. This suggests that systematically missing data in other data sources may have effects on inferences. Second, extended temporal coverage allows analyzing the evolution of central bank governance for more than a decade since the Global Financial Crisis. Finally, the data show that although there is a global tendency towards more CBI, there is significant variance across and within regions, including numerous reforms reducing CBI in the past two decades. This data contribution is important for research beyond the study of monetary institutions and their effects. |
| Keywords: | Central bank independence; Central banks; Data; Delegation; Global Financial Crisis; Great Moderation; Reforms |
| JEL: | E02 E5 E58 Y10 |
| Date: | 2025–01–21 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123578 |
| By: | Klaus, Hendrik |
| Abstract: | This paper explores the genesis of the German monetary framework between 1866 and 1876, with a specific focus on the 1875 Banking Act. The Banking Act constituted the final piece within the legislation that established Germany's post- unification monetary order, regulated bank note issuance across the Reich, and established the Reichsbank as Germany's first central bank. The Banking Act has rarely featured prominently in the literature, and it has often been regarded as a subordinate aspect of Germany's adoption of a gold currency. Drawing on a broad range of primary sources, this study argues that the Banking Act was in fact the most complicated and politicised element of the monetary reform. The debates on the centralisation of note issuance and banking functions are a fascinating window into how late nineteenth-century monetary management developed within the political imperatives of the time. As a case study, the historical perspective on the development of Germany's monetary framework is relevant in a broader context. It offers insight into the dynamics that have shaped political economies past and present, and it enables us to reflect critically on outcomes and alternatives for specific forms of monetary governance |
| Keywords: | Bankgesetz, Banking Act, Reichsbank, Ludwig Bamberger, Otto Michaelis, financial history, central bank history, free banking |
| JEL: | N13 N23 B15 B17 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ibfpps:311086 |
| By: | KOUAKOU, Thiédjé Gaudens-Omer |
| Abstract: | This paper analyzes the effect of Basel III adapted to WAEMU on the behavior of banks in the zone (intermediation and market activities). After having developed a model for optimizing the return on bank equity, under various constraints (balance sheet constraints, Basel III regulatory constraints), we resort to linear programming via the Danzig simplex algorithm and to a structure of reasonable rates to obtain the optimal values of the various bank balance sheet items. The results, obtained by comparing these theoretical values with the values observed before Basel III (before January 1, 2018), show an increase in the supply of loans, obtained not only from deposits and bank refinancing but also via resources from the financial markets. We can also observe the intuitive result of an increase of bank reserves in line with the constraint that Basel III imposes on banks to increase their liquidity. In short, Basel III tends to strengthen bank financing in the zone, while improving the soundness of banks through the constitution of larger reserves. |
| Keywords: | prudential regulation, calibration, credit supply, linear programming |
| JEL: | C44 E50 E58 |
| Date: | 2025–01–31 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123515 |
| By: | Roland, Isabelle (Bank of England); Saito, Yukiko (Waseda University); Schnattinger, Philip (Bank of England) |
| Abstract: | Credit market interventions have become a widespread policy tool deployed by governments around the world to support their corporate sectors following shocks like the global financial crisis and the pandemic. Among those policies, forbearance programmes allowed firms to temporarily stop making payments on certain debt obligations or obtain debt forgiveness. However, the impact of these policies is not fully understood. In particular, forbearance lending is generally believed to keep unviable firms alive and contribute to the zombification of the corporate sector. To inform this debate, we examine the effects of Japan’s small and medium-sized enterprise (SME) Financing Facilitation Act, which encouraged banks to offer loan forbearance to troubled SMEs. We develop a framework to quantify the aggregate impact of the policy using a difference-in-differences approach combined with back‑of‑the‑envelope counterfactual exercises. Our evaluation indicates that, when coupled with business restructuring plans, forbearance lending can temporarily boost output without contributing to the widespread zombification of the corporate sector. Forbearance is more effective when credit market disruptions impede the reallocation of capital. |
| Keywords: | Forbearance lending; zombie firms; credit frictions; misallocation; productivity; search and matching; credit market interventions; policy evaluation |
| JEL: | E22 E43 E44 E65 G21 O40 |
| Date: | 2024–12–13 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1102 |
| By: | Alessandra Donini; Giulia Fusi; Mattia Picarelli |
| Date: | 2025–02–21 |
| URL: | https://d.repec.org/n?u=RePEc:stm:wpaper:69 |
| By: | Francesco Luna; Ms. Luisa Zanforlin |
| Abstract: | Social welfare costs from bank resolution, including contagion and moral hazard, are often thought to be minimized when supervisors can direct the merger of a failing bank with a sound, healthy one. However, social losses may become even larger if the absorbing institutions fail themselves. We ask whether social welfare losses are indeed lower when supervisors intervene rather than not. We use the sand pile/Abelian model as a metaphor to model financial losses which, as sand grains that fall onto a pile, eventually lead to a slide/failure. When capital in the system is insufficient to absorb the failing institution there will be welfare losses. Results suggest that, over the longer-term, social costs are lower when supervisors manage mergers. Additionally, financial networks that have a structure that minimizes social losses also minimize crises frequency. However, the bank employed resolution strategy will determine which financial network structures are associated with the minimum average loss per bankruptcy event. |
| Keywords: | Applied Abelian model; Banking; Financial Networks; Financial Economics; Banking Crisis; Bankrupcy; Bank Resolution; Selforganized Criticality; Bank Regulation and Supervision |
| Date: | 2025–02–14 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/041 |
| By: | Cañón Salazar, Carlos (Bank of England); Tanaka, Misa (Bank of England); Thanassoulis, John (Warwick Business School, University of Warwick and CEPR and UK Competition and Markets Authority) |
| Abstract: | We develop a game-theoretic model in which financial regulators compete to attract internationally mobile banks by setting the level of regulatory stringency to meet both financial stability and growth objectives. We show that competitive deregulation will not arise if the relatively growth-focused regulator becomes even more growth focused, but it becomes more likely if the relatively stability-focused regulator becomes more growth focused. We also demonstrate that domestic nonregulatory inducements to retain banks (eg tax, labour laws) create an externality on the global equilibrium of regulatory stringency chosen by financial regulators with a growth objective. |
| Keywords: | Financial regulation; global financial markets; growth; competitiveness |
| JEL: | F43 G18 G28 L50 |
| Date: | 2024–12–06 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1098 |
| By: | Reddy, Niall |
| Abstract: | A large literature in heterodox political economy addresses an apparent puzzle in which investment has declined while profits have held up during the financialization era. The dominant answer to this puzzle centers on the rise of shareholder value orientation and the “downsizing and distributing” (DD) imperative it imposes on firms. Yet the detailed empirical literature on the topic - focussed on partial effects - pays precious little attention to actual observed patterns of growth, investment and distribution at a firm level. Digging deep into firm level data and correcting several conceptual and measurement errors, this paper challenges several key stylized facts of the financialization account, revealing a different set of patterns which are very difficult to square with stronger versions of DD theory. It shows that the profit-investment puzzle is not a paradox of the financialization era, but only of the post-2000 period. Similarly, the ramping up of payout rates only happens in a broad way after the turn of the millennium. While financialization theories cannot account for the 2000s watershed I argued that a trifecta of other structural shifts can. Ultimately this paper questions the widespread practice of giving analytical priority to financialization in heterodox political economy. |
| Date: | 2024–04–01 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:2zy5h_v2 |
| By: | Ana Paula Cusolito; Roberto N. Fattal Jaef; Fausto Andres Patino Pena; Singh, Akshat Vikram |
| Abstract: | This paper characterizes finance allocation distortions in capital markets across state-owned and private-owned enterprises. It does so by implementing Whited and Zhao’s (2021) methodology to infer idiosyncratic financial distortions on a novel firm-level database containing information on the ownership structure of firms operating in 24 European countries during 2010–16. The analysis finds that firms with public authorities as direct shareholders (state-owned enterprises) have subsidized access to debt and equity, compared to their private counterparts. The paper then quantifies the macroeconomic effects of removing state-owned firms and reallocating their financial resources toward the private sector. The findings show that although state-owned enterprises are on average subsidized relative to private firms, removal of state-owned enterprises from the market may lead to aggregate productivity losses of up to 40 percent due to their superior technical efficiency in some sectors. Targeted reforms that only shut down poorly performing state-owned enterprises lead to aggregate total factor productivity gains in every country, reaching up to 15 percent. Reforms that in addition remove distortions before reallocating the released resources toward more productive firms increase productivity up to 83.7 percent. |
| Date: | 2024–09–25 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10929 |
| By: | Can Sever |
| Abstract: | Economic growth in the advanced economies (AEs) has been slowing down since the early 2000s, while government debt ratios have been rising. The recent surge in debt at the onset of the Covid-19 pandemic has further intensified concerns about these phenomena. This paper aims to offer insight into the high-debt low-growth environment in AEs by exploring a causal link from government debt to future growth, specifically through the impact of debt on R&D activities. Using data from manufacturing industries since the 1980s, it shows that (i) government debt leads to a decline in growth, particularly in R&D-intensive industries; (ii) the differential effect of government debt on these industries is persistent; and (iii) more developed or open financial systems tend to mitigate this negative impact. These findings contribute to our understanding of the relationship between government debt and growth in AEs, given the role of technological progress and innovation in economic growth. |
| Keywords: | Government debt; fiscal policy; economic growth; R&D; innovation; financial development |
| Date: | 2025–02–07 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/036 |
| By: | Amat Adarov; Clements, Benedict; Jalles, João Tovar |
| Abstract: | The paper examines the macroeconomic effects of public investment in emerging market and developing economies. To this end, the analysis develops a new measure of public investment shocks based on cyclically adjusted government investment. Estimations using local projections based on a large sample of 129 countries over 1980–2019 suggest that public investment can significantly boost economic growth: an increase in public investment by 1 percent of gross domestic product raises output by 1.1 percent after five years, on average. However, the effects are much larger when public investment spending is efficient and fiscal space is ample—reaching up to 1.6 percent over the same period. Public investment multipliers tend to be larger during recessions and in capital-scarce economies. The paper also finds that public investment can crowd in private investment, as well as boost productivity and potential output. |
| Date: | 2024–10–22 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10954 |
| By: | John Nana Darko Francois; Maty Konte; Franz Ulrich Ruch |
| Abstract: | Current investment trends in emerging market and developing economies are not enough to meet the needs of their growing populations and will fall short of achieving the Sustainable Development Goals related to human and physical capital development. Public investment can play a critical role in addressing this shortfall, especially if it can crowd-in private investment. Using theory and panel data for 109 developing countries from 1980–2019, this paper investigates whether public investment crowds in or crowds out private investment. The paper also explores how the relationship changes across different groups of countries and under different institutional settings. The analysis uses changes in predicted disbursements on loans from official creditors to developing country governments as an instrument for changes in public investment. The findings show that public investment is a complement to private investment, raising the marginal productivity of the latter. As a result, an extra dollar of public investment raises private investment by 1.6 dollars. The findings also reveal stronger evidence of crowding-in of private investment in low-income countries and Sub-Saharan Africa, where investment needs are greatest. Finally, the findings are embedded in a model with imperfect capital markets, which shows that public investment can be used as an effective vehicle to address underinvestment issues induced by capital market distortions. |
| Date: | 2024–08–26 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10881 |
| By: | Amat Adarov; Panizza, Ugo |
| Abstract: | This paper introduces a novel index to measure public investment quality, utilizing the World Bank’s investment project performance data from 120 countries over 2000–21. After detailing the construction of the index, the paper examines how public investment quality influences the relationship between the level of public investment and sovereign risk. The findings show that high levels of public investment are linked to lower sovereign risk in countries with high investment quality and, conversely, to higher sovereign risk in countries with low investment quality. This relationship is especially pronounced in sub-investment grade countries. These results are corroborated by showing that when public investment quality is high, scaling up public investment enhances fiscal sustainability by reducing the ratio of debt to gross domestic product in the long run: high-quality public investment is self-financing. However, the opposite is true when public investment quality is low, where increased public investment results in a deterioration of fiscal fundamentals. |
| Date: | 2024–08–21 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10877 |
| By: | Sebastian Andreas Horn; David Mihalyi; Nickol, Philipp; Sosa-Padilla, César |
| Abstract: | How reliable are public debt statistics? This paper quantifies the magnitude, characteristics, and timing of hidden debt by tracking ex post data revisions across a comprehensive new database of more than 50 vintages of World Bank debt statistics. In a sample of debt data covering 146 countries and 53 years, the paper establishes three new stylized facts: (i) debt statistics are systematically under-reported; (ii) hidden debt accumulates in boom years and tends to be revealed in bad times, often during IMF programs and sovereign defaults; and (iii) in debt restructurings, higher hidden debt is associated with larger creditor losses. The novel data is used to numerically discipline a quantitative sovereign debt model with hidden debt accumulation and an endogenous monitoring decision that triggers revelations. Model simulations show that hidden debt has adverse effects on default risk, debt-carrying capacity and asset prices and is therefore welfare detrimental. |
| Date: | 2024–09–16 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10907 |
| By: | Fisera, Boris; Martin Melecky; Dorothe Singer |
| Abstract: | Financial deepening contributes to economic development, but its effect on the carbon intensity of production is an open empirical question. If banks finance investments in new, greener technologies, they can contribute to lowering carbon dioxide emissions per unit of output. But if they finance investments in more traditional, carbon-intensive technologies, they can contribute to increasing carbon dioxide emissions per unit of output. This paper studies the impact of financial deepening—an increased provision of bank credit as a share of gross domestic product—on carbon dioxide emissions per dollar of gross domestic product in a global sample of 125 economies from 1990 to 2019. Using a local projections approach, the paper finds that, on average, financial deepening leads to a relative increase in carbon dioxide emissions per dollar of gross domestic product, indicating that financial institutions finance relatively more carbon-intensive investments and consumption. However, a better institutional environment mitigates this adverse effect of financial deepening: conditional local projections reveal that in countries with more environmental regulations, a stronger rule of law, and a financial system that is relatively more market- than bank-based, financial deepening does not lead to higher carbon dioxide emissions per dollar of gross domestic product. Specifically, the results show that countries with an initially lower carbon intensity of production can mitigate the average adverse effect of financial deepening on carbon dioxide emissions per dollar of gross domestic product by improving their general institutional environment proxied by adherence to the rule of law, and, to some extent, by developing their financial markets. By contrast, countries with an initially higher carbon intensity of production are better off focusing on environmental regulations to mitigate the unconditional adverse effect of financial deepening on carbon dioxide emissions per dollar of gross domestic product. |
| Date: | 2024–10–07 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10948 |
| By: | Francisco E. Ilabaca; Robert Mann; Philip Mulder |
| Abstract: | This paper shows that when natural disasters hit low-income countries, banks operating in those countries reduce their cross-border lending (Working Paper no. 24-05). |
| Keywords: | International Lending, Global Banks, Climate Finance, Natural Disasters, Information Frictions |
| Date: | 2024–07–23 |
| URL: | https://d.repec.org/n?u=RePEc:ofr:wpaper:24-05 |