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on Financial Development and Growth |
| By: | Colin C. Caines; Amartya Lahiri |
| Abstract: | Saving rates are significantly different across countries and remain different for long periods of time. This paper provides an explanation for this phenomenon. We formalize a model of a world economy comprised of open economies inhabited by heterogeneous agents endowed with recursive preferences. Our assumed preferences imply increasing marginal impatience of agents as their consumption rises relative to average consumption of a reference group. Using measured productivity as the sole exogenous driver, we show that the model can not only reproduce the sustained long run differences in average saving rates across countries, but also provides a good fit to the time series behavior of saving observed in the data. |
| Keywords: | World savings; Recursive preferences |
| JEL: | E20 F30 F40 |
| Date: | 2025–08–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1416 |
| By: | Heng-fu Zou |
| Abstract: | Why do equity markets in some countries consistently outperform while others suffer from chronic underperformance, volatility, and investor distrust? Why has the canonical equity premium puzzle-first posed by Mehra and Prescott (1985)-remained unresolved despite decades of re finement in consumption-based, production-based, and behavioral asset pricing models? This paper offers a foundational answer: institutions are the missing capital. We argue that differences in institutional quality - such as the strength of property rights, legal enforcement, political stability, democratic accountability, and regulatory claritysystematically shape both the level and volatility of asset returns across countries and time. |
| Date: | 2025–08–08 |
| URL: | https://d.repec.org/n?u=RePEc:cuf:wpaper:778 |
| By: | Heng-fu Zou |
| Abstract: | This paper extends the Lucas (1978) asset pricing framework by incorporating institutional capital as both a productive asset enhancing dividend growth-and a direct source of utility. Building on the insights of Coase, Demsetz, Williamson, and Barzel, we model institutional investment alongside consumption, deriving closed-form affine pricing solutions under stochastic institutional quality. The model demonstrates how in stitutional capital influences the price-dividend ratio, risk-free rate, and equity premium through both productivity and preference channels. Analytical results and simulations reveal that stronger institutional investment raises asset values, lowers risk premia, and stabilizes returns, bridging institutional economics with modern asset pricing theory. |
| Date: | 2025–08–14 |
| URL: | https://d.repec.org/n?u=RePEc:cuf:wpaper:784 |
| By: | Heng-fu Zou |
| Abstract: | This paper develops a unified institution-based asset pricing model in which rare disasters are reinterpreted as endogenous institutional breakdowns such as revolutions, regime collapses, legal erosion, and constitutional crises - rather than purely exogenous macroeconomic shocks. Building upon and extending the rare disaster literature of Rietz(1988), Barro (2006, 2009), and Gabaix (2012), we model institutional capital as a dynamic stochastic process subject to both continuous fluctuations and discontinuous collapses driven by Poisson jump processes. These institutional shocks directly impact the stochastic discount factor and hence the pricing of risky assets. We analytically derive the resulting equity premium and show that institutional volatility, erosion, and catastrophic regime transitions generate sizable and persistent risk premia even under standard CRRA preferences. Simulations using realistic institutional indi- cators for OECD and emerging economies demonstrate that our model explains not only the magnitude of equity premia, but also their time varia tion and cross-country heterogeneity. The framework unifies consumption based, production-based, and disaster-based asset pricing under the general concept of institutional capital, offering a comprehensive explanation for the equity premium puzzle and broader asset price movements under political uncertainty. We conclude by discussing implications for institutional reform and global financial stability. |
| Keywords: | Institutional capital, equity premium puzzle, rare disasters, stochastic discount factor, political risk, regime shifts, asset pricing, Poisson jumps, macro-finance, constitutional collapse, OECD economies |
| Date: | 2025–07–20 |
| URL: | https://d.repec.org/n?u=RePEc:cuf:wpaper:777 |
| By: | Wei Liang; Heng-fu Zou |
| Abstract: | We develop a new theory of asset pricing based on the concept of liberal ideas capital-a stock of intangible, ideational resources rooted in human dignity, individual liberty, free speech, constitutional democracy, property rights, and the rule of law. Building upon the philosophical foundations of John Locke, Thomas Jefferson, Alexis de Tocqueville, Lord Acton, Lud- wig von Mises, Friedrich Hayek, and Milton Friedman, and integrating recent contributions by McCloskey, Phelps, and Heng-Fu Zou, we construct a dynamic general equilibrium model in which liberal ideas capital plays a central role in driving productivity, institutional stability, and investor confidence. In this framework, countries that invest in and accu mulate liberal ideas capital experience lower transaction costs, more secure property rights, higher innovation, and thus, superior asset returns and lower volatility over time. Empirically, we assemble cross-country data on liberalism-related indices-freedom of speech, property rights, rule of law, press freedom, and democratic governance-and demonstrate that nations with higher levels of liberal ideas capital exhibit systematically higher long-term equity returns and stronger economic performance. In contrast, countries dominated by authoritarian ideas capital exhibit per sistent institutional fragility, lower risk-adjusted returns, and weaker in vestor protection. Our findings challenge conventional asset pricing mod els by revealing the deep ideational foundations of market behavior. We argue that liberal ideas form the cognitive and institutional prerequisite for asset pricing itself, making price discovery and risk assessment possible. This elevates the intergenerational transmission of these norms-a process of "soulcraft" - to the most critical form of capital investment for ensuring long-run financial stability and prosperity. The paper thus offers a unified theory of political economy, ideology, and fnance, concluding that a society's most valuable asset is the shared belief in liberty. |
| Date: | 2025–08–08 |
| URL: | https://d.repec.org/n?u=RePEc:cuf:wpaper:779 |
| By: | Willem THORBECKE |
| Abstract: | Many shocks have buffeted the Japanese economy since 2012. This paper investigates how macroeconomic variables affect Japanese sectoral stock prices. The results indicate that changes in global demand and in the yen/dollar exchange rate are paramount. They impact all 86 sectors examined and often produce large swings in the aggregate stock market. By contrast shocks to monetary policy and interest rates only affect about ten of the 86 sectors, and their impact is concentrated on the financial sector. Given the importance of global factors, Japan should redouble efforts to promote freer trade and to help its firms discover new markets when access to U.S. markets is restricted. It should also nurture domestic growth engines. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:25084 |
| By: | Kiyoyasu TANAKA |
| Abstract: | Cross-border mergers and acquisitions (M&A) are a prominent mode of foreign direct investment. However, there remains mixed and inconclusive evidence for the impact of foreign acquisition on acquired domestic firms. This paper contributes to the literature by employing a staggered difference-in-differences approach to address the timing variation in foreign acquisitions and constructing a novel panel dataset on Japanese firms that precisely captures the post-acquisition period for acquired firms. The results show statistically insignificant estimates for the aggregate effects of foreign acquisition on the post-acquisition productivity, suggesting neither productivity gains nor adverse effects for acquired firms. Even after accounting for general acquisition effects, foreign ownership changes have no influence on post-acquisition productivity. By contrast, canonical two-way fixed effects regressions yield significantly positive estimates, highlighting the need for methodological refinement in the literature to address heterogeneous treatment effects of foreign acquisition. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:25085 |
| By: | Manuela Magalhâes (Universidad de Málaga); Jesús Rodríguez-López (Universidad Pablo de Olavide) |
| Abstract: | Spanish aggregate productivity was negatively correlated with the business cycle from 2000 to 2014, but this correlation later turned positive between 2015 and 2019. In this paper, we ask if this change is related to financial restrictions and firm creation and destruction in Spain. Using firm- level administrative data, we reach the following conclusions. First, during the 2000–07 expansion, low-productivity firms with access to financial resources were able to continue operating; in turn, this led to a crowding-out of financial resources, and forced high-productivity but financially vulnerable firms to close. We find that on average exiting firms were significantly larger and more productive than entering firms, a situation that entailed productivity losses in this period. Second, following the tightening of credit conditions after 2008, we find a more efficient selection at both exit and entry margins: exiting firms were less productive than entering firms. Both findings help explain, at least in part, the change in the productivity-GDP correlation. Finally, in a counterfactual exercise we quantify the effects of type-I selection errors, i.e., the closure of productive but financially vulnerable firms: had market selection not presented type-I errors, relative total factor productivity at the exit margin would have been 3% to 6.5% higher, while gains in relative labor productivity would have ranged between 27% and 46%. |
| Keywords: | Firm exit and entry, business cycle, cleansing effects, miss-selection, firm survival. |
| JEL: | E23 E32 E44 G32 L11 L25 L60 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pab:wpaper:25.02 |
| By: | Alberto Montagnoli; Miroslava Quiroga-Trevino; Christoph Thoenissen |
| Abstract: | This paper provides empirical evidence on the balance sheet channel of fiscal policy in peripheral European economies. Our findings using a Panel VAR, reveal that shifts in financial institutions' balance sheets following a debt-financed fiscal expansion, reduce credit provision and investment in these countries. Moreover, the analysis indicates that economies with higher sovereign exposure experienced higher credit crunches and investment declines. To explore the underlying mechanisms, we estimate a DSGE model that incorporates banks as primary holders of sovereign debt. The model shows that sovereign exposure amplifies the negative effects on credit supply, lowering investment and capital formation. A counterfactual scenario without bank-held sovereign bonds isolates the contribution of the balance sheet channel: removing this channel weakens the crowding-out effect, with investment falling 0.2 percentage points less and output increasing by 0.02 percentage points more. These effects appear stronger during the financial and sovereign debt crises. |
| Keywords: | SVAR;DSGE;Bayesian estimation;Fiscal policy;Sovereign debt;Credit;Euro Area. |
| JEL: | C11 E32 E44 E62 H63 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:bdm:wpaper:2025-12 |
| By: | Jean-Marc B. Atsebi; Jeta Menkulasi |
| Abstract: | With increasing debt vulnerabilities, domestic debt may become an important—though still distinct––part of debt restructurings. This paper aims to contribute to the discourse by examining the factors that precipitate domestic debt restructurings (DDRs) and their implications for macro-fiscal outcomes. We find that: (i) DDRs are less effective than external debt restructurings (EDRs) in reducing public debt and interest payments; and (ii) they entail deeper, more persistent costs to output and domestic credit. Still, well-designed DDRs can be critical for restoring macroeconomic stability and sustainability, regardless of costs. Their impacts depend on design, instruments, sovereign-bank nexus, concurrent fiscal consolidation, and financial development. Finally, the paper shows that gross international reserves and the presence of an IMF-supported program can mitigate the costs associated with DDRs while preserving their debt relief benefits. |
| Keywords: | Domestic Debt Restructuring (DDR); Macroeconomic Impact; Public Debt; Interest Payment; Output Loss; Finanial Stability; Sovereign-Bank Nexus |
| Date: | 2025–09–12 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/179 |
| By: | Neil Mehrotra; Michael E. Waugh |
| Abstract: | What are the effects of tariff changes and trade conflicts on the natural rate of interest? This article investigates this question, using a multicountry, heterogeneous-agent trade model in which the natural rate of interest is determined by firms’ demand for capital and households’ supply of assets through their savings behavior. We analyze how the equilibrium interest rate evolves during the transition to higher unilateral tariffs and a global trade war. In the short run, tariffs reduce capital demand, and so the natural rate of interest must fall for households’ asset supply to line up with capital demand. In the long run, both asset supply and capital demand fall by similar amounts, which leads to little change in the long-run natural rate of interest. |
| JEL: | E0 E40 F0 F10 F40 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34206 |
| By: | Kellen Lynch; Pinar Uysal; Ilknur Zer |
| Abstract: | European bank equity prices fell sharply following the April 2, 2025, U.S. reciprocal tariff announcement, reflecting investor concerns about rising trade tensions and their potential impact on global growth and financial stability. In this note, we examine how the effects of the tariff announcement on European banks varied with their trade exposure, capital strength, and asset quality. |
| Date: | 2025–08–26 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2025-08-26 |
| By: | Albertazzi, Ugo; Hooft, James ’t; Ter Steege, Lucas |
| Abstract: | In contrast to the conventional Fisherian view that inflation reduces real debt positions, we show that significant increases in inflation are strongly associated with financial crises. In the spirit of Jordà et al. (2020), countries with free and fixed ex-change rates can be compared to difference out the confounding reaction of monetary policy. Across a dataset of 18 advanced economies over 151 years, we show that the impact of inflation extends beyond its indirect effect via monetary policy. To further corroborate causality, we instrument inflation with oil supply shocks, finding that a 1pp rise in inflation doubles the probability of financial crisis from its sample average. We give evidence for the redistribution channel, where inflationary shocks directly cut real incomes, as a possible mechanism. In conjunction with recent literature on the dangers of rapidly tightening monetary policy, our results point to a difficult trade-off for central banks once inflation has risen. JEL Classification: E31, E44, E58, G01 |
| Keywords: | currency pegs, financial crises, inflation, monetary policy, oil supply |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253108 |
| By: | Sebastian Fossati (University of Alberta); Xiao Li (University of Alberta) |
| Abstract: | We model the conditional distribution of future exchange rate returns for nine currencies as a function of real-time financial conditions. We show that the lower and upper quantiles of the exchange rate return distribution exhibit significant in-sample co-movement with financial conditions. Similarly, the conditional moments of the out-of-sample forecast display time-varying patterns, with the variance and kurtosis showing the most pronounced changes during and after the 2008-09 financial crisis. Deteriorating financial conditions are associated with an increase in volatility, particularly for commodity currencies. Overall, we conclude that financial conditions capture tail dependencies in exchange rate returns and contain valuable information for out-of-sample prediction. |
| Keywords: | exchange rates; financial conditions; NFCI; density forecasts |
| JEL: | C22 F31 G17 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:ris:albaec:021546 |
| By: | Josep Espasa-Reig; Ana I. Moreno-Monroy; Pedro Salas-Rojo; Piotr Paradowski |
| Abstract: | We provide new estimates on household financial fragility and asset poverty for regions in 11 OECD countries over 2010-2022. To extend coverage to countries lacking regional wealth data, we test several methods to impute financial fragility at the regional level. We find that the imputations of wealth on income datasets perform well using a hot-deck method. There is however a “regression to the mean” effect, whereby extreme values in the target indicator tend to be smoothed during imputation. We conclude by outlining directions for refining these methods in future research. |
| JEL: | O18 I32 D31 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:lis:lwswps:49 |
| By: | De Haas, Ralph; González-Uribe, Juanita |
| Abstract: | We review the literature on the effectiveness of public policies to facilitate firms’ access to finance. The rationale for such policies is to address market failures that cause financial constraints. Using a simple taxonomy, we discuss the current evidence on common interventions to tackle these constraints: public lending through state and development banks, public lending through private banks, subsidized credit, credit guarantee schemes, export credit agencies, publicly backed venture capital, and tax incentives for equity investors. Based on the quantity and quality of the available evidence, we summarize the policies that have proven most effective in helping firms access external financing. In addition, we highlight areas where future research is needed to address current knowledge gaps and to provide more definitive policy guidance. |
| Keywords: | entrepreneurship; small business finance; public policy; financial constraints |
| JEL: | G20 G28 H25 H81 |
| Date: | 2025–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:129139 |
| By: | Altenburg, Tilman; Never, Babette; Strohmaier, Rita |
| Abstract: | Calls for development policy to place greater emphasis on national self-interest are growing louder in many donor countries, including Germany. There are indeed good reasons to dovetail Germany's international policies more effectively. Synergies between develop-ment cooperation (DC), foreign trade promotion and research partnerships have not been harnessed systematically to date, yet they could serve the interests of both Germany and its partner countries alike. Moreover, Germany is facing geopolitical competition from actors who have long been using their DC proactively to pursue strategic interests. We advocate adopting a development policy that pursues German and European interests in those areas in which they are compatible with development policy objectives. Instead of focusing on the interests of individual companies, it is important to identify long-term 'win-win' potential, for example through a more strategic approach to planning DC offers that involves the private sector and ministries more actively prior to intergovernmental negotiations with the partner countries. At the same time, we warn against subordinating DC to foreign economic policy objectives. Conditions such as tied aid provisions that link financial cooperation to business contracts for German/EU companies are expensive, inefficient and counterproductive in development terms. In addition, this approach would risk losing sight of Germany's overarching interest in solutions to global problems, such as peacebuilding and climate and biodiversity protection. We set out five guidelines for a development policy strategy that takes due consideration of Germany's own interests without harming the partner countries: 1. Avoid strict tied aid provisions. These would be inefficient in development terms and would be of little benefit to German companies. As an export nation, Germany should comply with freedom of contract rules. 2. Pursue the interests of German society as a whole where they align with DC objectives. We distinguish between Germany's global interests and those of individual companies. DC projects should align economic interests with the common good in the partner country. 3. Develop offers strategically prior to intergovernmental negotiations. The most effective synergies are generated if the private sector and other ministries are involved in preparing DC initiatives at an early stage. To do so, Germany needs to define joint national goals, coordinate ministerial instruments to achieve these goals and evaluate contributions by the private sector in advance. 4. Create strategic partnerships that serve as models. Germany has established a number of bilateral partnerships, especially on energy, raw material security and migration. None of these is exemplary in terms of effective interministerial coordination, private sector involvement or demons-trable benefits for both of the countries involved. At least one flagship project in each of the areas mentioned would make Germany attractive as a credible partner. 5. Expand minilateral formats with European states and influential third countries. Triangular and quadrilateral cooperation with 'global partners' and donor countries that share the same or similar interests can help advance Germany's interests in international development for the common good. |
| Keywords: | Development policy, foreign trade promotion, tied aid, securing raw materials, development banks, common good |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:idospb:325837 |
| By: | ANEGUE, Jean De Dieu |
| Abstract: | The purpose of this project is to analyze the impact of mobile payments on financial inclusion in Cameroon using quasi-experimental impact evaluation methods. The results show that the use of mobile payments does increase the propensity of economic agents to hold accounts in formal financial institutions such as banks. |
| Keywords: | Banking Acces , Impact Evaluation Methods |
| JEL: | C91 O1 O12 |
| Date: | 2025–09–10 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:126134 |
| By: | Gene Amromin; Kenechukwu E. Anadu; Falk Bräuning; Amy Chapel; Rebecca Chmielewski; Meeoak Cho; Patricia K. Cowperthwait; Lorenzo Garza; Cindy E. Hull; Siobhan Sanders; Sam Schulhofer-Wohl; Brett Solimine; Emma Weiss |
| Abstract: | Technology-focused Third-Party Service Providers (TPSPs) have become important players in the operations of financial institutions and the financial markets. This paper summarizes micro- and macro-prudential regulatory frameworks in place to address risks that TPSPs pose to the financial system. The key takeaways are as follows: First, in the U.S., TPSPs operate under limited comprehensive prudential regulatory oversight, aimed primarily at ensuring that their products are safe and resilient on an ongoing basis. Second, while banks rely on multiple TPSPs and hundreds of their services daily for their core banking businesses, U.S. banking supervisors have limited direct visibility into these activities and risks they may pose. Third, although the existing U.S. regulatory framework has some systemic risk considerations, there is no macroprudential structure in place for TPSP risks. Official bodies in other jurisdictions have developed macroprudential frameworks or high-level guidance to address TPSP risks, but their implementation in major economies is nascent at best. Finally, TPSPs are likely an important source of systemic vulnerability for financial institutions and financial markets, although vulnerabilities may be difficult to discern due to a need to assess the criticality of each activity performed by TPSPs and the concentration of TPSPs within that activity. |
| Keywords: | Financial stablity; third-party service providers; cyber risks |
| JEL: | G10 G23 G28 |
| Date: | 2025–06–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedhwp:101721 |
| By: | Bijan Aghdasi; Abhijit Tagade |
| Abstract: | Do markets price knowledge spillovers? We show that patent grants influence the stock returns of firms that are connected through technological knowledge dependencies. Using directed patent citations among publicly listed companies in the United States, we construct a granular measure of each firm's exposure to new patents granted to its technologically upstream firms. Patents granted to these upstream companies significantly boost its abnormal stock returns during the week of the grant. We find that these financial spillovers are predominantly localized within a firm's immediate technological connections. Additionally, we provide a novel empirical decomposition of financial spillovers generated from patent grants, by distinguishing those spillovers emerging from sources of technological knowledge, from those emerging from product market rivals (negative effect) and suppliers (positive effect). Our findings are robust to alternative specifications and placebo tests, and they suggest that technological knowledge spillovers create important market-priced ties between firms that are not fully captured by traditional product market relationships. |
| Keywords: | innovation, networks, spillovers, patents, stock returns, supply chains |
| Date: | 2025–08–13 |
| URL: | https://d.repec.org/n?u=RePEc:cep:cepdps:dp2117 |
| By: | Matthew O. Jackson; Agathe Pernoud |
| Abstract: | We examine optimal regulation of financial networks with debt interdependencies between financial firms. We first characterize when it is firms have an incentive to choose excessively risky portfolios and overly correlate their portfolios with those of their counterparties. We then characterize how optimal regulation depends on a firm's financial centrality and its available investment opportunities. In standard core-periphery networks, optimal regulation depends non-monotonically on the correlation of banks' investments, with maximal restrictions for intermediate levels of correlation. Moreover, it can be uniquely optimal to treat banks asymmetrically: restricting the investments of one core bank while allowing an otherwise identical core bank (in all aspects, including network centrality) to invest freely. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2506.16648 |
| By: | Daniel Dias; Tim Schmidt-Eisenlohr |
| Abstract: | We estimate the uninsured deposit premium - the difference between the rates paid on uninsured versus insured deposits - by linking observed average deposit rates to an estimated share of uninsured deposits. Using U.S. bank data from 1991 to 2025, we show that the average uninsured deposit premium rose by nearly 400 basis points over this period. This rise reflects both falling insured deposit rates and rising uninsured deposit rates. We find a strong correlation with the monetary policy cycle: a one-percentage-point increase in the Federal Funds Rate corresponds to a rise of roughly 32 basis points in the uninsured deposit premium. We develop a bargaining model between banks, insured depositors, and uninsured depositors that explains these dynamics. |
| Keywords: | uninsured deposits, monetary policy, bank funding, deposit pricing |
| JEL: | E52 G21 G28 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12103 |