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on Financial Development and Growth |
| By: | Cusolito, Ana Paula; Fattal Jaef, Roberto N.; Mare, Davide Salvatore; Singh, Akshat Vikram |
| Abstract: | This paper leverages the novel methodology by Whited and Zhao (2021) to identify financial distortions and applies it to a sample of 24 European countries. The analyses reveal that less developed economies face more severe financial misallocation. Distortions in the allocation of financial resources raise the relative cost of finance for younger, smaller, and more productive firms. Counterfactual analysis indicates that alleviating financial distortions could boost aggregate productivity by approximately 30-70 percent. On average, 75 percent of these gains across countries result from better access to finance, with the remainder from optimizing the debt-to-equity ratio. The paper also quantifies the link between financial misallocation and real-input allocative inefficiency, showing that reducing financial misallocation from the median to the 25th percentile of the cross-industry distribution can increase aggregate productivity by an average of 5.2 percent. The effect is larger, at 6.4 percent, for industries heavily reliant on external finance. |
| Date: | 2024–06–20 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10811 |
| By: | Maria Bigoni (University of Bologna); Gabriele Camera (Economic Science Institute, Chapman University); Marco Casari (University of Bologna) |
| Abstract: | Historically, shocks originating in the financial sector often spilled over into the real sector with dramatic consequences. We study in the lab how interventions targeting disclosure and capital requirements of financial intermediaries can reduce insolvencies or prevent their negative effects from propagating to the broader economy. In our two-sector economy, consumers and producers can fund financial intermediaries, who in turn provide them with liquidity to settle trades. However, intermediaries may undertake risky investments and become insolvent, which depresses real economic activity. In the experiment, insolvencies were frequent. As a consequence, consumers and producers often refused to fund intermediaries, which lowered the trade volume. Imposing the disclosure of risky investments did not reduce risk-taking and insolvencies. Instead, imposing capital requirements prevented insolvencies from disrupting real economic activity, thus boosting financial intermediation and trade. |
| Keywords: | Asymmetric information; Laboratory experiment; Limited Liability; Prudential regulation |
| JEL: | C92 D82 E44 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:chu:wpaper:24-18 |
| By: | Beck, Thorsten; Cull, Robert J.; Mare, Davide Salvatore; Valenzuela, Patricio |
| Abstract: | This paper surveys existing literature and data to take stock of the current state of banking systems across Sub-Saharan Africa. It documents different dimensions of the development of the banking systems in the region and compares Africa’s banking systems to those of comparable low- and lower-middle-income countries outside the region. The paper also discusses the progress in policies and institutions underpinning financial deepening and the results of specific innovations to reach traditionally unbanked segments of the population, such as innovative branch expansion programs, mobile banking, and new financial products. In view of the COVID-19 pandemic, the paper discusses government support for financial systems and banking sector performance during crises. Overall, the survey shows a picture of achievements and challenges, with progress along some fronts but other challenges persisting even as new ones arise, including the turning of the global financial cycle in 2022/23 and increasing geopolitical tensions. |
| Date: | 2023–12–07 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10632 |
| By: | Vargas Da Cruz, Marcio Jose; Pereira Lopez, Mariana De La Paz; Salgado Chavez, Edgar |
| Abstract: | This paper investigates the relationship between disruptive technologies and access to finance for digital tech firms in Africa. Through textual analysis of data from Crunchbase and Pitchbook, the study explores how firms across different age cohorts incorporate disruptive technologies into their offerings in e-commerce, fintech, and information technology services. The findings reveal three key insights for African digital tech startups. First, African startups are less likely to incorporate disruptive technologies into their offerings compared to other regions, except for mobile payments. Second, incorporating these technologies is associated with more funding, but this link is weaker in Africa than in other regions. These results hold when excluding mobile payments and addressing potential endogeneity using instrumental variables. Third, firms that do incorporate disruptive technologies tend to secure funding earlier, with lower initial amounts, but are more likely to succeed in terms of exit or valuation growth than their peers. |
| Date: | 2023–12–07 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10633 |
| By: | Indarte, Sasha; Kanz, Martin |
| Abstract: | Households in developing economies have greater access to formal credit today than at any point in history, owing to the global expansion of microfinance and recent innovations in consumer finance, such as digital lending. Although this has improved the ability to smooth consumption and invest in productive activities, it has also raised concerns about over-indebtedness. Against this background, this paper reviews and extends the literature on debt relief for households in developing countries. It begins by laying out a simple stylized model that illustrates the costs and benefits of debt relief. The model is used to guide the review of the evidence on various relief policies, such as debt forbearance, debt forgiveness, and personal bankruptcy. The paper additionally presents survey evidence from a population of microfinance and bank borrowers with recent exposure to debt relief. The results highlight that an important downside of discretionary debt relief policies, which are common in developing countries, is their potential to affect borrower expectations and create moral hazard. The development of legal bankruptcy institutions that offer a rules-based avenue to discharge unsustainable debts is a promising path to alleviate the credit market inefficiencies that have often accompanied debt relief initiatives in developing economies. |
| Date: | 2024–06–25 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10819 |
| By: | Lluberas, Rodrigo |
| Abstract: | The functioning of the banking sector is key for economic growth. In this paper, we first gather banks' balance sheet monthly regulatory information in a consistent manner for seven Latin American countries. Second, we estimate lending markups and deposits markdowns in each country over time. Third, with the estimated markups and markdowns in the different countries we study how they relate with banks' profitability, the cost of credit, credit risk and credit supply. Finally, we explore whether there are differences in markups on lending rates and markdowns on deposit rates between international and domestic banks. |
| Keywords: | Banking;Markups;markdowns;Market concentration |
| JEL: | E44 L11 L16 G21 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:13988 |
| By: | Alexandros Ragoussis; Rigo, Davide; Santoni, Gianluca |
| Abstract: | Using two decades of granular data on foreign direct investments, this study shows a consistent global rise in the concentration of cross-border investments within fewer multinational firms. This concentration is most prominent in developing economies, reaching record highs in recent years. Structural shifts into services do not stand out as the primary driver of variation in investment concentration across countries and over time. Instead, concentration has grown significantly more in destinations facing high economic uncertainty. |
| Date: | 2024–06–24 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10815 |
| By: | Ana M. de Almeida; Graeme Walsh; Horatiu Lovin; Marek Benda; Wilko Bolt |
| Abstract: | This article provides an overview of recent developments in the EU-UK foreign direct investment (FDI) relationships since Brexit. We begin with a conjunctural analysis that looks at recent trends in EU-UK FDI at a broad level, which includes detail at the sectoral and geographical level. Also included in the conjunctural analysis is a breakdown of foreign affiliates and an investigation of new FDI projects and jobs in the UK. We then look at recent developments in the financial sector, in terms of the real economy, FDI flows, banks, insurance companies, pension funds, and its evolving status as a leading global financial centre. The final part of the article turns to non-conjunctural analysis and provides an econometric investigation into the potential impact of Brexit in EU-UK FDI using a gravity-modelling approach. The formal analysis is a non-trivial exercise because the Brexit period overlaps with other significant events, such as the COVID-19 pandemic. Compared to a no-Brexit scenario, we find that Brexit contributed to a decline in EU FDI flows between the EU and the UK of around 4 per cent. Furthermore, business relocations involving temporary capital flows among important European financial centers marked the significant challenge the UK exit from the EU brought to the financial sector. |
| JEL: | F21 F36 C54 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:o202403 |
| By: | Islam, Asif Mohammed; Nguyen, Ha |
| Abstract: | The Covid-19 pandemic, followed by financial tightening due inflationary pressure, has raised public debt in developing economies as governments grapple with public health investments to curb the pandemic and collapse in revenues due to slower economic activity. The rise in debt may further disrupt the formal private sector in developing economies. Using two to three waves of panel firm-level data across developing economies, this study finds that higher public debt is correlated with low investment by formal private sector firms. The finding is largely driven by small and medium-size enterprises, domestic firms, and non-exporters — raising concerns about the distributional impacts. Potential channels are uncovered. High levels of debt reduced the accessibility of finance for private sector firms, limiting investment. Furthermore, a regulatory channel is observed. As public debt rises, firms spend more time with regulatory and tax officials, which is possibly indicative of higher efforts of governments to raise revenues. This channel is stronger for small and medium-size enterprises. |
| Date: | 2024–06–03 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10786 |
| By: | Fiuratti, Federico Ivan; Nikolova, Desislava Enikova; Pennings, Steven Michael; Schiffbauer, Marc Tobias |
| Abstract: | The European Commission’s “NextGenerationEU” COVID-19 recovery package has underscored interest in the size of regional fiscal multipliers in Europe. While the objective of these funds is the long-term transformation toward more sustainable green growth and digitalization in EU economies, several recent papers have also focused on their short-term stimulatory effects and have estimated large short-term regional multipliers on historical EU structural and investment fund spending. This has contributed to a view that EU funds can boost growth substantially not only in the long term, but also in the short term in countries receiving large flows, particularly in Central and Eastern Europe. This paper reevaluates the evidence by estimating regional short-term multipliers using recent data on EU fund spending and a leave-one-out predicted disbursement schedule instrument. In contrast with much of the recent literature, there is little evidence of large relative GDP multipliers at either the national or subnational level in the short term. This is despite a strong response of regional investment to EU funds, which often increases euro for euro. The results suggest that expectations should be tempered on using EU structural and investment funds as a tool for short-term regional fiscal stimulus, and instead policy makers may want to focus on the long-term benefits of EU funds, in line with their original purpose. |
| Date: | 2024–01–09 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10658 |
| By: | Andreea Maura Bobiceanu (Babes-Bolyai University); Simona Nistor (Babes-Bolyai University - Department of Finance); Steven Ongena (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)) |
| Abstract: | We leverage differences in central bank independence and financial stability sentiment across countries to investigate the variability in banks' stock market reactions to prudential policy announcements during the COVID-19 crisis. Our findings reveal that the relaxation of both macro and micro-prudential policies leads to negative cumulative abnormal returns (CARs), the reaction being attenuated in countries where the central bank is more independent or communicates deteriorations in financial stability. The CARs around the announcement dates are 0.75 percentage points (pp) and 6.89 pp higher in countries with greater versus lesser central bank independence, for macro- and micro-prudential policy announcements. The difference is close to 3.73 pp and 5.65 pp between banks based in countries where the central bank communicates a negative versus a positive sentiment about financial stability. The positive effect of higher degrees of central bank independence and deteriorations in financial stability sentiment on bank market valuation is enhanced for smaller banks, and in countries characterized by greater fiscal flexibility, and a higher prevalence of privately owned banks. |
| Keywords: | stock market reaction, macro-prudential regulation, micro-prudential regulation, central bank independence, financial stability sentiment |
| JEL: | E61 G14 G21 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2511 |
| By: | Gáspár, Attila; Sandström, Alexandra; Watson, Taylor; Wochner, Timo |
| Abstract: | Müller (2023) presents evidence for electoral cycles in macroprudential policy in a sample of 58 countries from 2000 through 2014. Consistent with theoretical arguments, the pattern of looser regulation is larger when election outcomes are uncertain and institutions are weak. In this replication, we first conduct a fully successful computational reproduction, using the provided replication package. We then subject the paper's main results to a series of robustness tests, involving measuring the dependent variable differently, bootstrapping standard errors, and applying different specifications of the main estimations. We also use new data, extending the covered time period, and re-examine the results. We find that the main results are robust to our robustness tests, but vanish using newer data. In an additional analysis, we provide suggestive evidence that the original results are based on rather limited variation in the dependent variable. |
| JEL: | D72 E32 G01 G21 G28 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:i4rdps:204 |
| By: | Metiu, Norbert |
| Abstract: | This paper describes the Bundesbank's weekly financial stress indicator for Germany. The indicator condenses several financial market variables into a summary measure of financial stress. It represents a contemporaneous, market-based indicator that captures the materialisation of systemic risk along three different risk dimensions - credit, liquidity and market risk. Judged by this measure, the German financial system has experienced its most severe financial stress period since 2002 during the 2008 global financial crisis, with highly elevated levels in all three dimensions of financial stress. The indicator also points to historically high stress levels during the euro area sovereign debt crisis in the early 2010s. Recent readings of the indicator, by contrast, indicate historically low levels of financial stress. |
| Keywords: | diffusion index, factor model, financial conditions, financial stability |
| JEL: | E44 E51 G12 G17 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubtps:312405 |
| By: | Bo Li; Alessandro Rebucci; Hui Tong |
| Abstract: | This paper develops a theory of preemptive controls on capital outflows by residents as a second-best tool to mitigate boom-bust cycles in domestic asset markets and prevent wealth transfers from uninformed traders to pump-and-dump speculators, or financial “looters, ” as in Akerlof and Romer (1993). The model implies that when domestic financial regulation is imperfectly designed or enforced, controls on residents' outflows reduce retail investor manipulation (which we call looting), stabilize asset prices, and diminish capital flight. The paper also provides compelling evidence that supports the main implications of the model when applied to housing markets, which is particularly relevant to institutions in developing countries. We find that deposit outflows to haven countries increase before busts in house prices, and countries with stricter controls on resident outflows experience significantly more contained deposit outflows to such destinations. The empirical analysis reveals a similar pattern for new incorporations in haven countries based on data from the Panama Papers. |
| JEL: | F3 G1 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33406 |
| By: | Ha, Jongrim; Liu, Haiqin; Rogers, John |
| Abstract: | Emerging markets and developing economies (EMDEs) exhibit significantly greater volatility in asset returns than advanced economies. The commonalities in these returns (and flows) across countries are particularly strong for EMDEs. If these occur independently of the exchange rate regime and if these global financial cycle effects are furthermore independent of countries’ financial openness, the result is Obstfeld (2022)’s “Lemma”: countries can do nothing to decouple from the global financial cycle. Under the prevalent view that U.S. monetary policy is the key driver of the global financial cycle, countries then inherit U.S. monetary policy no matter what they do on exchange rates or capital control policies. Using structural vector autoregression models for 78 countries over 1995–2019, as well as different methods of identifying U.S. monetary policy shocks from the literature, this paper tests the proposition that countries with less open capital accounts exhibit systematically smaller responses to U.S. monetary policy shocks than low capital control countries. This paper also considers the role of other institutional features such as exchange rate regimes and foreign exchange interventions in explaining cross-country differences in the responses to the shocks. The empirical results suggest that more stringent capital controls exhibit smaller responses of interest rates and exchange rates to U.S. monetary policy shocks and that this result holds more firmly for EMDEs than advanced economies. In contrast, the analysis finds only weak evidence that the degree of exchange rate flexibility affects U.S. spillovers to foreign interest rates and exchange rates. |
| Date: | 2023–10–04 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10582 |
| By: | Bou Habib, Chadi |
| Abstract: | This paper investigates the similarities between the economy of 1912 Mount Lebanon on the eve of the famine of 1916 and the economy of 2004 Lebanon that set the stage for the major economic and social crisis of 2019. A simple general equilibrium simulation shows that, as long as the Lebanese economy remains reliant on foreign inflows, crises will persist, with different manifestations. Regardless of the period considered, foreign inflows increase domestic prices and induce real appreciation. Low productive capacities and insufficient job creation lead to high emigration. Emigration increases the reliance on foreign inflows, which in turn increase domestic prices and reduce competitiveness, hence triggering further emigration and further reliance on foreign inflows. Income and prices increase, but exports decline, and growth remains volatile. The interruption of the flows of capital and goods and the impossibility to migrate due to the First World War drove Lebanon into starvation in 1916. The interruption of inflows of capital in 2019 led to a major crisis and massive outmigration, as predicted through the simulations based on the structure of the Lebanese economy in 2004. The simulations effectively capture the impact of external shocks on the Lebanese economy and closely align with the actual changes in economic variables during 2005 to 2020. |
| Date: | 2024–02–01 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10688 |
| By: | Julian Caballero; Sebastian Doerr; Aaron Mehrotra; Fabrizio Zampolli |
| Abstract: | Small and medium-sized enterprises (SMEs) in emerging market economies struggle to access credit, partly due to firms' short financial histories and lack of collateral. The rise of big tech and fintech lenders that make better use of data and digital innovation could reduce the need for collateral and improve SMEs' access to credit. However, big tech and fintech lending so far constitutes only a small share of the total. Digital innovation by itself may not be enough to substantially improve SME lending without further progress in overcoming more deep-seated obstacles. |
| Date: | 2025–02–27 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:99 |
| By: | Robert J. Kurtzman; Hannah Landel |
| Abstract: | Private depository institutions play a crucial role in the provisioning of credit in the United States. The two private depository sectors in the Financial Accounts of the United States (the Financial Accounts) serving as the primary lenders to households are U.S.-chartered depository institutions (banks) and credit unions. Credit unions mostly make loans to households, while banks make large shares of their loans to both households and businesses. |
| Date: | 2025–01–31 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2025-01-31-2 |
| By: | Jeffery Piao; K. Philip Wang; Diana L. Weng |
| Abstract: | Utilizing confidential microdata from the Census Bureau’s new technology survey (technology module of the Annual Business Survey), we shed light on U.S. banks’ use of artificial intelligence (AI) and its effect on their small business lending. We find that the percentage of banks using AI increases from 14% in 2017 to 43% in 2019. Linking banks’ AI use to their small business lending, we find that banks with greater AI usage lend significantly more to distant borrowers, about whom they have less soft information. Using an instrumental variable based on banks’ proximity to AI vendors, we show that AI’s effect is likely causal. In contrast, we do not find similar effects for cloud systems, other types of software, or hardware surveyed by Census, highlighting AI’s uniqueness. Moreover, AI’s effect on distant lending is more pronounced in poorer areas and areas with less bank presence. Last, we find that banks with greater AI usage experience lower default rates among distant borrowers and charge these borrowers lower interest rates, suggesting that AI helps banks identify creditworthy borrowers at loan origination. Overall, our evidence suggests that AI helps banks reduce information asymmetry with borrowers, thereby enabling them to extend credit over greater distances. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:cen:wpaper:25-07 |
| By: | Cull, Robert J.; Foster, Vivien; Jolliffe, Dean Mitchell; Lederman, Daniel; Mare, Davide Salvatore; Veerappan, Malarvizhi |
| Abstract: | Treating data collected pre- and post-COVID-19 as a quasi-experiment, this paper examines the importance of presumed enablers and safeguards in driving the observed expansion of digital payments and digital financial inclusion. The analysis interacts drivers of digital payment usage with a country-specific proxy of the severity of the COVID-19 shock, leveraging variation in both the drivers and the quasi-treatment (the COVID-19 shock) to identify the parameters. Although regulation of banks and digital economic activity were correlated with digital payments before and during the pandemic, the capabilities of users and connectivity (to electricity, the internet, and mobile telephony) were responsible for increased use of digital financial services in response to the shock. An interpretation is that governments and the private sector were able to overcome underdeveloped banking systems and weak regulation of the digital economy, but only where there was adequate digital infrastructure, connectivity, and a high share of the population that understood and could make use of digital payments. |
| Date: | 2023–11–13 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10603 |
| By: | Francisco E. Ilabaca; Vy Nguyen |
| Abstract: | Per CSBS, reporting standards for the NMLS MSB Call Report are still under development and reporting is also still being reviewed through the supervisory process. Accordingly, CSBS has advised that the 2021 MSB Call Report data can be used on a limited basis to estimate the: (i) total volume for MSB companies in the United States; and (ii) number of companies reporting in each MSB activity. Disclaimers have been made where appropriate to identify the limits of the NMLS MSB Call Report and its focus on money transmission. |
| Date: | 2023–05–30 |
| URL: | https://d.repec.org/n?u=RePEc:ofr:ofrblg:23-13 |
| By: | Jaccard, Ivan; Kockerols, Thore; Schüler, Yves |
| Abstract: | Does it pay to invest in green companies? In countries where a market for carbon is functioning, such as those within the European Union, our findings suggest that it should be beneficial. Using a sample of green and brown European firms, we initially demonstrate that green companies have outperformed brown ones in recent times. Subsequently, we develop a production economy model in which brown firms acquire permits to emit carbon into the atmosphere. We find that the presence of a well-functioning carbon market could account for the green equity premium observed in our data. Incorporating a preference for green financial assets is also unlikely to overturn our results. JEL Classification: E32, Q51, G18 |
| Keywords: | asset pricing, composite habits, equity premium, general equilibrium, monopolistic competition |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253030 |
| By: | Priftis, Romanos; Schoenle, Raphael |
| Abstract: | We construct a New-Keynesian E-DSGE model with energy disaggregation and financial intermediaries to show how energy-related fiscal and macroprudential policies interact in affecting the euro area macroeconomy and carbon emissions. When a shock to the price of fossil resources propagates through the energy and banking sector, it leads to a surge in inflation while lowering output and carbon emissions, absent policy interventions. By contrast, imposing energy production subsidies reduces both CPI and core inflation and increases aggregate output, while energy consumption subsidies only lower CPI inflation and reduce aggregate output. Carbon subsidies instead produce an intermediate effect. Given that both energy subsidies raise carbon emissions and delay the “green transition, ” accompanying them with parallel macroprudential policy that taxes dirty energy assets in bank portfolios promotes “green” investment while enabling energy subsidies to effectively mitigate the adverse effects of supply-type shocks, witnessed in recent years in the EA. JEL Classification: E52, E62, H23, Q43, Q58 |
| Keywords: | DSGE model, energy sector, energy subsidies, financial frictions, macroprudential policy |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253032 |