|
on Financial Development and Growth |
| By: | Bryan Hardy; Can Sever |
| Abstract: | What is needed for poor countries to catch up with rich ones? This paper first documents the role of human capital, physical capital, and financial development in convergence in manufacturing labor productivity across countries, and then examines the influence of economic structure and financial development at the aggregate level. Using industry-level data from manufacturing industries in a large set of countries over the period 1980-2022, we show that manufacturing industries exhibit strong unconditional convergence over time, but there is variation in the pace of convergence: Greater reliance on human capital in an industry is linked to faster convergence, whereas dependence on physical capital has no bearing. Instead, industries with a greater dependence on physical capital see convergence only if there is sufficient financial development. At the country level, we find that convergence tends to be faster as countries shift away from agriculture (which typically requires less human capital), and towards industrial production or services. Furthermore, poorer countries that initially have a higher share of agriculture in their GDP have been shifting away from agriculture at a faster rate, which may have contributed to the observed aggregate convergence. Greater financial development is also linked to faster convergence at the country level. |
| Keywords: | Productivity; convergence; financial development; capital; human capital; structural transformation |
| Date: | 2025–06–13 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/112 |
| By: | Mr. Nathaniel G Arnold; Allan Dizioli; Alexandra Fotiou; Jan-Martin Frie; Ms. Burcu Hacibedel; Tara Iyer; Ms. Huidan Huidan Lin; Mr. Malhar S Nabar; Mr. Hui Tong; Mr. Frederik G Toscani |
| Abstract: | Focusing on a cross-border perspective, this paper identifies four key binding constraints that hinder firms’ ability to innovate and scale up within the EU single market—fragmented regulations, inefficient financial intermediation, limited labor mobility, and fragmented energy market. To address these constraints and facilitate firms’ cross border scale up, investment and innovation, the paper proposes key action areas for deepening the integration of the single market, including lowering regulatory fragmentation, advancing the capital markets union, enhancing labor mobility within the EU, and integrating the EU energy market. Through illustrative scenarios, the paper highlights that a few actionable steps along these dimensions could lead off the process of deeper integration and deliver a meaningful initial payoff by increasing the EU GDP level relative to baseline by around 3 percent over 10 years—a sizable improvement considering that the EU potential growth is projected to be just above 1 percent annually over this horizon. |
| Keywords: | single market; 28th regime; productivity; scale up; capital markets union |
| Date: | 2025–06–13 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/113 |
| By: | Le Ngoc, Anh (University of Economics Ho Chi Minh City); Heshmati, Almas (University of Economics Ho Chi Minh City) |
| Abstract: | This study examines the dual impact of Foreign Direct Investment (FDI) on sustainable economic growth in Asia, focusing on its effects on Green GDP, greenhouse gas (GHG) emissions, and the Environmental Performance Index (EPI). Using data from 38 Asian countries spanning 1999 to 2022 and employing a two-step GMM regression analysis, the findings reveal that while FDI positively influences Green GDP growth, it concurrently exacerbates GHG emissions and reduces EPI scores. These results underscore the paradoxical role of FDI in fostering economic growth while posing environmental challenges. The study highlights the importance of robust environmental policies, investment in green technologies, and regional cooperation to align FDI with sustainability goals. It also emphasizes the need for a balanced approach to leverage FDI's economic benefits without compromising environmental integrity. This research contributes to the literature by providing a comprehensive analysis of FDI's environmental and economic implications in the Asian context, offering policy recommendations for achieving sustainable development. |
| Keywords: | sustainable economic growth, green economy, foreign direct investment, Asia |
| JEL: | F20 F21 O11 O44 O53 Q56 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17900 |
| By: | Marco Jacopo Lombardi; Cristina Manea; Andreas Schrimpf |
| Abstract: | We construct a new financial conditions index for the United States based on a dynamic factor model applied to a broad set of financial prices and yields. The resulting two latent factors capture, respectively, the general level of safe interest rates and an overall measure of perceived and priced financial risk. Analysing the interaction between these factors and the macroeconomy, we find that: (i) both factors are affected significantly by monetary policy; (ii) positive shifts in both factors lead to a persistent contraction in economic activity; (iii) relative to the safe interest rates factor, the risk–related factor exhibits stronger predictive power for economic activity. Our results are consistent with both the demand and the credit channels of monetary policy being at work, and emphasize that isolating movements in safe interest rates from shifts in perceived financial risk is essential to accurately assess the transmission of financial conditions to economic activity. |
| Keywords: | financial conditions, monetary policy, financial accelerator, dynamic factor model |
| JEL: | C38 E52 G10 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1272 |
| By: | Tore Dubbert; Adrian Schroeder |
| Abstract: | We estimate output gaps and financial cycles using a cross-country sample comprising Germany, the United States, and the United Kingdom by extending the approach of Berger, Richter & Wong (2022). Specifically, we apply the trend-cycle decomposition of Beveridge & Nelson (1981) within Bayesian vector autoregression models but select different sets of conditioning variables and shrinkage parameters for output gaps and financial cycles – i. e. credit and property price cycles – in each country. As demonstrated by our cross-country results, this strategy yields more realistic estimates of financial cycle amplitudes while retaining reliable output gap estimates. Our results further indicate that large, positive Beveridge-Nelson-based financial cycles, unlike traditional financial cycles, should not be interpreted as early warning indicators of systemic risk. Instead, they indicate periods of financial overhang that may impose constraints on the broader economy. |
| Keywords: | output gap, financial cycle, Beveridge-Nelson decomposition, Bayesian VAR |
| JEL: | C32 E32 E51 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:cqe:wpaper:11225 |
| By: | Christian Bayer; Fabio Stohler |
| Abstract: | If households self‐select into a risky high‐income state through investment, increased government debt can stimulate investment and improve welfare. In a heterogeneous agent endogenous growth model, government debt helps households smooth consumption and encourages investment in risky, high‐return assets, crowding in aggregate growth. However, when debt becomes excessive, capital crowding out and distortionary taxation negate these benefits. Using a model calibrated to U.S. data, we show that this crowding‐in effect suggests a higher optimal debt‐to‐GDP ratio than currently observed. |
| Keywords: | Incomplete Markets, Public Debt, Endogenous Growth, Portfolio Choice |
| JEL: | D31 E21 G11 H63 O43 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_691 |
| By: | Felix Martin (Center for Global Development) |
| Abstract: | This working paper analyses the evolution of China’s role in international development finance and explores how that role might develop over the next five years. China's rise as one of the world economy’s leading trading nations over the past 25 years has been extensively analysed. The growth and persistence of unprecedented global financial imbalances—reflecting in part the so-called “China shock” to the world trading system—is also well documented. China’s emergence in more recent years as the single largest bilateral official lender to developing country sovereigns under the auspices of the Belt and Road Initiative (BRI) has also been the subject of detailed academic and policy research. This working paper seeks to add value by demonstrating the connections between these three trends, and by analysing how they relate to the recent evolution of international financial flows—and especially private financial flows to developing countries—more broadly. The working paper concludes that as a result of the reversal of private capital inflows since 2021, China is increasingly confronted by a policy trilemma, according to which it will be forced to choose between (1) scaling back lending under the Belt and Road Initiative; (2) delaying or abandoning its commitment to the internationalization of the Chinese yuan; or (3) making domestic policy adjustments to revive capital inflows. Precisely because China is now such a dominant player in global trade and finance, whichever choice it makes will imply systemic consequences for the international monetary and financial system. As a result, China’s future role in international development finance will depend significantly on the increasingly contested geopolitical context for global trade and finance generally. |
| Date: | 2025–06–11 |
| URL: | https://d.repec.org/n?u=RePEc:cgd:wpaper:721 |
| By: | Regina Grafe (University of Cambridge) |
| Abstract: | Economic Historians have long assumed that colonial Spanish American finance was poorly developed. 19th and 20th century fiscal and financial woes of Spanish American societies were read as part of a colonial legacy that weighed on former Spanish colonies from their moment of Independence (1808-20s). A sizeable theoretical literature has offered possible causal links between colonial rule and poorly developed financial intermediation pointing primarily to a lack of secure property rights. This paper seeks to propose an alternative explanatory path. It discusses the existence of a sui generis financial system that provided cheap and ubiquitous public and private credit. It analyses the subscriptions to one particularly large loan to the public purse in the 1770s to zoom in on the functioning of public credit, its link with private finance, the composition of the subscribers, and the role of the merchant corporation. The paper suggests that reading the evidence within a theoretical frame of financialisation may be more helpful than the traditional institutionalist political economy analysis. While the concept of financialisation is at present poorly theorised, it helps to ask important questions about the economic impact of easy credit in colonial Spanish America. |
| JEL: | N26 O16 |
| Date: | 2025–01–27 |
| URL: | https://d.repec.org/n?u=RePEc:cmh:wpaper:40 |
| By: | Pereira, Thales Zamberlan (São Paulo School of Economics / FGV) |
| Abstract: | Drawing on 20, 000 monthly quotations, this study revises imperial Brazil's inflation and living standards estimates. The new price index eliminates the nineteenth-century ‘low-growth puzzle’: Brazil’s GDP per capita rose in line with the Latin-American average. Earlier series, which relied on baskets disproportionately weighted toward agricultural goods or whose composition varied over time, display continuous growth and overstate inflation by 57–270%. The revised index reveals a sharp rise in the 1850s and stability thereafter. New evidence on exchange and freight rates, terms of trade, regional commerce, and real wages shows that regional specialization in food production helped stabilize prices after the mid-century. |
| Date: | 2025–05–31 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:y5fnp_v1 |
| By: | Jose M. Berrospide; Fang Cai; Siddhartha Lewis-Hayre; Filip Zikes |
| Abstract: | Private credit (or private debt) has emerged as one of the fastest-growing segments of nonbank financial intermediaries (NBFIs) over the past 15 years or so. Although there is no universal definition, private credit generally refers to direct loans made to mid-market businesses typically by non-bank vehicles such as private debt (PD) funds and Business Development Companies (BDCs) (Cai and Haque, 2024; Haque, Mayer, and Stefanescu, 2025). The asset class totaled $1.34 trillion in the U.S. (Exhibit 1) and nearly $2 trillion globally by 2024-Q2, and has grown roughly five times since 2009. |
| Date: | 2025–05–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2025-05-23 |
| By: | Samiha Tariq; Weikang Zhang |
| Abstract: | This study explores the interdependent relationship between consumer credit and consumer confidence in the United States using monthly data from January 1978 to August 2024. Utilizing a Vector Error Correction Model (VECM), the analysis focuses on the interplay between household borrowing behaviour and consumer sentiment while controlling for macroeconomic factors such as interest rates, inflation, unemployment, and money supply. The results reveal a stable long-run equilibrium: heightened consumer confidence is associated with increased credit utilization, reflecting greater financial optimism among households. In the short run, shifts in consumer confidence exert relatively modest immediate influence on credit usage, whereas consumer credit adjusts slowly, displaying significant inertia. Impulse-response analysis confirms that shocks to consumer confidence generate sustained positive effects on borrowing, while unexpected increases in credit initially depress sentiment but only fleetingly. These findings underscore the critical role of the relationship between consumer confidence and credit-market dynamics and highlight its policy relevance for fostering balanced and stable household finances. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2505.21832 |
| By: | Daniel Barth; Stacey L. Schreft |
| Abstract: | This article refines the concept of black swans, typically described as highly unlikely and catastrophic events, by clearly distinguishing between knowable and unknowable events. By emphasizing that black swans are “unknown unknowns, ” the article highlights that the realization of new black swans cannot be prevented and motivates a need for policies that build the financial system's resilience to unforeseeable crises. The article introduces a "resilience principle" that calls for policies that are adaptable, universal, and systemic. Examples are provided of policies with these features, none of which relies on the official sector being better positioned than the private sector to anticipate the unknown. |
| Keywords: | Black Swans; Systemic Risk; Uncertainty; Financial Stability |
| JEL: | G01 G10 E44 D80 H41 |
| Date: | 2025–06–06 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-43 |
| By: | Patrick A. Imam; Jonathan R. W. Temple |
| Abstract: | During a major crisis, the transitional dynamics of conditional convergence are unlikely to apply. In this paper, we introduce a Markov chain approach which integrates the study of crises and convergence. We allow upwards and downwards mobility to change when a country enters a crisis regime. We find that conflict and debt crises help to explain the persistence of low relative income, and that the convergence process has changed over time. Faster global convergence in the early 2000s can be attributed partly to fewer and shorter crises, so the multiple shocks after 2020 are likely to have slowed income convergence. |
| Keywords: | Convergence; crisis; economic growth; development accounting |
| Date: | 2025–06–13 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/116 |
| By: | Jonas Cekal (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Adam Gersl (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | This paper deals with the effectiveness of crisis management measures used by national authorities to tackle a systemic banking crisis. Quarterly panel dataset of 69 countries over the time span 1970 to 2023 was created and a total of 54 crisis periods were examined based on the identification of various sources. The estimation employs two-way fixed effects model in difference-in-differences design to examine the effect of individual policies on the economy as represented by real GDP, house prices and credit. We find a significant effect of bank nationalizations and deposit freezes on the increases of real GDP growth and nominal house prices growth. On the contrary, we were not able to draw any conclusions from the analysis of the remaining measures such as liquidity support, bank recapitalizations or asset purchases. |
| Keywords: | State financial support, Bailout, Economic growth, Financial stability, Systemic banking crisis |
| JEL: | G01 G21 G28 E65 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:fau:wpaper:wp2025_10 |
| By: | Jin-Wook Chang; Grace Chuan |
| Abstract: | The isolated effects of collateral reuse on financial stability are ambiguous and understudied. While greater collateral reuse can guarantee more payments with fewer assets, it can also increase the exposure to potential drops in collateral price. To analyze these tradeoffs, we develop a financial network model with endogenous asset pricing, multiple equilibria, and equilibrium selection. We find that more collateral reuse decreases the likelihood of the worst equilibrium (crisis), with varying effects depending on the network structure. Therefore, collateral reuse can unambiguously improve financial stability for a fixed degree of risk-taking behavior. However, with endogenous risk-taking, we show that a higher degree of collateral reuse can worsen financial stability through greater risk-taking. As a result, while crises may occur less frequently, their severity would increase, leading to a lower social surplus during crises. |
| Keywords: | Collateral; Collateral reuse; Financial network; Fire sale; Multiple equilibria; Equilibrium selection; Systemic risk |
| JEL: | D49 D53 G01 G21 G33 |
| Date: | 2025–05–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-35 |
| By: | International Monetary Fund |
| Abstract: | This inaugural Financial Sector Assessment Program (FSAP) in Uzbekistan took place against the backdrop of a strong and resilient economy undergoing wide-ranging reforms. The main objectives of the authorities’ strategy for developing the banking sector are to significantly increase the role of private banks and improve the operations of the remaining state-owned commercial banks. |
| Date: | 2025–06–24 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfscr:2025/145 |
| By: | Miriam Bruhn; Federico Alfonso Diaz Kalan; Nicolo Fraccaroli; Claudia Ruiz Ortega |
| Abstract: | This paper studies the impact of a World Bank program aimed at promoting access to finance for micro, small, and medium-size enterprises in Ecuador. A staggered difference-in-differences method is used to estimate the impact of the program on 2, 035 participant firms during 2019–23. The findings show that the program had a positive effect on these firms, by boosting their financing, number of workers, short-term assets, and sales. This effect is similar when enterprises are female-led and is larger for firms that had no previous access to finance. |
| Date: | 2025–05–13 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:11121 |
| By: | Tatsuo USHIJIMA; Takafumi SASAKI |
| Abstract: | This study investigates the value of corporate diversification in Japanese firms with particular attention to its dynamics. Our analysis, based on a panel of listed nonfinancial firms, indicates that the value of diversification increases substantially when external capital is costlier or more difficult to access. Moreover, this tendency is more pronounced for firms in which divisional cash flows are less positively correlated. This pattern implies that coinsurance is instrumental to the observed association between the value of diversification and capital market conditions. We also find that this association is stronger for firms with higher bankruptcy risk, which is consistent with the notion that the financing advantages of diversified firms improve their ability to fulfill contractual obligations. These results suggest that the value of corporate diversification fluctuates because macroeconomic shocks change the relative value of the internal and external capital markets. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:25058 |
| By: | Yoichiro NISHIMURA; Katsushi SUZUKI |
| Abstract: | This study examines the impact of bank–firm relationships on innovation outcomes by utilizing patent data from Japanese firms. Our results reveal that compared with other firms, (1) firms with closer relationships with banks are less likely to engage in high-risk innovation and that (2) firms that receive board member appointments or equity investment from banks tend to pursue exploitative innovation rather than exploratory innovation. Conversely, firms with greater dependence on loans from specific banks tend to exhibit greater R&D investment but produce fewer patents than do other firms. These findings suggest that while banks with close relationships with firms may encourage higher levels of R&D investment, they simultaneously impede the pursuit of high-quality and exploratory innovation. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:25051 |
| By: | Heider, Florian; Krahnen, Jan Pieter; Schlegel, Jonas; Pelizzon, Loriana |
| Abstract: | This study analyseswhy European banks, despite improved cost efficiency, continue to trade at lower valuations than their United States (US) counterparts. The gap stems from limited growth potential due to market fragmentation and underdeveloped capital markets. To close this competitiveness divide, the study calls for accelerating the Savings and Investment Union (SIU), expanding investment banking capacity, and implementing smart banking regulation and supervision that reinforces market discipline while enabling risk-taking within a stable, integrated European financial system. This document was provided by the Economic Governance and EMU Scrutiny Unit at the request of the ECON Committee. |
| Keywords: | European Banks, Bank Competitiveness, Market Fragmentation, Price to Book Ratio |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:safewh:319625 |
| By: | Hannah L Winterberg |
| Abstract: | The higher aggregate prevalence of loan over bond funding in Europe is not only driven by the well-documented differences in financial market settings but also strongly shaped by different firm characteristics. The European economy is more fragmented than the U.S. economy, and thus features a different firm distribution in terms of size and collateral availability. I estimate that if all European firms had access to a financial market like the U.S. market, their aggregate bond funding share would remain significantly smaller. This counterfactual suggests a limited potential for European corporate bond markets in the short and medium term. |
| Keywords: | Corporate bond markets; bank reliance; firm size distribution; euro area. |
| Date: | 2025–06–13 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/115 |
| By: | Gozlugol, Alperen |
| Abstract: | A gloomy narrative has recently surrounded the London Stock Exchange (‘LSE') and London's standing as an international financial centre, driven by declining IPOs, fewer listed companies, and high-profile delistings, with firms preferring the US market. This has triggered a major UK regulatory overhaul, spanning listing rules, audit, corporate governance, and capital raising, as regulation was widely blamed for this status quo. This article examines UK market developments and the motivations behind the overhaul, finding little evidence of a funding gap for firms. Instead, reforms appear aimed at preserving London's global financial stature. It argues that regulation has become a convenient scapegoat but was neither the root cause of the LSE's challenges nor will deregulation resolve them. Two analyses support this view: a UK–US regulatory comparison, which weakens claims of UK overregulation, and an assessment of the market ecosystem, which suggests structural issues beyond regulation are hindering the LSE’s competitiveness. |
| Keywords: | the London Stock Exchange; public equity markets; capital markets regulation; reform; listing rules |
| JEL: | F3 G3 |
| Date: | 2025–06–19 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:128018 |
| By: | Mr. Eugenio M Cerutti; Melih Firat; Martina Hengge |
| Abstract: | Cross-border payments are essential to the global financial system, facilitating trade and investment. The global cross-border traditional and crypto payment market approached a value of about one quadrillion dollars in 2024, with crypto payments representing only a small fraction despite their recent surge. Focusing on data from Swift—the largest traditional cross-border financial messaging network—we study the characteristics and evolving patterns of these payments over 2021-24. Notably, payments are predominantly concentrated in advanced economies, and are driven by financial institutions and large transactions. While currency usage remains stable—with the U.S. dollar maintaining the largest share—the Chinese renminbi demonstrates signs of increasing global integration, albeit from a low base. Gravity model estimates confirm that traditional economic linkages, via trade, portfolio investment, and FDI, shape cross-border payments. However, aggregate dynamics mask substantial heterogeneity across message types (customer vs. financial related payments), currencies, and transaction sizes, with information asymmetries playing a diminished role in larger payments. |
| Keywords: | Cross-Border Payments; Trade; FDI; Portfolio Investment; Networks |
| Date: | 2025–06–13 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/120 |