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on Financial Development and Growth |
| By: | Payne Hennigan |
| Abstract: | I develop a dynamic model of how internal capital markets in conglomerates respond to liquidity shocks when affiliated firms vary in innovation potential. A two-stage framework defines cutoff rules for when the conglomerate should liquidate low-productivity firms, coerce intermediate types into short-termist strategies, or preserve high-potential firms for long-horizon R&D. Embedding these margins into an endogenous growth model, I show how the optimal policy evolves: early in development, coercion preserves liquidity while sustaining broad innovation; as the economy nears the frontier and short-term returns decline, the optimal strategy shifts toward binary reallocation between liquidation and long-termism. I characterize two policy failures: a "coercion trap, " where short-termism persists too long, and a "liquidation fallacy, " where viable firms are discarded prematurely. The framework provides microfoundations for dynamic reallocation in conglomerate systems and offers policy insights for crisis-era restructuring. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2505.13993 |
| By: | Joris Tielens (National Bank of Belgium, Research Department) |
| Abstract: | We study the interconnection between the productivity and pricing effects of financial shocks. Combining administrative records on firm-level output prices and quantities with quasi-experimental variation in credit supply, we show that a tightening of credit conditions has a persistent, yet delayed, negative effect on firms’ long-run physical productivity growth (TFPQ) but also induces firms to change their pricing policies. Commonly used revenue-based productivity measures (TFPR)—which conflate price and productivity—offer biased predictions regarding the consequences of financial shocks for firms’ productivity growth, underestimating the long-run elasticity of physical productivity to credit supply by half. We also show that the pricing adjustments themselves have productivity implications. Firms use low pricing as a source of internal financing, allowing them to avoid cutting expenditures on productivity-enhancing activities, thereby softening the impact of financial shocks. We incorporate these forces into a quantitative model of firm dynamics to quantify the importance of productivity and pricing dynamics (and their interplay) in driving the scarring effects of financial crises on aggregate productivity and welfare. |
| Keywords: | productivity, pricing, financial constraints, innovation |
| JEL: | D22 D24 E31 E44 G01 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbb:reswpp:202507-479 |
| By: | Xing Guo; Pablo Ottonello; Thomas Winberry; Toni Whited |
| Abstract: | We study the macroeconomic consequences of asymmetric information between firms and external investors. To do so, we develop a heterogeneous firm macro model in which firms have private information about their quality. Private information creates a lemons problem in the market for external finance, depressing investment relative to the full information benchmark. We measure the distribution of private information, and therefore the magnitude of this lemons problem, using high-frequency stock price changes when firms raise new funding (revealing their quality to the market). We find that changes in distribution of private information are a quantitatively important determinant of aggregate fluctuations. For example, a spike in private information accounts for 40% of the decline in aggregate investment during the 2007-2009 financial crisis and made monetary stimulus significantly less effective at that time. |
| JEL: | E22 E32 E52 G30 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34019 |
| By: | John B. Donaldson; Hyung Seok E. Kim; Rajnish Mehra |
| Abstract: | We develop a dynamic macroeconomic model in which the secular decline in real interest rates arises endogenously from rising wealth inequality. Challenging the standard “safe asset shortage” hypothesis, the model shows how falling real rates can coexist with a stable safe asset ratio—closely matching U.S. empirical patterns. The mechanism combines limited financial market participation, which concentrates capital ownership among a shrinking class of stockholders, with egalitarian wage bargaining, which generates time-varying labor income shares under incomplete markets. As inequality increases, stockholders face higher financial and operating leverage, increasing their consumption volatility and precautionary demand for bonds. At the same time, greater wage instability raises workers’ demand for safe assets. The resulting surge in precautionary savings from both groups depresses real returns and creates the appearance of a safe asset shortage, despite an unchanged supply. This outcome reflects a pecuniary externality: agents fail to internalize the aggregate constraint on safe assets, especially over the business cycle. Our calibrated model reproduces key macro-financial patterns and offers new insights into the joint dynamics of wealth distribution, labor market arrangements, and asset pricing. |
| JEL: | D31 D52 E13 E21 E24 E32 E43 E44 G1 G12 J41 J63 J64 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34016 |
| By: | Julio Villavicencio Vásquez (Departamento de Economía de la Pontificia Universidad Católica del Perú) |
| Abstract: | This paper examines the relationship between the competitiveness of a country’s productive system and the development of its capital markets. Competitiveness is measured using the Economic Fitness Index (EFI), which assess a country’s ability to produce diversified and complex goods. Analyzing panel data from 98 countries (1997–2022), the study finds a significant positive relationship between productive complexity and capital market development, even when controlling for macroeconomic stability, institutional quality, and banking development. The findings suggest that productive complexity enhances the demand for and supply of financial instruments, fostering deeper capital markets. Robustness checks using the Economic Complexity Index (ECI) confirm these results, underscoring the role of economic sophistication in financial market development. Palabras claves: Capital Market Development, Economic Fitness Index (EFI), Economic Complexity Index (ECI). JEL Classification-JE: C12, C14, G14, G15 |
| Keywords: | Capital Market Development, Economic Fitness Index (EFI), Economic Complexity Index (ECI). |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pcp:pucwps:wp00542 |
| By: | Judith Arnal |
| Abstract: | En junio de 2025, siete Estados miembros de la UE lanzaron Finance Europe, una etiqueta paneuropea para productos de ahorro minorista que exige invertir al menos el 70% de los recursos en activos europeos. La iniciativa responde al diagnóstico del informa Letta sobre la fuga anual de 300.000 millones de euros de ahorro europe hacia mercados extranjeros, principalmente estadounidenses, debido supuestamente a la fragmentación de los mercados financieros europeos. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:fda:fdafen:2025-26 |
| By: | Böninghausen, Benjamin; Evrard, Johanne; Gati, Zakaria; Gori, Sofia; Lambert, Claudia; Legran, Daniel; Schuster, Wagner Eduardo; van Overbeek, Fons |
| Abstract: | The European Union (EU) economy depends heavily on bank funding. For this reason, strengthening EU equity markets as an alternative funding source has been a policy priority under the Capital Markets Union (CMU) agenda, and more recently a key feature of the Savings and Investment Union (SIU). EU listed equity markets are smaller and structurally different from those in the United States (US), with differing market capitalisations of listed firms and differences in the number of companies listed, stemming from lower initial public offering (IPO) activity in Europe. This paper aims to understand the drivers behind the EU-US listing gap, focusing on two aspects: (1) the general firm-level benefits of listing, and (2) whether pre-listing financing opportunities in the EU are underdeveloped, hindering firm growth and ultimately market depth. This paper first puts forward an empirical analysis to assess how a firm’s decision to list impacts various key performance indicators, with a view to assessing the implications of listing for the economy at large. Second, it zooms in on innovative firms to shed light on the primary challenges faced by EU startups in their funding pipelines, with a focus on late-stage equity financing and venture capital (VC) markets. Focusing on the euro area (EA) as a proxy to derive broader benefits of listing in the EU, we find that EA companies’ key profitability measures, employment, innovation capacity and productivity all increase after listing – and are thus indicative of wider economic benefits. This is, however, associated with challenges for the long-term investment strategies of listed companies, such as potential short-termism – a topic widely studied in the literature. Moreover, a comparison with the US suggests that, while the benefits and risks of listing are qualitatively similar on the other side of the Atlantic, EA companies seem to benefit somewhat less from listing than their US peers. […] JEL Classification: G10, G30, L10, L50, G24, G32, L21, L25 |
| Keywords: | capital markets union, equity markets, financial structure, listing, savings and investments union, venture capital |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2025373 |
| By: | Karan, Mehmet Baha; Westerman, Wim (University of Groningen) |
| Abstract: | Probably, the Knights Templar as bankers of the Crusaders and softeners of the Churchs view on taking interest, impressed early Italian bankers. In particular, the Medici family from Florence established good relations with the Church and wisely benefited from the economic conditions during the Renaissance.The Netherlands differed from prior leading areas in that banking developed here in tandem with economic growth in an open environment. Moreover, the skilful Dutch had access to financial markets and controlled them. The bank money of the Amsterdam Bank of Exchange ensured financial stabilityand fuelled economic activity. English banking started with the Goldsmiths, who deposited money from the public. The public trusted the Goldsmiths, who could therefore circulate money deposited with them.In this way, a fractional reserve system emerged. While the financial sector grew under open conditions, the Bank of England started as the first modern central bank. France experimented with paper money, but the experiment under the flamboyant Scot John Law became a failure. During the Napoleonic era, the Rothschilds appeared on the stage. Their banking empire was based on the network of five brothers in major European cities. The Rothschilds, with their strong family ties and circulating money across borders, were virtually untouchable. J. P. Morgan, with his strong relations, was the most notable banker in America's Gilded Age. Beyond this, he was successful also in heavy industries, being an outstanding businessman and a true leader. He even saved the U.S. economy from a crisis twice and co-moulded its central banking system. The Ottoman Bank was one of the oldest modern banks operating in adeveloping country. Being established with much foreign capital, it served as an independent central bank in Turkey after the Ottoman Empire. Throughout the 20th century, banking was largely organized country-wise. ‘National Champions’ such as Citibank dominated the scene, often benefiting fromrelationships in (semi-) colonies. Following the breakdown of the post World War II monetary system, thin lines between creative deal making and clear unethical tactics were crossed by unscrupulous bankers at times. In hindsight, economic freedom and liberal democracy were a critical factor in the developmentof banks as economic cornerstones. It is therefore essential that their entrepreneurial conditions are kept intact, whereas the Global Financial Crisis has shown that controls, internal norm setting and sector innovations may be helpful. Banks and their current partial replacers serve a public task. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:gro:rugfeb:2024012-eef |
| By: | Césaire Meh; Kevin Moran |
| Abstract: | We develop a framework to quantitatively assess the links between traditional and shadow banks and how these links are modified by regulatory reforms in the traditional banking sector. In the model, banks screen projects and originate loans, and then sell some of these loans (securitize them) to shadow banks, in order to redeploy capital and invest in alternative productive investment opportunities. This capital redeployment towards profitable investment implies a potentially socially beneficial role for shadow banks. However, the availability of securitization might also lead banks to screen projects less intensively and increase risk-taking. We explore the quantitative implication of this tradeoff and how it is affected by regulation of the traditional bank sector. Nous développons un modèle macroéconomique permettant d’analyser les liens entre le secteur bancaire traditionnel et le secteur parallèle ("shadow banking") et comment ces liens sont affectés par la réglementation bancaire imposée au secteur bancaire traditionnel. Dans le modèle, les banques traditionnelles font la sélection initiale des projets et émettent des prêts, mais peuvent ensuite une partie de ces prêts (en les titrisant) à leur contreparties du secteur parallèle, afin de réallouer leur capital à d’autres opportunités d’investissement productives. Cette réallocation de capital vers des investissements rentables confère aux shadow banks un rôle potentiellement bénéfique sur le plan social. Toutefois, la possibilité de titrisation des prêts peut également inciter les banques à réduire leurs efforts initiaux dans les sélection des projets et à prendre davantage de risques. Nous examinons les implications quantitatives de cette tension et la manière dont celles-ci sont influencées par la réglementation du secteur bancaire traditionnel. |
| Keywords: | Banks, Shadow banks, Moral hazard, Bank regulation, secteur bancaire traditionnel, secteur bancaire parallèle (shadow banking), réglementation bancaire, aléa moral |
| JEL: | E44 E52 G21 |
| Date: | 2025–07–28 |
| URL: | https://d.repec.org/n?u=RePEc:cir:cirwor:2025s-22 |
| By: | Heng-fu Zou (IAS; Wuhan University; World Bank) |
| Abstract: | Standard asset pricing models, whether consumption-based (CCAPM) or production-based (PCAPM), treat institutions-such as property rights, contract enforcement, and rule of law-as exogenous, stable, and frictionless. This assumption collapses under empirical scrutiny in a world where institutional deterioration, geopolitical conflict, and strategic coercion shape both economic fundamentals and financial markets. We develop a new framework of Institution- Based Asset Pricing (IBAP) in which institutions are modeled as a dynamic, investable capital stock. Agents optimally allocate resources not only to con sumption and physical capital, but also to institutional investment, which sustains enforcement mechanisms and mitigates systemic risk. Institutional quality enters both the production function and the utility function, directly affecting the stochastic discount factor and asset risk premia. Our model explains fundamental differences in asset pricing mechanisms across political regimes for instance, between China's extractive, state-controlled financial system and the liberal, rules-based system of the United States. We show that shocks to institutional depreciation, underinvestment, or coercive disruption (e.g., rare earth embargoes, chip sanctions, or capital controls) propagate into asset prices, volatility, and returns. By endogenizing institutions, this paper offers a unified theory of growth, risk, and valuation under institutional uncertainty -- one that is urgently needed in today’s multipolar and unstable global order. |
| Keywords: | Asset Pricing, Institutions, Consumption-Based Capital Asset Pricing Model, Production-Based Asset Pricing Model, Political Risk, Institutional Volatility, Endogenous Institutions, Macro-Financial Resilience |
| Date: | 2025–07–10 |
| URL: | https://d.repec.org/n?u=RePEc:cuf:wpaper:765 |
| By: | Heng-fu Zou |
| Abstract: | This paper develops a novel institution-based asset pricing model to address the longstanding equity premium puzzle within the context of OECD economies. We endogenize institutional quality -- capturing property rights, rule of law, and political stability -- as a capital-like state variable subject to stochastic shocks, depreciation, and investment. Building on recursive utility and production-based frameworks, we derive the stochastic discount factor (SDF) and demonstrate how institutional volatility amplifes consumption risk and increases equity premia. Our analytical results and numerical simulations show that economies with stronger and more stable institutions exhibit lower risk premia and smoother asset returns, while institutional uncertainty generates excess volatility and persistent return differentials. Empirical proxies -- including political risk indices, rule-of-law scores, and policy uncertainty measures -- confirm the model's predictions across OECD stock markets. This approach not only helps resolve the equity premium puzzle but also highlights the macro financial significance of investing in and protecting institutional capital. |
| Keywords: | Institutional asset pricing, equity premium puzzle, stochastic discount factor, rule of law, political risk, institutional capital, OECD economies, recursive utility, production-based model, global financial stability |
| Date: | 2025–07–14 |
| URL: | https://d.repec.org/n?u=RePEc:cuf:wpaper:775 |
| By: | Kitamura, Kazuhito |
| Abstract: | This paper challenges traditional economics' reliance on Adam Smith's "invisible hand" and its assumption of equilibrium derived from nominal variables, arguing that this hinders economists' understanding of modern economies. It proposes "dynamic equilibrium, " where stability arises from interactions between agents' internal characteristics and external factors. A key equation derived from the paper is "R_t-ρ=n+D_a-(U_(θa)θ)/U_c". Its left-hand side, the discrepancy between asset return (R_t) and time preference rate (ρ), is balanced by two forces on the right-hand side: retaining capital within the economy (the marginal utility of assets compared to consumption) and promoting its diffusion and dilution (capital outflow (D_a) and population growth (n)). That suggests that if time preference is an inherent trait, economies with a lower time preference will have a funds surplus, but this will be partially offset by capital outflow or a weak asset preference, so the decline in the real interest rate will be limited, and vice varsa. The paper argues that while conventional economics has focused on the left-hand side of this equation, understanding the right-hand side is crucial. This mechanism will be able to pragmatically explain various modern economic phenomena through the immobilization of the relations between debtor and creditor even when agents are rational and markets are efficient : for example, long-term global imbalances, deflationary equilibrium in developed economies, and inequalities of income and assets and so on. Ultimately, the paper reinterprets modern economic disequilibrium as a result of rational agent behavior, offering insights for more effective macroeconomic policy. |
| Keywords: | dynamic equilibrium; time preference; asset preference; capital flows; global imbalance |
| JEL: | C50 C62 D00 D50 F02 F61 R13 |
| Date: | 2025–07–29 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125537 |
| By: | Efraim Benmelech; Nitish Kumar; Raghuram Rajan |
| Abstract: | We examine the importance of corporate assets in supporting debt. Prior studies typically see only secured debt as asset backed, while the rest is deemed cash flow based. This implies only a small fraction of US debt is asset backed. Yet because corporations often resist offering security explicitly to debt, much unsecured debt is implicitly asset backed. Moreover, we find that the degree to which unsecured debt is asset backed can change with a firm’s condition and the economic situation. Consequently, asset values can affect the quantum and price of borrowing, with effects accentuated in adverse economic conditions, as suggested by financial accelerator theories. Given that a corporation’s debt is typically supported by both expected cash flows and assets, with the relative support varying with time and situation, the industry practice of classifying debt as “asset based” or “cash flow based” is overly categorical, especially for long term corporate bonds. |
| JEL: | E50 G3 G33 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34008 |
| By: | Bezemer, Dirk; Stumphius, Chris (University of Groningen) |
| Abstract: | Financial development supports productive investment, but financialization may undermine it. We extend this insight to the energy transition, where sustainable finance is hoped to reduce emissions, but must do soin a financialized credit system and corporate environment. We analyze the green bond market in a global sample of 147 corporates across 10 industries over 2010-2020. In a matched-firm analysis we examine the effect of green bond issuance on a firm’s environmental performance post-issuance in terms of greenhouse gas emissions and energy intensity. Different from earlier findings, green-bond issuers in this sample do not significantly improve their environmental performance post-issuance, neither in the full sample nor within industries. There are large differences between industries which suggest entry points to improve the effectiveness of green bonds. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:gro:rugfeb:2024004-gem |
| By: | Delis, Manthos; Iosifidi, Maria |
| Abstract: | We develop a model of green lending to study its implications for monetary policy and environmental regulation. Banks finance firms’ brown and/or green projects. The costs of brown projects increase with rising regulatory stringency or when endogenous monetary policy affects the cost of funds. Both policies can elevate the equilibrium share of green lending, resulting in greener output. Our findings remain consistent when we introduce central banks with an explicit green objective (e.g., differential interest rates based on project type), forward-looking bank behavior, and adjustment costs. Additionally, we demonstrate the relative impacts of regulatory and monetary persistent regime changes. |
| Keywords: | Green lending; Green monetary policy; Environmental regulation |
| JEL: | E44 E52 G21 Q50 |
| Date: | 2025–06–25 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125118 |
| By: | van der Kwaak, Christiaan (University of Groningen) |
| Abstract: | In this paper, we study the long-run impact of the central bank lending at low-interest rates to banks in times of financial crisis. While the provision of such funding mitigates the impact of financial crises ex post, we find that it increases bank risk taking ex ante, and therefore increases the likelihood of financial crises. Despite more frequent crises, however, the long-run impact on the macroeconomy is beneficial, as the positive effect from low interest-rate funding mitigates the contraction of credit at the height of a crisis. The long-run impact on the macroeconomy, however, is quantitatively small. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:gro:rugfeb:2024014-eef |
| By: | van der Kwaak, Christiaan (University of Groningen) |
| Abstract: | In this paper, we investigate the long-run effects from central bank bond purchases onfinancial stability within a New Keynesian DSGE model with financial frictions. Banks havea portfolio choice between safe government bonds and risky corporate securities, and aresubject to limited liability. Bond purchases by the central bank induce banks to shift fromsafe bonds to risky securities, thereby increasing the probability of insolvency, everythingelse equal. However, bond purchases also lead to capital gains on banks’ existing assets, which reduces banks’ reliance on deposits. Moreover, a lower return on banks’ assets (asa result of the bond purchases by the central bank) decrease banks’ profitability, therebydecreasing depositors’ willingness to let banks operate with high leverage ratios. Our keyconclusion is that bond purchases also enhance financial stability in the long-run. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:gro:rugfeb:2024013-eef |
| By: | Salvatore Federico; Andrea Modena; Luca Regis |
| Abstract: | In this paper, we examine how dividend taxes (and bans) and capital requirements that vary with the state of the economy influence a bank’s optimal capital buffers and shareholder value. In the model, the bank distributes dividends and issues costly equity to maximise shareholder value, while its assets generate stochastic income under time varying macroeconomic conditions. We solve the bank’s stochastic control problem and derive the distribution of its capital buffers in closed form. Imposing dividend taxes (or bans) in bad macroeconomic states generates an intertemporal trade-off, as it encourages capital buffers accumulation in those states but promotes dividend payouts in the good ones. Furthermore, the policy undermines financial stability by reducing the bank’s value and weakening its incentives to recapitalise in both good and bad states. Coordinating dividend taxes with counter-cyclical capital requirements can mitigate value losses and ease the trade-off, but it also exacerbates disincentives for recapitalisation. |
| Keywords: | Capital requirements; dividend bans; dividend taxes; policy coordination; stochastic optimal control |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:cca:wpaper:746 |
| By: | Ozili, Peterson K |
| Abstract: | Little attention has been paid to the role of inflation and financial inclusion in influencing financial stability. These factors have become all the more important in light of the recent banking crisis in the United States. The lessons learnt from the recent banking crisis have heightened the need for financial regulators and bank supervisors to undertake continuous search for the non-traditional determinants of financial stability to identify risks early and mitigate risks to financial system stability. In this article, we examine some non-traditional determinants of financial stability using data from sixty-one countries from 2009 to 2021. The first-difference panel GMM regression method was used to estimate the model, and we find that greater financial stability in the previous period is followed by greater financial stability in the subsequent period in all regions, signalling the persistence of financial stability. The loan-to-deposit ratio improves financial stability in European and Americas countries while countries that have a high level of financial inclusion, and whose banking sector have a high loan-to-deposit ratio, are more financially stable. Financial inclusion improves financial stability in high inflation environments particularly in African and Americas countries. High levels of financial inclusion impair financial stability during a recession particularly in Asian countries. African banks with a high loan-to-deposit ratio are more financially stable during a recession. Also, Americas and African countries that have a combined high financial inclusion and inflation rates and whose banking sector have a high loan-to-deposit ratio are less financially stable, indicating that high inflation hinders financial inclusion and loan-to-deposit ratio from improving financial stability. |
| Keywords: | financial stability, determinants, financial inclusion, inflation, bank efficiency, loan-to-deposit ratio, economic growth, unemployment rate. |
| JEL: | G01 G20 G21 G23 G28 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125565 |
| By: | Ioana Moldovan; Shu-Chun S. Yang; Luis-Felipe Zanna |
| Abstract: | This paper examines Ramsey-optimal policies related to fiscal spending and international reserve accumulation in response to volatile aid flows in Low-Income Countries (LICs). We develop a real Dynamic Stochastic General Equilibrium (DSGE) model of a small open economy, incorporating government transfers and public investment as fiscal spending components, along with two prominent characteristics of LICs: Dutch disease (DD) externalities and financially constrained households. Driven by considerations of precautionary saving, Ramsey-optimal policies involve partial reserve accumulation and partial fiscal spending of aid. Stronger DD externalities necessitate greater reserve ac- cumulation to stabilize future output, thereby mitigating consumption volatility. While transfers directly support private consumption smoothing, public investment also con- tributes to this goal by sustaining future income through gradual capital accumulation. Higher aid volatility calls for increased public investment, underscoring the role of public capital accumulation as a precautionary saving instrument, beyond its developmental role discussed in the literature. |
| Keywords: | aid; fiscal policy; reserve policy; foreign exchange intervention; optimal policy; low-income countries |
| Date: | 2025–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/154 |
| By: | Hermes, Niels; Hudon, Marek; Moahid, Masaood (University of Groningen) |
| Abstract: | Microfinance regulation plays a crucial role in ensuring financial stability and client protection, yet their influence on Microfinance Institutions (MFIs) remains a topic of contention. Using Artificial Intelligence (AI) in the screening stage, this Systematic Literature Review (SLR) incorporates both quantitative and qualitative articles, offering a comprehensive analysis of the effects of regulatory measures on the performance of MFIs. Overall, we find that while microfinance regulation initially may hinder the financial and social performance of MFIs, in thelong run its stabilizing effects reverse the adverse effects through the self-correcting loop, which eventually support MFIs to systematic growth. Our study calls for an optimal level of regulation that increases the compatibility of the financial, social, and stability goals of microfinance. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:gro:rugfeb:2024010-eef |
| By: | Tian, Xin (University of Groningen) |
| Abstract: | This paper examines whether a flexible exchange rate regime, capital controls, and foreign reserves are effective tools to reduce BRICS countries’ exposure toglobal financial cycle (GFCy) shocks. Based on local projections in which we allow the response of national financial cycles (NFCys) to the GFCy to vary, we observe that flexible exchange rate regime absorbs GFCy shocks in BRICS countries, as do tighter capital controls and larger international reserves. We also find thatthe responses of NFCys to GFCy shocks are heterogeneous across countries, withstronger effects observed in countries with higher inflation and GDP growth. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:gro:rugfeb:2024007-gem |
| By: | Dieter Vanwalleghem (ESC [Rennes] - ESC Rennes School of Business); Carmela D’avino (IESEG - UCL - Université catholique de Lille) |
| Abstract: | This paper examines the significance of functional distance in explaining the lending behavior of foreign branches of global banks. We operationalize functional distance, or the distance between the global bank's headquarters and the host country of the foreign branch, along a geographic, linguistic, and cultural dimension. Analyzing the lending activities of US global banks' foreign branches in 38 countries from 2001 to 2020, we find that geographic and linguistic functional distance has an adverse effect on local lending. We further find that a host country's institutional quality can moderate the effect of functional distance on local lending. |
| Keywords: | Global banks, Foreign branches, Bank lending, Functional distance |
| Date: | 2025–07–03 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05147313 |
| By: | Torben Klarl; Alexander S. Kritikos; Knarik Poghosyan |
| Abstract: | While Equity Crowdfunding (ECF) platforms are a virtual space for raising funds, geography remains relevant. To determine how location matters for entrepreneurs using equity crowdfunding (ECF), we analyze the spatial distribution of successful ECF campaigns and the spatial relationship between ECF campaigns and traditional investors, such as banks and venture capitalists (VCs). Using data from the two leading German platforms – Companisto and Seedmacht – we employ spatial eigenvalue filtering and negative binomial estimations. In addition, we introduce an event study based on the implementation of the Small Investor Protection Act in Germany allowing us to obtain causal evidence. Our combined analysis reveals a significant geographic concentration of successful ECF campaigns in some, but not all, dense areas. ECF campaigns tend to cluster in dense areas with VC activity, while they are less prevalent in dense areas with high banking activity, and are rarely found in rural areas. Thus, rather than closing the so-called regional funding gap, our results suggest that, from a spatial perspective, ECF fills the gap when firms in dense areas seek external financing below the minimum equity threshold offered by VCs and when there are few banks offering loans. |
| Keywords: | Crowdfunding, Finance Geography, Entrepreneurial Finance, Venture Capital (VC) Proximity |
| JEL: | G30 L26 M13 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2134 |
| By: | Volha Audzei; Jan Bruha; Ivan Sutoris |
| Abstract: | In this paper, we study domestic and foreign monetary policy transmission in a small open economy in which firms can decide to hold foreign currency loans (FCLs). In a workhorse two-country DSGE model, firms borrow in advance to cover production costs and choose the share of FCLs based on interest rate differentials and expected exchange rate movements. In this framework, we further examine how FCL holdings affect the transmission of exogenous shocks and monetary policy. The results indicate that FCLs impact the effectiveness of domestic policy depending on the shock type: they strengthen monetary policy transmission in response to domestic shocks, while weakening it in response to asymmetric foreign and exchange rate shocks. Symmetric global supply shocks reduce domestic policy efficacy, requiring higher rates to curb inflation but causing larger output losses. In contrast, global demand shocks allow for less aggressive domestic policy responses under large FCL holdings. |
| Keywords: | Cost channel of monetary policy, dynamic stochastic general equilibrium models, foreign currency loans, small open economy |
| JEL: | E32 E44 E52 F41 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:cnb:wpaper:2025/10 |
| By: | Elfsbacka-Schmöller, Michaela; Goldfayn-Frank, Olga; Schmidt, Tobias |
| Abstract: | This paper provides novel empirical evidence on the impact of monetary policy on innovation investment using unique firm-level data. First, we document the effect of a large, systematic monetary tightening (ECB rate increases from 0% to 4.5% during 2022-23), with average firm-level innovation cuts of 20%. These cuts persist over the medium term, indicating a sustained innovation slowdown. Second, we use the survey to identify elasticities of innovation expenditure to exogenous policy rate changes. Responses to hikes and cuts are significant and largely symmetric at the baseline rate (4.5%), though we detect potential state-dependent asymmetry due to the extensive margin. The financing channel emerges as one of the transmission channels, with more pronounced effects in firms with higher shares of bank loans and variable-rate loans. Crucially, we show that monetary policy transmits via aggregate demand, with stronger responses in firms with pessimistic demand expectations. Forward guidance provides substantial additional stimulus by reducing uncertainty about future rates, suggesting long-term, supply-side effects of announcements. These results challenge monetary long-run neutrality and are suggestive of policy endogeneity of R∗ operating through innovation-driven technology growth. JEL Classification: E52, E22, E24, D22 |
| Keywords: | endogenous growth, forward guidance, monetary policy transmission, R&D, R∗ |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253080 |
| By: | Athanasopoulos, Angelos; Fraccaroli, Nicolo; Kern, Andreas; Romelli, Davide |
| Abstract: | This paper studies the impact of central bank independence on sovereign borrowing, using an index that captures institutional constraints on central bank lending to the government across 155 countries from 1972 to 2023. The findings show that tighter lending to the executive significantly reduces sovereign interest rates and raises the debt-to-gross domestic product ratio in developing countries. These effects reflect the executive’s improved ability to borrow at lower costs under greater central bank independence. The results are robust to multiple tests, but there are no significant effects in advanced economies. From a policy perspective, the results highlight the key role of independent central banks as catalysts for reducing governments’ borrowing costs and enhancing the government’s borrowing capacity. |
| Date: | 2025–07–25 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:11179 |
| By: | Bartels, Bernhard; Eichengreen, Barry; Schumacher, Julian; Weder di Mauro, Beatrice |
| Abstract: | Unprecedented balance sheet expansion in recent years has resulted in heightened financial risk for central banks, reflected initially in higher profits and subsequently in significant losses. Combining data on central bank balance sheets with market data on asset prices, we provide evidence on the evolution and determinants of financial risk-taking by 18 advanced economy central banks. Based on the estimated Value at Risk (VaR), we document that average central bank balance sheet risk increased to about 3 percent of GDP. Central banks took more risk in periods of low policy rates, less expansionary fiscal policies, and more favorable growth prospects. Less independent central banks were more risk averse than their more independent peers, contrary to the fiscal dominance view. JEL Classification: E52, E58, E63, G32 |
| Keywords: | central bank independence, central bank profitability, monetary-fiscal interactions, monetary policy |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253079 |
| By: | Bindseil, Ulrich; Mäkeler, Hendrik; Pihl, Christopher |
| Abstract: | Central bank collateral frameworks and the liquidity transformation they allow for play important roles for financing long term economic projects (and thereby economic growth) while preserving financial stability. To shed light on early central bank collateral frameworks, this note analyses a document of the Riksens ständers lånebank of 1682 which pledges real estate to serve as collateral for a loan of the Riksbank to the farmer Olof Olofsson. A transcription and translation are provided and the document is analyzed in the context of the 17th century operations, balance sheet, and mandate of the Riksens ständers lånebank and the related literature. We recall the role of central bank credit to private debtors in early central banking, and that, contrary to some prominent views, government financing was more the exception than the rule as key reason to establish and operate central banks before 1700. We also derive lessons for today's central bank collateral frameworks and their role in liquidity transformation. |
| Keywords: | Central bank collateral, early central banking, central bank operations |
| JEL: | E32 E5 N23 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ibfpps:323592 |
| By: | Boris Hofmann; Xiaorui Tang; Feng Zhu |
| Abstract: | This paper examines the sentiments of central banks and the media regarding central bank digital currencies across 15 major global economies. Leveraging large language models, we develop jurisdiction-level central bank digital currency sentiment indices derived from central bank publications and news articles on a daily basis. Our findings reveal significant divergences between central bank and media sentiments, with notable variations over time and across jurisdictions. Analyzing the interplay between these sentiments, we observe that central bank sentiment tends to exert a stronger influence on media sentiment than the reverse. Additionally, we identify substantial cross-border sentiment spillovers, where sentiment in leading economies shapes sentiment in other regions. Through an event study approach, we demonstrate that cryptocurrency and equity markets primarily respond to shifts in central bank sentiments. Specifically, more positive central bank sentiments on central bank digital currency are associated with negative impacts on cryptocurrency market returns and the stock performance of banking and payment-related firms. |
| Keywords: | Central bank digital currency (CBDC), central bank communication, media sentiment, large language model (LLM), financial market |
| JEL: | E58 G12 G18 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1279 |
| By: | Aslanidis, Nektarios; Bariviera, Aurelio; Kapetanios, George; Sarafidis, Vasilis |
| Abstract: | This paper analyzes realized return behavior across a broad set of crypto assets by estimating heterogeneous exposures to idiosyncratic and systematic risk. A key challenge arises from the latent nature of broader economy-wide risk sources: macro-financial proxies are unavailable at high-frequencies, while the abundance of low-frequency candidates offers limited guidance on empirical relevance. To address this, we develop a two-stage ``divide-and-conquer'' approach. The first stage estimates exposures to high-frequency idiosyncratic and market risk only, using asset-level IV regressions. The second stage identifies latent economy-wide factors by extracting the leading principal component from the model residuals and mapping it to lower-frequency macro-financial uncertainty and sentiment-based indicators via high-dimensional variable selection. Structured patterns of heterogeneity in exposures are uncovered using Mean Group estimators across asset categories. The method is applied to a broad sample of crypto assets, covering more than 80% of total market capitalization. We document short-term mean reversion and significant average exposures to idiosyncratic volatility and illiquidity. Green and DeFi assets are, on average, more exposed to market-level and economy-wide risk than their non-Green and non-DeFi counterparts. By contrast, stablecoins are less exposed to idiosyncratic, market-level, and economy-wide risk factors relative to non-stablecoins. At a conceptual level, our study develops a coherent framework for isolating distinct layers of risk in crypto markets. Empirically, it sheds light on how return sensitivities vary across digital asset categories -- insights that are important for both portfolio design and regulatory oversight. |
| Keywords: | Idiosyncratic and systematic risk; divide and conquer; heterogeneous exposures; endogeneity; IV estimation; high-dimensional analysis; multiple testing boosting; principal components; stablecoins; green assets; defi assets |
| JEL: | C23 C33 C44 C55 C58 G10 G11 |
| Date: | 2025–06–25 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125124 |