|
on Financial Development and Growth |
| By: | Tobias Adrian; Yuya Sasaki; Yulong Wang |
| Abstract: | The Growth-at-Risk (GaR) framework has garnered attention in recent econometric literature, yet current approaches implicitly assume a constant Pareto exponent. We introduce novel and robust econometrics to estimate the tails of GaR based on a rigorous theoretical framework and establish validity and effectiveness. Simulations demonstrate consistent outperformance relative to existing alternatives in terms of predictive accuracy. We perform a long-term GaR analysis that provides accurate and insightful predictions, effectively capturing financial anomalies better than current methods. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2508.00263 |
| By: | De Sanctis, Alessandro; Kapp, Daniel; Vinci, Francesca; Wojciechowski, Robert |
| Abstract: | This study evaluates the effectiveness of EU Cohesion Policy as an investment programme, employing a novel dataset that links firm-level data from Orbis with project-level information from the Kohesio database. It focuses on two key questions: (1) Which firms receive EU funding? (2) How does receiving EU funding affect firm performance? By applying a logit model and a local projection difference-in-differences approach, we provide new insights into the allocation mechanisms of EU Cohesion Policy funds and their firm-level impact. Our findings show that funding tends to be allocated to firms that already perform relatively well, and that firms receiving EU funding experience a persistent productivity increase of approximately 3% after 4 years, with smaller and more financially constrained firms experiencing relatively greater improvements. Moreover, funding targeting “SME investment” tends to enhance firm performance disproportionately more than other categories, whereas projects directed the “green transition” appear comparatively less beneficial. JEL Classification: E22, D24, H54, O38, O52 |
| Keywords: | corporate investment, European Structural and Investment Funds, fiscal policy, place-based policy, productivity |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253099 |
| By: | Huisheng Wang; H. Vicky Zhao |
| Abstract: | Investment herding, a phenomenon where households mimic the decisions of others rather than relying on their own analysis, has significant effects on financial markets and household behavior. Excessive investment herding may reduce investments and lead to a depletion of household consumption, which is called the crowding-out effect. While existing research has qualitatively examined the impact of investment herding on consumption, quantitative studies in this area remain limited. In this work, we investigate the optimal investment and consumption decisions of households under the impact of investment herding. We formulate an optimization problem to model how investment herding influences household decisions over time. Based on the optimal control theory, we solve for the analytical solutions of optimal investment and consumption decisions. We theoretically analyze the impact of investment herding on household consumption decisions and demonstrate the existence of the crowding-out effect. We further explore how parameters, such as interest rate, excess return rate, and volatility, influence the crowding-out effect. Finally, we conduct a real data test to validate our theoretical analysis of the crowding-out effect. This study is crucial to understanding the impact of investment herding on household consumption and offering valuable insights for policymakers seeking to stimulate consumption and mitigate the negative effects of investment herding on economic growth. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2507.10052 |
| By: | Pham, Ngoc Sang; Le Van, Cuong; Bosi, Stefano |
| Abstract: | We study an overlapping generations (OLG) exchange economy with an asset that yields dividends. First, we derive general conditions, based on exogenous parameters, that give rise to three distinct scenarios: (1) only bubbleless equilibria exist, (2) a bubbleless equilibrium coexists with a continuum of bubbly equilibria, and (3) all equilibria are bubbly. Under stationary endowments and standard assumptions, we provide a complete characterization of the equilibrium set and the associated asset price dynamics. In this setting, a bubbly equilibrium exists if and only if the interest rate in the economy without the asset is strictly lower than the population growth rate and the sum of per capita dividends is finite. Second, we establish necessary and sufficient conditions for Pareto optimality. Finally, we investigate the relationship between asset price behaviors and the optimality of equilibria. |
| Keywords: | exchange economy, overlapping generations, asset price bubble, fundamental value, low interest rate, Pareto optimal |
| JEL: | C6 D5 D61 E4 G12 |
| Date: | 2025–08–04 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125605 |
| By: | Zechlin, Linus |
| Abstract: | The economic complexity framework by César Hidalgo and Ricardo Hausmann has inspired a substantial body of literature throughout recent years. Following previous research, which explored the various drivers of economic complexity, this article contributes by exploring the interplay with financial development. For the base sample of the European Union, a positive effect of financial development on economic complexity is found, identifying the financial institutions channel as the strongest driver of the Economic Complexity Index. Critical reflection leads to the assumption that a holistic replication of the study on a global scale could retrieve non-linear characteristics of said relationship. |
| Keywords: | Economic Complexity, Financial Development, European Economics |
| JEL: | C51 G10 G20 O16 O30 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ipewps:323944 |
| By: | Gómez-biscarri Javier; López-espinosa Germán; Martinez Santos Fernando (European Commission - JRC) |
| Abstract: | In this paper we investigate the role played by banks in financing European fintech startups. We postulate that this role may be influenced by two conflicting objectives. First, banks could be motivated by value considerations, in that the objective would be to help the fintech scale-up and reach a successful exit, so value can be captured from returns on equity or debt investments. Alternatively, given that fintechs can be viewed as substitutes to banks, investment in fintechs might be motivated by a desire to curb down competition (“buying out competitors”). We examine these conflicting objectives using data on investments made by EU and non-EU banks in fintech startups, and take advantage of an exogenous shock to fintech value provided by the EU’s PSD2 policy. Our results suggest that EU banks are driven by the motive of reducing competition. On the contrary, the behavior of non-EU banks seems to be driven by the value capturing motive, and this may have generated a substitution after PSD2 in non-EU bank financing of EU fintechs towards debt. Our findings suggest that EU fintechs may need to reduce their reliance on bank financing in order to close the financing gap and achieve successful scaling up. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:jrs:wpaper:202507 |
| By: | Nicolas Veron (Peterson Institute for International Economics) |
| Abstract: | The debate about a European Union single market for nonbank financial services goes back decades. In recent years, the economic and strategic case for the idea, rebranded as capital markets union in 2014 and included in a broader concept of savings and investments union in 2024, has strengthened. But progress towards that goal has been embarrassingly modest. This working paper argues that supervisory integration--the pooling of capital market supervision at the EU level--is the only realistic option to create a foundation for the successful development of competitive capital markets on a European scale. This could be achieved through a radical transformation of the European Securities and Markets Authority (ESMA) into a single, independent, and authoritative European supervisor. ESMA would gradually take over the jobs currently done by national capital market and audit supervisors and would replace them with its own network of national offices in EU countries. This consolidation would undercut the current incentives for market fragmentation, competitive distortion, and supervisory arbitrage, while respecting the European Union's multiplicity of financial centers, diverse market environments, and differentiated national social models. It would also represent a major simplification of the current arcane decision-making processes, allowing the European Union to move closer to the vision of a single jurisdiction for capital markets. |
| Keywords: | Capital markets supervision, European Union, nonbank financial institutions |
| JEL: | G23 G24 G28 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:iie:wpaper:wp25-18 |
| By: | Vanessa Schmidt; Hannah Seidl |
| Abstract: | We study the effects of movements in aggregate lending standards on macroeconomic aggregates and inequality. We show in a New Keynesian model with heterogeneous households and housing that a looser loan-to-value (LTV) ratio stimulates housing demand, nondurable consumption, and output. Our model implies that the LTV shock transmits to macroeconomic aggregates through higher household liquidity and a general-equilibrium increase in house prices and labor income. We also show that a looser LTV ratio redistributes housing wealth from the top 10% of the housing wealth distribution to the bottom 50%, indicating an overall decrease in inequality. |
| Keywords: | Heterogeneous Agents, Incomplete Markets, Housing, Macroprudential Policies |
| JEL: | E12 E21 E44 E52 |
| Date: | 2025–08–12 |
| URL: | https://d.repec.org/n?u=RePEc:bdp:dpaper:0071 |
| By: | Jakob Segerlind (Department of Economics, New School For Social Research, USA) |
| Abstract: | This paper revisits the role of the Great Depression as a driver of income leveling, using new evidence on Stockholm’s income distribution between 1926 and 1936. Drawing on previously unexploited Swedish Tax Assessment Calendars and official tabulated tax data, the study generates detailed estimates of income shares across the distribution. Contrary to conventional narratives portraying financial crises as powerful equalizers, the Gini coefficient in Stockholm remained stable throughout the Depression, despite a moderately severe domestic financial crisis. While the top 1 percent income share declined modestly, the lower half of the distribution saw no relative improvement. These findings challenge the interpretation of the Great Depression as a major “leveling event” in Sweden by downplaying its immediate distributive effects and instead pointing toward the importance of fundamental political and structural transformations that were not driven by the crisis itself. The results underscore the ambiguous relationship between financial crises and inequality, offering a historical perspective relevant to contemporary debates beyond Sweden. |
| Keywords: | Income inequality, financial crisis, Great Depression, Stockholm, income distribution, political economy |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:new:wpaper:2511 |
| By: | Mahdi Ebsim; Miguel Faria-e-Castro; Julian Kozlowski |
| Abstract: | We study how aggregate shocks shape the joint dynamics of credit spreads, debt, and liquid asset holdings for nonfinancial firms, focusing on the Great Financial Crisis (GFC) and COVID-19. Both episodes saw sharp credit spread increases and investment declines, but debt and liquidity fell during the GFC and rose during COVID-19. Cross-sectionally, leverage drove spreads and investment in the GFC, while liquidity dominated during COVID-19. We build a macro-finance model of firm capital structure with a liquidity motive for working capital. Calibrated to data, it attributes the GFC to real and financial shocks, and COVID-19 to an additional liquidity shock. |
| Keywords: | credit spreads; liquidity; Great Recession; COVID-19 |
| JEL: | E6 G2 |
| Date: | 2025–08–14 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:101435 |
| By: | Viral V. Acharya; Raghuram Rajan; Zhi Quan (Bill) Shu |
| Abstract: | Theory suggests that in the face of fire sale externalities, banks have incentives to overinvest in order to issue excessive money-like deposit liabilities. The existence of a private market for insurance such as contingent capital can eliminate the overinvestment incentives, leading to efficient outcomes. However, it does not eliminate fire sales. A central bank that can infuse liquidity cheaply may be motivated to intervene in the face of fire sales. If so, it can crowd out the private market and, if liquidity intervention is not priced at higher-than-breakeven rates, induce overinvestment. We examine various forms of public intervention to identify the least distortionary ones. Our analysis helps understand the historical prevalence of private insurance in the era preceding central banks and deposit insurance, their subsequent disappearance, as well as the continuing incidence of banking crises and speculative excesses. |
| JEL: | E40 E41 E50 E58 G01 G2 G21 G23 G28 N20 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34099 |
| By: | Sow, Seydou |
| Abstract: | This study examines the impact of Official Development Assistance (ODA) on economic resilience in WAEMU countries, aiming to identify critical dependency thresholds beyond which aid effects become significantly positive or negative, while analyzing specific channels through which ODA influences growth and shock absorption capacity. The methodology employs two complementary approaches applied to a panel of eight WAEMU countries over the period 2000-2022: the Panel Smooth Transition Regression (PSTR) model to capture the non-linear relationship between ODA and economic growth, and the Fully Modified Ordinary Least Squares (FMOLS) approach to identify transmission channels while correcting for endogeneity bias. Results confirm the existence of a robust non-linear relationship with convergent critical thresholds: 7.86% of GDP using the PSTR model and an optimal range of 8-10% of GDP with the FMOLS approach, below which aid effects are negative and beyond which diminishing returns appear. Channel analysis reveals that governance constitutes the most powerful determinant of economic resilience with an impact four times greater than investment and eight times greater than direct ODA, while crises reduce growth by 0.68 percentage points and increase inflation by over 3 points, confirming the region's strong structural vulnerability. These findings imply that aid effectiveness fundamentally depends on respecting optimal thresholds and prioritizing institutional strengthening, requiring a redesign of allocation strategies that favor governance and capacity-building programs, while maintaining aid flows within the critical range of 8-10% of GDP and diversifying financing sources to reduce external dependence and strengthen resilience against future shocks. |
| Keywords: | Official Development Assistance, Economic Resilience, WAEMU, Non-linear Effects, Institutional Quality, Panel Data |
| JEL: | C23 F35 O11 O55 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125681 |
| By: | Noda, Hideo; Fang, Fengqi |
| Abstract: | In this study, we attempt to construct an overlapping generations model designed to theoretically analyze the macroeconomic situation of sub-Saharan African countries. Our aim is to examine the conditions necessary for the effective functioning of infrastructure development financed by seigniorage and monetary control policies in some sub-Saharan African countries with stagnant macroeconomic performance. We also consider the implications of our model in terms of inflation and population aging. As a result, when the government selects the monetary growth rate that maximizes the long-term growth rate of gross domestic product (GDP), the absolute value of the monetary growth rate elasticity of the private capital--public capital ratio must be equal to the reciprocal of the private capital elasticity of GDP, which is greater than 1. Thus, seigniorage per se is not the cause of economic stagnation in some sub-Saharan African countries. If maximizing social welfare is equivalent to maximizing the long-term growth rate of GDP in terms of selecting the public investment share, then the public investment share elasticity of the private capital--public capital ratio is zero. Moreover, when the initial value of the private capital--public capital ratio is sufficiently low (high) level, inflation (deflation) occurs during the transition process to a steady state. Furthermore, population aging does not necessarily constitute a bottleneck for economic growth in sub-Saharan African countries. |
| Keywords: | Economic growth, Inflation, Infrastructure, Seigniorage, Sub-Saharan Africa |
| JEL: | E0 H5 O4 |
| Date: | 2025–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125632 |
| By: | Alok Johri |
| Abstract: | I build a sovereign default model in which importing economies must cover intermediate imports using accumulated foreign exchange (reserves). This occasionally-binding constraint: explains why imports and production fall during defaults; complements models with simultaneous holdings of debt and reserves; generates endogenous default costs that increase with output; and motivates defaults for reserve conservation. The model is less reliant on ad-hoc default costs prevalent in prior quantitative sovereign default models seeking to match the data. Simulations from the model reveal average output losses in default that are greater than 10%, and a 17% fall in imports and a large reserve-to-gdp ratio. |
| Keywords: | Sovereign default; imports and default costs; sovereign spreads; foreign exchange-in-advance constraints; international reserves |
| JEL: | F34 F41 E32 G15 H63 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:mcm:deptwp:2025-06 |
| By: | Carlos Giraldo (Fondo Latinoamericano de Reservas - FLAR); Iader Giraldo-Salazar (Fondo Latinoamericano de Reservas - FLAR); Jose E. Gomez-Gonzalez (Department of Finance, Information Systems, and Economics, City University of New York – Lehman College); Jorge M Uribe (Universitat Oberta de Catalunya) |
| Abstract: | This paper examines the transmission of U.S. monetary policy shocks to bank lending in 12 Latin American countries between 2000 and 2020. Using data from 118 banks, we find evidence of an international bank lending channel, even in countries with low direct exposure to U.S. banks. Crucially, the strength and direction of this transmission depend on the degree of financial dollarization. While U.S. tightening is, on average, associated with rising credit, in more dollarized economies it leads to slower loan growth. These findings underscore the vulnerability of dollarized banking systems and point to the need for strengthened local macroprudential and supervisory frameworks. |
| Keywords: | International bank lending channel; Financial dollarization; U.S. monetary policy shocks |
| Date: | 2025–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:col:000566:021498 |
| By: | Lorenzo Menna (Banco de México); Rubens Moura (Banco de México); Martin Tobal (Banco de México) |
| Abstract: | This paper explores how global shocks transmits to emerging market and developing economies (EMDEs) when assets in major financial centers are overvalued. While international organizations and historical experience have long warned about asset overvaluation, academic research has yet to scrutinize its role as a source of global financial vulnerability. Using a panel local projection model and plausibly exogenous shocks, we find that a tightening in global financial conditions raises sovereign spreads in EMDEs and the effect is amplified when assets are overvalued. Strong external balances help cushion this impact, which is particularly important in current context of elevated volatility |
| Keywords: | Global Financial Cycle; Asset Overvaluation; Asset Pricing; Financial; Risk-taking |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:369 |
| By: | Ahmed Mahrous; Maurantonio Caprolu; Roberto Di Pietro |
| Abstract: | Stablecoins, with a capitalization exceeding 200 billion USD as of January 2025, have shown significant growth, with annual transaction volumes exceeding 10 trillion dollars in 2023 and nearly doubling that figure in 2024. This exceptional success has attracted the attention of traditional financial institutions, with an increasing number of governments exploring the potential of Central Bank Digital Currencies (CBDCs). Although academia has recognized the importance of stablecoins, research in this area remains fragmented, incomplete, and sometimes contradictory. In this paper, we aim to address the cited gap with a structured literature analysis, correlating recent contributions to present a picture of the complex economic, technical, and regulatory aspects of stablecoins. To achieve this, we formulate the main research questions and categorize scientific contributions accordingly, identifying main results, data sources, methodologies, and open research questions. The research questions we address in this survey paper cover several topics, such as the stability of various stablecoins, novel designs and implementations, and relevant regulatory challenges. The studies employ a wide range of methodologies and data sources, which we critically analyze and synthesize. Our analysis also reveals significant research gaps, including limited studies on security and privacy, underexplored stablecoins, unexamined failure cases, unstudied governance mechanisms, and the treatment of stablecoins under financial accounting standards, among other areas. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2507.13883 |
| By: | Qifeng Tang; Yain-Whar Si |
| Abstract: | With the advancement of digital payment technologies, central banks worldwide have increasingly begun to explore the implementation of Central Bank Digital Currencies (CBDCs). This paper presents a comprehensive review of the latest developments in CBDC system design and implementation. By analyzing 135 research papers published between 2018 and 2025, the study provides an in-depth examination of CBDC design taxonomy and ecosystem frameworks. Grounded in the CBDC Design Pyramid, the paper refines and expands key architectural elements by thoroughly investigating innovations in ledger technologies, the selection of consensus mechanisms, and challenges associated with offline payments and digital wallet integration. Furthermore, it conceptualizes a CBDC ecosystem. A detailed comparative analysis of 26 existing CBDC systems is conducted across four dimensions: system architecture, ledger technology, access model, and application domain. The findings reveal that the most common configuration consists of a two-tier architecture, distributed ledger technology (DLT), and a token-based access model. However, no dominant trend has emerged regarding application domains. Notably, recent research shows a growing focus on leveraging CBDCs for cross-border payments to resolve inefficiencies and structural delays in current systems. Finally, the paper offers several forward-looking recommendations for future research. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2507.08880 |
| By: | Lars Norden; Bernardus Van Doornik; Weichao Wang |
| Abstract: | We investigate the theoretical mechanisms through which labor turnover adversely affects bank risk and performance. Using monthly matched employer-employee data from Brazil during 2003-2019, we find banks with higher labor turnover show lower risk buffers, higher loan growth, and lower profitability. These adverse effects align with the firm-specific human capital theory. Consistent with our identifying assumptions, the effects are stronger when turnover reduces experience and expertise, among loan officers, as well as across cities and banks. Placebo tests and further analyses confirm our results. The evidence suggests that high labor turnover impairs bank information production, increasing risk and lowering performance. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:626 |
| By: | Gianluca Cafiso; Marco Ferdinando Martorana |
| Abstract: | We investigate the extent to which crime, and the inability to effectively suppress it, affect the performance of local banks in terms of credit extension, asset quality, and profitability. The analysis focuses on cooperative banks in Italy, typically small institutions with strong ties to their local communities, over the period 2013–2023. The findings suggest that both crime and judicial inefficiency, even when considered separately and after controlling for banks’ operational efficiency, significantly influence credit extension and the incidence of non-performing loans. While their impact on overall profitability appears limited, non-interest income is significantly reduced. |
| Keywords: | cooperative banks, crime, judicial inefficiency, loans, profitability |
| JEL: | G21 E51 K42 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12025 |
| By: | Anthony Murphy (Federal Reserve Bank of Dallas); Dylan Ryfe (Federal Reserve Bank of Dallas) |
| Abstract: | There is a lot of policy interest in the issue of household access to consumer credit in low and moderate income (LMI) and so-called banking desert areas. Under the Community Reinvestment Act, bank regulators also devote a lot of resources to this issue. LMI areas are census tracts with median family income less than 80% of the relevant metro area or district. Banking deserts are counties with no bank or credit union branches. We examine access to consumer credit in these areas using a representative 5% sample of credit records and both regression discontinuity design (RDD) and matching estimators of the average treatment effect on the treated (ATT). The RDD results are local; for example, they apply close to an 80% median family income boundary for an LMI designation. The matching results apply more generally, albeit to areas with reasonable overlap in propensity scores, etc. Using both approaches, we find little support for the claim that households in LMI and banking desert areas face reduced access to consumer credit. |
| Date: | 2025–08–08 |
| URL: | https://d.repec.org/n?u=RePEc:boc:usug25:11 |