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on Financial Development and Growth |
| By: | Francois-Michel Boire; Thibaut Duprey; Alexander Ueberfeldt |
| Abstract: | This paper studies how financial shocks shape the distribution of output growth by introducing a quantile-augmented vector autoregression (QAVAR), which integrates quantile regressions into a structural VAR framework. The QAVAR preserves standard shock identification while delivering flexible, nonparametric forecasts of conditional moments and tail risk measures for gross domestic product (GDP). Applying the model to financial conditions and credit spread shocks, we find that adverse financial shocks worsen the downside risk to GDP growth significantly, while the median and upper percentiles respond more moderately. This underscores the importance of nonlinearities and heterogeneous tail dynamics in assessing macro-financial risks. |
| Keywords: | Central bank research; Econometric and statistical methods; Financial markets; Financial stability; Monetary and financial indicators |
| JEL: | C32 C53 E32 E44 G01 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:25-25 |
| By: | Yin-Fang Zhang; Antonio Savoia; Kunal Sen |
| Abstract: | An important feature of the process of transformation in developing economies is the depth and outreach of their capital and credit markets, i.e. financial development. As this is often considered crucial to support growth and poverty reduction, it is important to understand what structural factors drive it. The literature so far has assessed the role of historical, political, cultural, and institutional determinants, but has not yet adequately investigated the role of inequality. This paper addresses this lacuna by empirically investigating its effects. |
| Keywords: | Econometric models (Finance), Income inequality, Capital market, Financial markets, Sustainable development |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:unu:wpaper:wp-2025-59 |
| By: | Charles Kenny (Center for Global Development) |
| Abstract: | This paper examines the changing shape of Chinese investment in Africa, as it evolves from large scale infrastructure toward small scale manufacturing. It looks at the opportunity for the region in the context of a deepening manufacturing labor shortage in China; discusses barriers to that opportunity in both China and the Africa region; and the potential response of Western countries. It may be possible for at least some economies in Africa to benefit from a combination of Chinese investment in manufactured export and processed commodity industries and preferential access to economies including the US and China if geopolitics allow, but there are many reasons this could fail and the geopolitics are increasingly hostile. A backup plan for regional growth would be wise. |
| Date: | 2025–06–09 |
| URL: | https://d.repec.org/n?u=RePEc:cgd:ppaper:359 |
| By: | Véronique Genre; Christophe Guette-Khiter; François Robin |
| Abstract: | Whereas the market value of listed companies can be observed directly using share prices, the vast majority of foreign direct investment (FDI) is in unlisted companies and can only be estimated based on book value. Valuing FDI at market prices reduces France’s net external borrowing position by EUR 200 billion. <p> Alors que la valeur de marché des entreprises cotées en bourse est accessible grâce aux cours des actions, la très grande majorité des investissements directs étrangers (IDE) sont réalisés dans des entreprises non cotées et ne sont estimés qu’à leur valeur comptable. La valorisation des IDE à leur prix de marché réduit de 200 milliards d’euros la position extérieure nette débitrice de la France. |
| Date: | 2025–05–23 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:econot:404 |
| By: | Kondor, Péter |
| Abstract: | In financial crises, a period of overheated credit markets turns into a credit crunch accompanied by a systemic breakdown in the financial intermediary sector. Without a deep understanding of their roots, designing policies to decrease the probability of suffering from them or to avoid the worst consequences is like flying blind. In this review, I survey the recent development of the theory of financial crises. I focus on the answers these theories provide to four fundamental questions. What makes the booming phase fragile, and what are the incentives and frictions leading to that fragility? What triggers the crisis? Why is the downturn persistent? Should policy intervene, and if so, how? |
| Keywords: | financial crises; overheated credit markets; credit crunch |
| JEL: | E32 E44 G28 |
| Date: | 2025–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:129142 |
| By: | Mikayel Sukiasyan |
| Abstract: | What is the best macroprudential regulation when households differ in their exposure to profits from the financial sector? To answer the question, I study a real business cycle model with household heterogeneity and market incompleteness. In the model, shocks are amplified in states with high leverage, leading to lower investment. I consider the problem of a Ramsey planner who can finance transfers with a distortive tax on labor and levy taxes on the balance sheet components of experts. I show that the optimal tax on capital purchases is zero and the optimal policy relies mostly on a tax on deposit issuance. The latter redistributes between agents by affecting the equilibrium rate on deposits. The welfare gains from optimal policy are due to both redistribution and insurance and are larger the more unequal the initial distribution is. A simple tax rule that targets a level of leverage can achieve most of the welfare gains from optimal policy. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.10933 |
| By: | Haelim Anderson; Matthew S. Jaremski |
| Abstract: | We examine the effects of changes in an interest rate cap on small loan brokers in New Jersey during the Great Depression. Using newly constructed data on brokers and banks, we find that small loans declined sharply when the cap was lowered, and despite worsening economic conditions, they rebounded when the cap was raised back up. Consumers could not obtain alternative credit from banks, effectively shutting them out of the market. The cap had a permanent impact on the small loan market due to the large number of broker closures, thereby further reducing the availability of small loans and increasing market concentration. Our findings highlight the fundamental trade-off faced by policymakers: strict rate caps may protect borrowers from predatory lending but can eliminate necessary credit options for vulnerable populations. |
| JEL: | G01 G21 G28 N12 N22 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34277 |
| By: | Mark L. Egan; Ali Hortaçsu; Nathan A. Kaplan; Adi Sunderam; Vincent Yao |
| Abstract: | We examine the implications of sleepy deposits and their impact on competition, bank value, and financial stability in the US banking sector. We first document the shopping behavior of depositors using novel data on account openings and closures. Depositors infrequently shop for deposits, with 5–15% of depositors opening a new account each year. Shopping behavior is idiosyncratic: deposit accounts are more likely to be closed due to the depositor either moving or dying than because the depositor switched to a new account offering higher rates or better services. Building on these facts, we develop an empirical model of the supply and demand for "sleepy deposits." In the model, banks face dynamic "invest-versus-harvest" incentives in competing for depositors who shop infrequently. We estimate the model and find that depositor sleepiness accounts for 58% of the average bank’s deposit franchise value. Sleepiness softens competition, particularly raising markups and franchise value for banks in low-concentration areas, as well as for banks with either low-quality deposit services or high marginal costs. Sleepiness also creates stability in the banking sector. For two main money center banks in the US, the probability of default after the Federal Reserve's 2022-2023 hiking cycle would have increased to more than 20% in a counterfactual without sleepy depositors. |
| JEL: | G0 G21 L0 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34267 |
| By: | Tristan Jourde; Quentin Moreaux |
| Abstract: | This paper introduces a market-based framework to study the effects of tail climate risks in the financial sector. In addition to identifying the financial institutions most vulnerable to physical and transition climate risks, our framework explores the potential for these risks to induce contagion effects in the financial sector. Based on the securities of large European financial institutions (including the UK) spanning from 2005 to 2022, we show that, unlike physical risk, transition risk significantly and increasingly influences systemic risk in the financial sector. We also examine the potential levers available to financial institutions and regulators to address climate-related financial risk. |
| Keywords: | Climate Risks, Contagion, ESG, Financial Stability, Systemic Risk |
| JEL: | G10 G20 G32 Q54 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:993 |
| By: | Yosuke Fukunishi (Graduate School of Economics, The University of Tokyo); Haorong Qiu (Graduate School of Economics, The University of Tokyo); Akihiko Takahashi (Graduate School of Economics, The University of Tokyo); Fan Ye (Graduate School of Economics, The University of Tokyo) |
| Abstract: | This study introduces a novel generative modeling framework for simulating the term structure of interest rates. In recent years, generative models have achieved significant progress in image generation and are increasingly being applied to finance. To the best of our knowledge, this is the first study to apply a generative model—specifically, a diffusion model—to the term structure of interest rates. Furthermore, we extend the framework to incorporate conditional generation mechanisms and v-parameterization. The training dataset consists of spot yield curves constructed from daily overnight index swap (OIS) rates using cubic Hermite splines. As base conditioning variables, we use short-term interest rates and changes in consumer price indexes (CPIs). Empirical analysis covering the period from 2015 to 2025 demonstrates that our model successfully reproduces the level and shape of yield curves corresponding to historical macroeconomic conditions and short-term interest rate environments. Additionally, when incorporating further conditioning variables related to quantitative easing policies, monetary base, current account balances, and nominal gross domestic product (GDP), we find that the inclusion of quantitative easing indicator notably enhances the model’s output relative to the base conditioning case. This suggests improved robustness and representational capacity under expanded conditioning. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:cfi:fseres:cf604 |
| By: | David R. Baqaee; Ariel Burstein |
| Abstract: | This paper quantifies misallocation caused by limited risk-sharing and imperfect consumption-smoothing. We measure these losses in terms of how much of society’s resources would be left over if financial markets were complete and each consumer were compensated to maintain their status-quo welfare. Using exact formulas and approximate sufficient statistics, we analyze standard incomplete-market environments—ranging from closed-economy Bewley-Aiyagari models to multi-country settings with input-output linkages. We find that incomplete insurance against household-level idiosyncratic risk is very costly—about 20% of aggregate consumption—based on both structural models and sufficient-statistics computed using household consumption panel data. By contrast, the cost of imperfect international financial markets (abstracting from within-country heterogeneity) is roughly 5%, driven by the inclusion of fast-growing economies such as China and India. Unexploited risk-sharing opportunities among countries at similar levels of development, on the other hand, are fairly limited (less than 1%). |
| JEL: | E0 F0 F1 F30 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34233 |
| By: | Daiya Mita (Nomura Asset Management Co. Ltd.); Taiga Saito (Graduate School of Economics, Hitotsubashi University); Akihiko Takahashi (Faculty of Economics, The University of Tokyo) |
| Abstract: | For global multi-asset fund managers, reflecting their macroeconomic views in the prediction of expected interest rates across countries, exchange rates, and equity prices in a manner consistent with economic theory is challenging. The existing literature has yet to provide an established multi-currency model that is flexible enough to incorporate such views into the prediction of future asset price dynamics. To address this problem, this paper proposes a novel multi-currency incomplete market model in which agents in each country have logarithmic utility but differ in their time preferences and subjective beliefs, within a market equilibrium framework, namely, supply and demand equilibrium. With only a few exogenous inputs, such as each country’s output process and agents’ preference parameters, the model endogenously determines equilibrium interest rates, exchange rates, and stock prices, along with optimal consumption and portfolios. Thus, the model enables us to (i) flexibly incorporate crosscountry differences in investors’ time preferences and macroeconomic outlooks, and (ii) examine how these differences affect equilibrium interest rates and asset prices, including stock prices and exchange rates. Moreover, by applying the particle filtering method within a state-space framework based on the twocountry, two-currency version of the model to Japanese and U.S. market data (equity index futures, shortterm interest rates, and the exchange rate), the model not only fits the observed dynamics of equity indices, short rates, and the exchange rate, but also effectively estimates the dynamics of home-country biases and latent economic factors, which can be utilized in making investment decisions in asset management practice. |
| Keywords: | multi-currency equilibrium model, incomplete market, subjective beliefs, multi-asset investment, state-space model |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:tky:fseres:2025cf1257 |
| By: | Maéva Silvestrini |
| Abstract: | International monetary shocks have large spillover effects on emerging economies: a rise in US policy rates often triggers capital outflows from these countries and reduces access to bank credit. This blog post confirms the crucial but little-known stabilising role played by another source of financing during such shocks: inter-firm credit provided by foreign suppliers. <p> Les chocs monétaires internationaux affectent fortement les économies émergentes : une hausse des taux directeurs américains y entraine souvent des sorties de capitaux et un moindre accès au crédit bancaire. Ce billet confirme le rôle stabilisateur crucial, mais peu connu, d’une autre source de financement face à ces chocs : le crédit inter-entreprises accordé par les fournisseurs étrangers. |
| Date: | 2025–07–28 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:econot:410 |
| By: | Luc Jacolin; Quentin Dufresne; Marin Ferry |
| Abstract: | Leveraging a unique dataset that combines country-level information on debt restructuring with firm-level data from the World Bank Enterprise Surveys (WBES) spanning from 2004 to 2023, we analyze the effects of debt restructuring on firm sales growth. Using recent advancements in difference-in-differences estimation to account for the staggered implementation of restructurings, we find that sovereign debt restructuring increases firm performance by 5–9 percentage points, with stronger effects for private, domestically-owned firms and those reliant on public and financial services. The impact varies by debt type (domestic or external), creditor composition, and implementation speed. Swift external restructurings led by official creditors, such as the Paris Club, yield the most substantial positive effects, whereas other types of restructurings show no significant impact on private sector growth. |
| Keywords: | Debt Restructuring, Debt Distress, WBES, Difference-in-Differences (DiD), Paris Club |
| JEL: | D22 F34 O16 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:991 |
| By: | Kling, Gerhard; Lo, Yuen C; Murinde, Victor; Volz, Ulrich |
| Abstract: | We present the first systematic investigation of the impact of climate vulnerability on the cost of sovereign debt using a sample of 46 developing and advanced countries from 1996 to 2016. We find that a subgroup of 25 developing countries with higher exposure to climate vulnerability—all of which are members of the V20 climate vulnerable forum—exhibit, on average, a 1.174% higher cost of debt. We estimate that 40 members of the V20 paid USD 62 billion in additional interest from 2007 to 2016 due to their climate vulnerability. We also find that a measure of social readiness has a negative impact on bond yields, suggesting that social and physical investments in adaptation and resilience can help mitigate climate risk-related financing costs. Our findings indicate that climate vulnerability can threaten sovereign debt sustainability and cause financial exclusion, thereby undermining investment in adaptation and accelerating a vicious cycle of climate vulnerability, debt and underdevelopment. |
| JEL: | Q54 H63 G12 |
| Date: | 2025–09–23 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:129272 |
| By: | Robalino, David A. (World Bank); Bourkane, Loubna (African Development Bank); Ben Ghod Bene, Amir |
| Abstract: | The paper discusses the limits of credit and capital subsidies to finance MSMEs in the presence of jobs-related externalities. Using a stylized model of the decision to lend to enterprises with different levels of risk, we show that instruments like credit guarantees are likely to exclude enterprises that have a higher social rate of return and a higher social value than some of those that get access to credit. We also show that pigouvian wage subsidies equal to the value of the jobs externality are unlikely to be an efficient policy instrument; they would need to be firm specific and do not change the distribution of financial risks. We argue that impact investment funds focused on jobs (IIFJ) can be a market mechanism to channel part of existing government subsidies and deal with market failures resulting from both asymmetric information and jobs externalities. Using an extended version of the model that is calibrated to a representative country we show that -- if well designed -- IIFJ can generate significant welfare gains relative to traditional investment funds because of their impact on jobs. |
| Keywords: | impact investment funds, jobs externalities, credit guarantees, pigouvian wage subsidies |
| JEL: | G2 J3 O1 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18119 |
| By: | Razan Amine; Qianqian Zhang; Shushanik Hakobyan; Ankita Goel |
| Abstract: | This paper analyzes the major bottlenecks to private sector development in sub-Saharan Africa using novel methods based on firm-level data. Employing both perception-based and proxy-based methodologies, we identify and measure seven key obstacles to development. Our findings reveal significant divergences between firms' perceptions and objective measures of business constraints. While firms frequently cite infrastructure deficiencies as their primary concern, our proxy-based analysis identifies corruption followed by financial constraints as the most severe impediments to firm growth. Furthermore, small and medium-sized enterprises face disproportionate challenges compared to large firms, especially regarding financial access and human capital limitations. These findings underscore the need for targeted, context-specific policy interventions that address the objective constraints facing different types of firms across diverse economic environments in sub-Saharan Africa. |
| Keywords: | Sub-Saharan Africa; private sector development; firm-level data; principal component analysis |
| Date: | 2025–09–19 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/188 |
| By: | David Argente; Paula Gonzalez Alvarez; Esteban Méndez; Diana Van Patten |
| Abstract: | Digital payment platforms can displace cash and extend financial services to underserved populations, yet many adults worldwide remain unbanked. Leveraging granular microdata on individual transactions and user characteristics, we argue that broad cash substitution via peer-to-peer (P2P) platforms depends on a “rapid low income-gradient”, the speed at which adoption spreads from affluent early users to lower-income groups. In three Latin American cases, Brazil’s Pix, Costa Rica’s Sinpe Móvil, and Mexico’s CoDi, we document that low adoption costs, strong network effects, coordinated supply-side integration, and early awareness efforts enabled Pix and Sinpe Móvil to reach nearly all income segments within five years, whereas CoDi remains characterized by low usage and predominantly high-income adopters. |
| JEL: | E4 E5 O10 O2 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34280 |