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on Financial Development and Growth |
| By: | Andreea Rotarescu (Wake Forest University, Department of Economics) |
| Abstract: | This paper studies the adverse long-term impact of declining bank health on aggregate productivity. I develop a simple model of productivity-enhancing investment where firm exposure to fragile banks leads to losses on both the intensive and extensive margins. The model highlights the existence of a bias in measuring observable TFP growth during episodes of heightened firm exits. To address this bias, I construct an exit-adjusted measure of productivity growth using data on Spanish firm-bank relationships and bank bailouts from 2007-2017 and use this measure to quantify the output loss from bank distress. The identification of the exit bias exploits regional variation in weak-bank density. A counterfactual analysis shows that, a decade after the banking crisis, output growth from the extensive margin recovers but the intensive margin proves much more persistent. Together, these dynamics amount to a cumulative loss of 3% of pre-crisis GDP over ten years. |
| Keywords: | Banking Crises; Firm Investment; Aggregate Productivity; Endogenous Exit; Sample Selection |
| JEL: | E22 G01 G21 G33 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ris:wfuewp:021681 |
| By: | Clemens Possing (University of Waterloo); Andreea Rotarescu (Wake Forest University, Department of Economics); Kyungchul Song (University of British Columbia) |
| Abstract: | This paper investigates feedback effects between bank health and zombie firms—financially distressed firms receiving subsidized credit. The literature focuses on how banks create zombies, overlooking zombies’ impact on bank health. Using Spanish firm-bank data (2005-2014), we document a vicious cycle: lower bank capital ratios are associated with higher zombie activity in served industries, while higher zombie prevalence is associated with reduced bank capital. We link this to a previously unexplored mechanism where banks respond appropriately to observable financial distress through higher provisioning, but overlook risks from relationship borrowers receiving subsidized rates. Our findings suggest that this feedback stems not from financial distress alone, but from the combination of distress with interest rate subsidies. |
| Keywords: | Zombie Lending; Bank-Firm-Industry Feedback; Capital Misallocation; Networks; Cross-Sectional Dependence |
| JEL: | C23 E44 G21 G32 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:ris:wfuewp:021682 |
| By: | Sergio A. Correia; Stephan Luck; Emil Verner |
| Abstract: | This paper studies the role of banking supervision in anticipating, monitoring, and disciplining failing banks. We document that supervisors anticipate most bank failures with a high degree of accuracy. Supervisors play an important role in requiring troubled banks to recognize losses, taking enforcement actions, and ultimately closing failing banks. To establish causality, we exploit exogenous variation in supervisory strictness during the Global Financial Crisis. Stricter supervision leads to more loss recognition, reduced dividend payouts, and an increase in the likelihood and speed of closure. Increased strictness entails a trade-off between a lower resolution cost to the FDIC and reduced credit. |
| JEL: | G0 G01 G21 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34343 |
| By: | Alberto Russo (Department of Economics and Social Sciences, Università Politecnica delle Marche, Ancona, Italy and Department of Economics, Universitat Jaume I, Castellón, Spain) |
| Abstract: | Drawing on Peter Turchin’s structural-demographic theory, this paper provides a preliminary examination of how rising inequality and financial liberalization contribute to political instability through the interplay of mass immiseration and elite overproduction. We capture these dynamics through a simplified agent-based macroeconomic model, introducing two structural shocks – growing inequality and financial liberalization – that reflect the transformations reshaping advanced economies in recent decades, a process intertwined with political disintegration. A wealth tax on the richest households can reduce political fragmentation and improve economic performance, but lasting resilience will require embedding such measures within a broader rethinking of the policy paradigm that has prevailed since the 1980s. |
| Keywords: | growing inequality; financial liberalization; political instability; agent-based model |
| JEL: | C63 D31 E02 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:jau:wpaper:2025/07 |
| By: | Milo\v{s} Ciganovi\'c; Elena Scola Gagliardi; Massimiliano Tancioni |
| Abstract: | We estimate the dynamic distributional effects of financial shocks in the Euro Area using survey-based microdata on personal incomes. We find that positive financial shocks increase inequality, with heterogeneity across different income groups. Much of the response emerges in the tails of the income distribution. By decomposing individual incomes into financial and labor components, we identify two distinct transmission mechanisms: financial income inequality rises, likely due to differences in asset holdings. In contrast, labor income inequality increases through a skill premium channel. We then consider a nonlinear model framework, distinguishing the sign of the shock, allowing us to document the presence of asymmetric effects. While positive shocks lead to income disparities, adverse shocks have the opposite effect. Notably, middle-income groups are only affected following a negative shock, highlighting differential vulnerabilities across the income distribution. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2510.11289 |
| By: | Jan Toporowski (International University College) |
| Abstract: | This paper commemorates the 70th anniversary of Kalecki's seminal lecture in Mexico on financing economic development. The first part of this paper outlines the theoretical model underlying Kalecki's view of development financing. A second part of the paper summarizes the foundations of structuralist development economics in the Prebisch-Singer approach to international trade and import-substitution development strategies. A third part of the paper examines the confrontation between Kalecki’s view of economic development strategy, and the structuralist approach, in the case of Cuba, highlighting the differences between the two approaches. A fourth part concludes with some reflections on the relevance today of structuralism and Kalecki's view of economic development. |
| Keywords: | Kalecki, structuralist economics, economic development, development finance, land reform, import substitution, Prebisch-Singer. |
| JEL: | B24 B31 F54 O11 O19 |
| Date: | 2025–06–06 |
| URL: | https://d.repec.org/n?u=RePEc:thk:wpaper:inetwp234 |
| By: | Mr. Matthieu Bellon; Ross Warwick |
| Abstract: | Can simply exceeding a critical tax-to-GDP threshold bring about an accelerated trajectory of economic growth and development in a country? We conduct new event studies and exploit a richer dataset to revisit Gaspar, Jaramillo and Wingender’s 2016 “tax tipping point” result. Both with their regression discontinuity approach and a dynamic difference-in-differences estimation, we find that cumulative growth over 10 years increases by 10 percentage points when a country’s tax-to-GDP ratio increases above a 10 percent threshold. Further, we show that crossing the threshold coincides with the beginning of significant improvements in measures of a country’s financial development, government effectiveness, legal framework, and governance. Event studies additionally reveal that only transformational episodes of tax increases above the threshold deliver these gains: episodic crossings that fail to bring tax revenues durably above the threshold and that don't coincide with improvements in financial development and government effectiveness yield fleeting gains. Our results suggest that a minimal tax capacity is necessary for growth but emphasize that only a sustained tax increase associated with other developmental progress is sufficient. |
| Keywords: | Income per Capita; Taxation; Development; Multiple Equilibria; Event Study |
| Date: | 2025–10–03 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/203 |
| By: | Nouhaila Zeroual (Faculté des Sciences Juridiques Economiques et Sociales - Souissi, Rabat); Mohammed Rachid Aasri (Faculté des Sciences Juridiques Economiques et Sociales - Souissi, Rabat) |
| Abstract: | Abstract The sharp rise of public debt over the past years has renewed the debate about its impact on economic growth. This article provides a review of the main theoretical and empirical perspectives, highlighting the Keynesian, classical and threshold-based approaches. While Keynesian studies emphasize the potential of public debt to stimulate growth when used to finance productive investments during downturns, classical view warns against the risks of excessive borrowing, including crowding out and fiscal instability. Threshold-based perspective, suggest a non-linear relationship, suggesting that debt supports growth at moderate levels but becomes harmful when certain limits are exceeded. Empirical evidence from advances, emerging and low-income economies, including recent findings from Africa, the MENA region and Europe, shows that the impact of public debt on economic growth varies considerably, depending on internal and external factors such as institutional quality, fiscal policy frameworks and macroeconomic conditions. The often cited 90% debt-to-GDP ratio found by Reinhart and Rogoff, illustrates the importance of identifying critical levels at which debt starts impacting negatively growth. However, as the reviewed studies reveal, such thresholds are not universal and unique, their effects vary between countries, and depend on many factors. The findings suggest that public debt can support economic growth when managed prudently and used to finance productive investments, but can be harmful when mismanaged or accumulated. |
| Keywords: | Debt thresholds, Economic growth, Public debt |
| Date: | 2025–09–06 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05248805 |
| By: | David Dione (LARSES - Laboratoire d'Etude et de Recherche en Sciences Economiques et Sociales - UASZ - Université Assane Seck de Ziguinchor [Sénégal]) |
| Abstract: | Public debt represents the sum of all loans taken out by governments that have not yet been repaid. Since gaining independence, Senegal, like many countries, has resorted to both external and domestic borrowing to finance its economy. However, this debt has only increased year after year. In fact, at the end of 2024, Senegal was the most indebted country on the African continent, with an estimated public debt of 118.8% (IMF, 2024). If this situation persists, one of the consequences could be financial instability, which could permanently compromise the country's economic growth. Based on this observation, the objective of this article is to study the impact of public debt on economic growth in Senegal. To this end, a number of variables were used, all taken from the World Bank database covering the period 1980 to 2024. Based on a rigorous and appropriate methodological approach (ARDL method), our results show that public debt has a negative impact on Senegal's economic growth. Our recommendations are to channel public debt funds into areas such as education, infrastructure, and human capital development, which would generate sustained long-term growth for the country. |
| Abstract: | La dette publique représente la somme de tous les emprunts contractés par les administrations et qui n'ont pas encore été remboursés. Depuis son indépendance, le Sénégal comme beaucoup de pays, a recours à l'emprunt extérieur comme intérieur pour financer son économie. Cependant, cette dette ne fait qu'augmenter d'années en années. En effet, en fin 2024, le Sénégal était le pays le plus endetté du continent africain avec une dette publique estimée à 118, 8% (FMI, 2024). Or, si cette situation persiste alors l'une des conséquences serait le risque d'une instabilité financière pouvant compromettre durablement la croissance économique du pays. Partant de ce constat, l'objectif de l'article est donc d'étudier l'impact de la dette publique sur la croissance économique du Sénégal. Pour cela, un certain nombre de variables a été utilisé tous issues de la base de données de la Banque Mondiale couvrant la période 1980 à 2024. Basé sur une approche méthodologique rigoureuse et adéquate (méthode ARDL), nos résultats montrent que la dette publique impacte négativement la croissance économique du Sénégal. Nos recommandations vont dans le sens d'une orientation des fonds issus de la dette publique dans des domaines tels que l'éducation, les infrastructures et le développement du capital humain ce qui permettrait de générer une croissance soutenue à long terme pour le pays. |
| Keywords: | "Dette publique", "Croissance économique", "Sénégal" |
| Date: | 2025–08–31 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05252429 |
| By: | Mark S Manger (University of Toronto); David Mihalyi (World Bank & Kiel Institute); Ugo Panizza (Geneva Graduate Institute & CEPR); Niccolò Rescia (Global Sovereign Advisory & Aix Marseille Univ, CNRS, AMSE, Marseille, France) |
| Abstract: | This paper introduces the African Debt Database (ADD) -a new, comprehensive dataset that traces both domestic and external debt instruments at a granular level. The main innovation is a detailed mapping of Africa's domestic debt markets, drawing on rich, new data extracted from government auction reports and bond prospectuses. The database covers over 50, 000 individual government loans and securities issued by 54 African countries between 2000 and 2024, amounting to a total of USD 6.3 trillion in debt. For each instrument, it provides harmonized micro-level information on currency, maturity, interest rates, instrument type, and creditor. The data reveal the growing dominance of domestic debt in Africa -albeit with substantial cross-country variation. Four stylized facts stand out: (i) the rapid expansion of domestic debt markets, especially in middle-income countries; (ii) the wide dispersion in borrowing costs and real interest rates; (iii) large cross-country differences in maturity structures and associated rollover risks; and (iv) a rising debt-service burden, particularly due to international bonds. Generally, this project shows that debt transparency is both feasible and valuable, even in data-scarce environments. |
| Keywords: | Sovereign Borrowing, public debt, Development Finance, Domestic Markets, Africa |
| JEL: | F34 H63 O55 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:aim:wpaimx:2516 |
| By: | Sebastian Horn; Carmen M. Reinhart; Christoph Trebesch |
| Abstract: | This paper provides a comprehensive overview of China’s lending to developing countries—a central feature of today’s international financial system. Building on our previous research and the work of others, we document the scale, destination, and terms of China’s overseas lending boom, as well as the lending bust and defaults that have followed. We compare China’s lending boom to past boom-bust cycles and discuss the implications of China’s rise as an international creditor on recipient countries and sovereign debt markets. The evidence indicates that Chinese state banks are assertive and commercially sophisticated lenders. For recipient countries, however, the jury is still out: it remains to be seen whether the gains from China’s lending—through growth and improved infrastructure—will outweigh the more immediate burdens of debt service or the multifaceted costs of default. |
| JEL: | E3 F34 F65 F68 N2 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34359 |
| By: | Mr. Antonio David; Samuel Pienknagura; Juan Yepez |
| Abstract: | Using quarterly data on bank credit to the private sector and a comprehensive database on fiscal policy announcements for a sample of 32 advanced economies and emerging markets, we estimate the dynamic response of bank credit to fiscal consolidations. Our results show that the relationship between fiscal consolidation announcements and real bank credit differs by country groups. In countries with high sovereign risk, consolidation announcements “crowd-in” bank credit, particularly credit to the corporate sector, whereas countries with low initial risk experience credit contractions. Further, we present evidence that the composition of fiscal consolidations matters: expenditure-based consolidations are associated with a more favorable bank credit response than revenue-based ones. Finally, we show that bank credit responds more favorably to fiscal consolidations in countries with flexible exchange rate regimes, lower levels of household indebtedness, and when consolidation are announced during periods of robust economic activity. |
| Keywords: | Fiscal Consolidations; Sovereign Risk; Bank Credit |
| Date: | 2025–10–03 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/206 |
| By: | Eriko Togo; Hui Miao; Mr. Myrvin L Anthony; Miss Marie S Kim; Joe Kogan; Shijia Luo |
| Abstract: | Amid rising domestic sovereign debt overhang in some emerging and developing economies (EMDEs), this paper underscores the importance of effective domestic sovereign debt restructuring (DDR) strategies where a DDR is deemed necessary. The paper suggests that delayed responses to, or inaction on, rising domestic debt vulnerabilities can be costly, highlighting the importance of assessing the intertemporal tradeoff between short-term costs from a DDR and achieving long-term economic resilience. Drawing on case studies, practical guidance is provided for designing and executing a DDR, tailored to country-specific circumstances and constraints, to minimize risks to financial stability and domestic debt market dysfunction. Restructuring alone does not ensure success. A comprehensive macroeconomic adjustment program addressing the root cause of debt accumulation—while distributing the burden among creditors, implementing fiscal adjustment, and securing support from the international financial community anchored by an IMF arrangement—will enhance the chance of a successful DDR outcome. |
| Keywords: | Domestic Debt Restructuring; Sovereign Debt; Debt Relief; Government Securities Markets |
| Date: | 2025–10–03 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/202 |
| By: | Arunima Paul; John Chung |
| Abstract: | Credit access plays a pivotal role in enabling firms to participate in global markets and support broader economic growth. While large firms benefit from steady revenue streams and easier financing options, small and medium-sized enterprises (SMEs) frequently encounter substantial challenges in securing credit. This paper analyzes U.S. metropolitan area–level data to assess how local expansions in credit supply, particularly via Community Reinvestment Act (CRA) loans, influence export performance. Using the geographic dispersion of bank headquarters as an instrumental variable, we estimate that a 10% increase in credit availability results in a 4.5% increase in export volumes. Extending the analysis to a heterogeneous firm framework with credit frictions, we show that a 10% reduction in trade costs produces welfare gains from trade that are 18.75% larger when firms are unconstrained by credit. |
| Keywords: | Credit access; Exports; SMEs; Community Reinvestment Act; Financial constraints; Trade; Welfare |
| JEL: | G21 F41 E44 F14 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:abn:wpaper:auwp2025-09 |
| By: | María Alejandra Amado (BANCO DE ESPAÑA); Carlos Burga (PUC-CHILE); José E. Gutiérrez (BANCO DE ESPAÑA) |
| Abstract: | We document a novel channel through which domestic bank regulations generate cross-border real effects via international trade. Our setting is a one-time, unexpected increase in loan loss provisions in Spain in 2012. Using comprehensive administrative data from the Spanish credit register matched with customs data, we show that importers relying on the most affected banks experienced sharp reductions in credit supply, which led to a decline in their purchases abroad. Leveraging bilateral trade data at the country-product level, we find that Spanish aggregate imports declined, indicating limited reallocation across firms: the shock on highly exposed importers was not offset by the expansion from less exposed ones. This decline in Spain’s import demand is transmitted internationally, as total exports of Spain’s trading partners fell. The effect was stronger for countries with less developed financial systems, for exporters facing higher bilateral trade costs vis-à-vis Spain, and for products that are harder to reallocate across markets. Our findings highlight international trade as a key transmission mechanism of banking regulation –and domestic shocks more broadly– with implications for the cross-border coordination of prudential policy. |
| Keywords: | bank regulations, spillovers, international trade |
| JEL: | F14 F36 F42 G21 G28 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2538 |
| By: | Nancy Lee (Center for Global Development); Samuel Matthews (Center for Global Development); James Reid (Center for Global Development) |
| Abstract: | This paper begins by looking at private investment and bank credit to the private sector as a share of GDP in EMDEs in this century. It finds worrisome levels and trends, especially compared to private investment ratios for economies that achieved sustained high growth in the last century. As exogenous shocks proliferate and growth slows, EMDEs need better evidence on structural policies that help boost private investment ratios. The World Bank’s new B-Ready database scores governments’ investment-related policies and services across nearly 1, 200 indicators per economy (for an initial sample of 50 economies), organized into 10 topics and 3 pillars. The paper tests the hypothesis that there are significant correlations between these scores and private investment outcomes. The B-Ready detail helps governments identify areas of strength and weakness. But governments need help in setting priorities across nearly 1, 200 indicators. Setting priorities requires evidence not only about the scores themselves but also about which indicators are most correlated with actual private finance flows. Taking due account of the limitations of analysis based on correlations, our findings suggest that, as a point of departure, governments would do well to pay attention to policies and systems that confer economy-wide benefits attractive to private finance providers. While there are differences between foreign investors, domestic investors, and bank lenders, the evidence points overall to the importance of trade openness; strong and efficient e-payment systems; better access to data for assessing creditworthiness; policies and systems for protecting competition; support for local innovation (including intellectual property protection for domestic innovators); opening up government procurement; and well-functioning dispute settlement mechanisms that don’t require court litigation. The cost of making and receiving e-payments and trade openness stand out as significant factors for all three sources of finance. |
| Date: | 2025–10–09 |
| URL: | https://d.repec.org/n?u=RePEc:cgd:ppaper:363 |
| By: | Martinez Cillero Maria (European Commission - JRC) |
| Abstract: | "This note presents the latest trends in the investment behaviour of multinational enterprises, focusing on non-EU (foreign) investors. It looks at merger and acquisition (M&A) deals and other equity investments of at least 10% of capital of the target company in the EU, as well as at greenfield projects. A detailed overview of deals and greenfield projects corresponding the quarters 3 and 4 of 2024 is provided, includiding trends, and origin, sectoral and destination breakdowns." |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:ipt:iptwpa:jrc142506 |
| By: | Corina Boar; Denis Gorea; Virgiliu Midrigan |
| Abstract: | We use firm-level data to document that private businesses experience large fluctuations in their profit shares. These are due to large, fat-tailed and transitory changes in output that are not fully accompanied by changes in their inputs. We interpret this evidence using a model of entrepreneurial dynamics. Because firms can limit their exposure to risk by operating at a smaller scale, our model predicts large macroeconomic losses from uninsurable business risk, much larger than those stemming from credit constraints. While self-financing allows entrepreneurs to quickly overcome credit constraints, even wealthy entrepreneurs remain considerably exposed to risk. |
| Keywords: | entrepreneurship, risk, credit constraints, misallocation |
| JEL: | E2 E44 G32 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1300 |
| By: | Qu Feng; Shang-Jin Wei; Guiying Laura Wu; Mengying Yuan |
| Abstract: | Capital controls and other policy distortions in the capital market are costly to entrepreneurs. We propose a structural estimation approach to quantify the effect using IPO locational choices. We estimate the willingness-to-pay to bypass these distortions by the Chinese entrepreneurs with overseas listed firms to be a haircut in firm value by 50-60%. We infer that the welfare for the entrepreneurs could rise by 22% from the relevant capital market reforms. |
| JEL: | F30 O16 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34341 |
| By: | Mauri Kotamaki (Turku School of Economics, University of Turku, Finland) |
| Abstract: | This paper estimates the causal effect of financial constraints on the short-term performance of Finnish SMEs using survey data from 2016-2024 and propensity score matching (PSM). We examine six outcomes: turnover, employment, investment, profitability, solvency, and innovation, and report effects on both odds and probability scales. Financial constraints significantly increase the likelihood of adverse outcomes: constrained firms face 10-30\% higher odds of reporting deterioration in core indicators, with the largest effects on solvency (29\% higher odds) and profitability, followed by investment and turnover; employment effects are smaller, and innovation effects modest. Marginal effects indicate up to a 4 percentage point reduction in the probability of improvement for key outcomes. Results are robust to multiple-testing adjustments, and alternative specifications. Heterogeneity analysis reveals that the effects vary by firm size, pointing to a dual mechanism: turnover and profitability effects are strongest for micro and small firms, reflecting immediate liquidity stress, while employment and investment effects intensify with firm size, suggesting real adjustments (growth obstacles) are more pronounced in mid-sized SMEs. Policy implications and directions for future research are discussed. |
| Keywords: | credit constraints, financing, impact analysis, propensity score matching |
| JEL: | G32 D22 L25 C21 O16 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:tkk:dpaper:dp172 |
| By: | Konrad Adler (University of St. Gallen - School of Finance; Swiss Finance Institute) |
| Abstract: | This paper studies how financial covenants, provisions included in most loan contracts, influence firm investment. I develop a structural model incorporating covenants and find that they allow for 4.7% higher aggregate investment relative to a no-covenants baseline. While covenants are beneficial overall, the model also reveals costs faced by firms attempting to avoid covenant violations. In two applications of the model, I find that, first, the transmission of aggregate shocks to firm financing crucially depends on firms' efforts to avoid covenant violations. Second, the model shows that earnings-based covenants allow for higher investment in industries with low asset pledgeability but offer no advantage when assets can be easily pledged. |
| Keywords: | Financial Constraints, Covenants, Investment, Heterogeneous Firms |
| JEL: | E44 G31 G32 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2570 |
| By: | Jean-Paul L’Huillier; Pierlauro Lopez; Sanjay R. Singh |
| Abstract: | Motivated by behavioral evidence, we develop a tractable method for incorporating competition neglect in a general equilibrium firm investment problem. Competition neglect causes firms to systematically underestimate the investment of their competitors. When we introduce competition neglect into a canonical RBC model, this friction acts like an investment wedge that causes overinvestment at first, and underinvestment later on. In contrast to a model with exogenous investment shocks, these dynamics are accompanied by realistic variation in equity premia, even in the absence of financial frictions. Investment booms raise stock prices in general equilibrium, predicting periods of low excess returns going forward. The model can generate realistic comovement of real and financial variables. |
| Keywords: | animal spirits; boom-bust cycles; Behavioral macroeconomics |
| JEL: | E22 E32 D21 D91 |
| Date: | 2025–10–08 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:101905 |
| By: | Kolaric, Sascha; Kiesel, Florian; Ongena, Steven |
| Abstract: | Do credit ratings help enforce market discipline on banks? Analyzing a uniquely comprehensive data set consisting of 1, 081 rating change announcements for 154 international financial institutions between January 2004 and December 2015, we find that rating downgrades for internal reasons, such as adverse changes in the operating performance or capital structure of banks, are associated with a significant credit default swap spread widening. However, this widening only occurs for banks that are not perceived as to be Too‐Big‐to‐Fail (TBTF). Our findings question the reliability of credit ratings as a tool to discipline TBTF banks and suggest that regulatory monitoring should remain the main mechanism for disciplining these banks. |
| Date: | 2025–09–23 |
| URL: | https://d.repec.org/n?u=RePEc:dar:wpaper:157321 |
| By: | William Ginn (Labcorp, Coburg University of Applied Sciences); Jamel Saadaoui (University Paris 8); Evangelos Salachas (University of the Aegean) |
| Abstract: | This paper examines how U.S. monetary policy shocks influence asset price bubbles under different inflation regimes. Using data from 1998–2023, we show that the transmission of policy is neither constant nor time-invariant. Standard local projection (LP) estimates suggest modest average effects, but including the COVID-19 period reveals that these relationships weaken. Employing time-varying local projections (TVP-LP), we document sharp shifts in transmission during the Global Financial Crisis and the pandemic, motivating a nonlinear approach. Nonlinear VAR-LP estimates uncover clear asymmetries: in high-inflation states, monetary tightening deflates bubbles by raising financing costs and constraining risk-taking; in low-inflation states, the same shocks amplify bubbles by raising expected inflation, narrowing credit spreads, and boosting equity returns. We interpret this inversion as evidence of a state-contingent speculative signaling channel, whereby tightening is perceived as a signal of stronger demand or implicit accommodation, encouraging further speculation. This mechanism highlights that safeguarding financial stability requires more than interest rate adjustments alone—it demands explicit attention to the inflationary environment and investor perceptions. |
| Keywords: | Financial stability, asset prices, booms and busts, local projections |
| JEL: | E |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:inf:wpaper:2025.17 |
| By: | Lukyanov, Georgy |
| Abstract: | Firms often choose between concentrated, renegotiable bank claims and dispersed, arm’s-length market debt. I develop a tractable adverse-selection model in which both financiers can take collateral, but they differ in enforcement and coordination efficiency at default. The single primitive wedge—a higher effective liquidation rate for concentrated creditors—is sufficient to generate coexistence, a sharp cutoff in the bank–bond partition, and distinctive comparative statics. A marginal improvement in bankruptcy/insolvency efficiency or bondholder coordination reallocates issuance toward bonds, compresses loan–bond pricing gaps for safe types, and shifts default incidence and collateral intensity in predictable ways. The welfare decomposition clarifies when strengthening bank enforcement reduces deadweight liquidation losses (by moving marginal types into monitored finance) versus when improving market-side coordination dominates (by accelerating dispersed-creditor resolution). The model delivers stability-relevant predictions for default rates, recovery, covenant stringency, and issuance composition around reforms that move liquidation efficiency on either side, and it provides a disciplined mapping to empirical proxies (recoveries, covenant strength, creditor dispersion). |
| Keywords: | Bank–bond choice; Collateral and enforcement; Liquidation efficiency; Creditor coordination; Adverse selection; Financial stability. |
| JEL: | G21 G32 G33 D82 K22 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:131006 |
| By: | Stein Berre; Asani Sarkar |
| Abstract: | The term “exorbitant privilege” emerged in the 1960s to describe the advantages derived by the U.S. economy from the dollar’s status as the de facto global reserve currency. In this post, we examine the exorbitant privilege that accrued to the Netherlands in the eighteenth century, when the Dutch guilder enjoyed global reserve currency status. We show how the private actions of financial institutions created and maintained this privilege, even in the absence of a central bank. While privilege benefited the Dutch financial system in many ways, it also laid the seeds of later financial crisis. |
| Keywords: | exorbitant privilege; reserve currency; Netherlands; eighteenth century |
| JEL: | N13 N23 |
| Date: | 2025–10–07 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:101924 |
| By: | Nicola Borri; Yukun Liu; Aleh Tsyvinski; Xi Wu |
| Abstract: | Cryptocurrencies are coming of age. We organize empirical regularities into ten stylized facts and analyze cryptocurrency through the lens of empirical asset pricing. We find important similarities with traditional markets -- risk-adjusted performance is broadly comparable, and the cross-section of returns can be summarized by a small set of factors. However, cryptocurrency also has its own distinct character: jumps are frequent and large, and blockchain information helps drive prices. This common set of facts provides evidence that cryptocurrency is emerging as an investable asset class. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2510.14435 |
| By: | Demary, Markus; Taft, Niklas |
| Abstract: | Bei Stablecoins handelt es sich um Finanzinstrumente, die ähnlich wie Geldmarktfonds funktionieren und in US-Staatsanleihen investieren. Jedoch werden bei Stablecoins keine Fondsanteile, sondern Kryptowerte erworben. Wie bei den Eurodollars in den 1960er und 1970er Jahren handelt es sich um finanzielle Verbindlichkeiten, die außerhalb des US-Bankensystems geschaffen wurden. Mit dem GENIUS-Gesetz (Guiding and Establishing National Innovation for U.S. Stablecoins of 2025) zielen die USA auf die Förderung des Marktes für Stablecoins ab. Die Auswirkungen einer verstärkten Vernetzung von Stablecoins mit dem weltweit größten und liquidesten Markt für Staatsanleihen ist für die globale Finanzmarktstabilität jedoch bedeutsam. Die Staatsverschuldung der USA beläuft sich aktuell auf rund 122 Prozent des Bruttoinlandsprodukts (BIP). Sie ist auch deshalb gestiegen, weil sich die Lebenserwartung der Bevölkerung von 70 Jahren im Jahr 1966 auf 78 Jahre im Jahr 2024 verlängert hat. Dies hat dazu geführt, dass die Ausgaben für Medicare und Medicaid von jeweils 0, 2 Prozent des BIP auf 3, 6 und 3, 1 Prozent des BIP und die Ausgaben der Rentenversicherung im gleichen Zeitraum von 2, 4 Prozent auf 4, 8 Prozent gestiegen sind. Für die wachsende Staatsverschuldung der USA ist auch verantwortlich, dass sich zwischen Staatsausgaben und Steuereinnahmen im Zeitablauf eine Schere aufgetan hat. Zudem werden rund 13 Prozent der Steuerschuld nicht eingetrieben. Trotz der hohen Ausgaben im Vergleich zu den Einnahmen finanzieren ausländische Anleger diese Verschuldung, da die USA über den bedeutendsten sicheren Hafen für Investoren verfügen und der US-Dollar die bedeutendste Reserve- und Transaktionswährung darstellt. US-Staatsanleihen gelten dabei als das sicherste Finanzinstrument. Aufgrund der global hohen Nachfrage nach diesem Safe Asset, verfügen die USA über sehr günstige Finanzierungsbedingungen. Grund zur Sorge bereitet aber eine Entdollarisierung, d.h. eine Verringerung der Verwendung des Dollars im Welthandel und bei Finanztransaktionen. Eine Förderung des Marktes für Stablecoins soll der Entdollarisierung entgegenwirken. Ähnlich wie die Geldmarktfonds können sie die Liquiditätshaltung von Haushalten und Unternehmen mit der Staatsfinanzierung verbinden. Die Vernetzung von US-Staatsverschuldung und Stablecoins könnte Gefahren für die globale Finanzstabilität mit sich bringen. Denn wenn der Markt für US-Staatsanleihen unter Druck geraten würde, dann sind Stablecoins für ihre Anleger nicht länger ein sicherer Vermögenswert. Ähnlich wie bei Geldmarktfonds besteht bei Stablecoins ein Run-Risiko. In Panik geratene Kunden können ihr Geld sofort abziehen, was einen sofortigen Verkaufsdruck auslöst und Notfallverkäufe auf der Aktivseite des Stablecoins nach sich ziehen kann, welche zu einem Preisverfall bei US-Staatsanleihen führen können. Aufgrund der hohen globalen Bedeutung des US-Kapitalmarkts als sicherer Hafen könnte sich daraus eine globale Finanzmarktkrise entwickeln. |
| Abstract: | Stablecoins are financial instruments which work similar to money market funds, and which invest in US government bonds. Stablecoins, however, issue cryptocurrencies instead of fund shares. Similar to the Eurodollar market in the 1960ies and the 1970ies are financial liabilities created, which are issued outside the US capital market. With the GENIUS Act (Guiding and Establishing National Innovation for U.S. Stablecoins of 2025) the USA aim to promote the market for stablecoins. The consequences of a deepening interconnection between stablecoins and the globally largest and most liquid market for government bonds are crucial for global financial stability. The government debt of the USA sums currently to 122 percent of its gross domestic product (GDP). It has increased inter alia because the life expectancy of the US population has increased from 70 years in the year 1966 to 78 years in the year 2024. Demographic change has contributed to the increased expenditures for Medicare and Medicaid from 0.2 percent of the GDP each to 3.6 and 3.1 percent of the GDP and it has contributed to increased expenditures for Social Security from 2.4 percent to 4.8 percent of the GDP over the same time span. Also responsible for the growing debt ratio is the growing gap between government spending and tax revenues. Moreover, 13 percent of the tax revenues in the USA cannot be collected. Despite the high government expenditures in relation to the tax revenues are foreign investors willing to finance the government debt, because the USA is the globally most important safe haven for investors and the US-Dollar is the most important reserve and transaction currency in global foreign exchange markets. USTreasuries are the globally most important safe assets. The high global demand for this safe asset contributes to the low financing cost of the USA. One reason to worry is the process of de-dollarization, which is a reduction in the use of the US-Dollar in global trade and financial transactions. The promotion of the market for stablecoins could lessen the dedollarization. Similar to money market funds could stablecoins connect the liquidity demand of households and companies to government financing. However, the interconnection between the US government debt and stablecoins could lead to threats to global financial stability. If the market for US government bonds would come under pressure, stablecoins would no longer be regarded as safe money by their holders. Similar to money market funds, stablecoins would be prone to a run-risk. If panicking holders of a large stablecoin could try to withdraw money, this will force its management to enact fire-sales of the fund's bonds which could trigger a price drop of US government bonds. Because of the high global importance of the US capital market as a safe haven this could trigger a global financial crisis. |
| JEL: | E44 F31 F34 H5 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:iwkrep:328257 |
| By: | Hongzhe Wen; R. S. M. Lau |
| Abstract: | Stablecoins have emerged as a significant component of global financial infrastructure, with aggregate market capitalization surpassing USD250 billion in 2025. Their increasing integration into payment and settlement systems has simultaneously introduced novel channels of systemic exposure, particularly liquidity risk during periods of market stress. This study develops a hybrid monetary architecture that embeds fiat-backed stablecoins within a central bank-anchored framework to structurally mitigate liquidity fragility. The proposed model combines 100 percent reserve backing, interoperable redemption rails, and standing liquidity facilities to guarantee instant convertibility at par. Using the 2023 SVB USDC de-peg event as a calibrated stress scenario, we demonstrate that this architecture reduces peak peg deviations, shortens stress persistence, and stabilizes redemption queues under high redemption intensity. By integrating liquidity backstops and eliminating maturity-transformation channels, the framework addresses run dynamics ex ante rather than through ad hoc intervention. These findings provide empirical and theoretical support for a hybrid stablecoin-CBDC architecture that enhances systemic resilience, preserves monetary integrity, and establishes a credible pathway for stablecoin integration into regulated financial systems. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2510.10469 |
| By: | Luis Araujo; Leo Ferraris; Marco Mantovani; Daniela Puzzello |
| Abstract: | Sovereign digital currencies are about to be launched in several countries. A key feature of this intangible counterpart of cash is its traceability. Using a microfounded monetary model, we show that traceability can be exploited to incentivize liquidity transfers among traders, thus stimulating production and trade. We empirically test the theoretical prediction through a controlled laboratory experiment. We find that sovereign digital currency stimulates production and trade, provided that the authorities actively help promote its acceptability. |
| Keywords: | digital currency, cash, monetary policy, laboratory experiment |
| JEL: | E40 C90 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:mib:wpaper:557 |
| By: | Syngjoo Choi; Bongseop Kim; Young-Sik Kim; Ohik Kwon; Soeun Park |
| Abstract: | To overcome the lack of data in predicting the payment preference for central bank digital currency (CBDC), we conducted a discrete choice experiment that varied the attributes of payment methods among over 3, 500 participants in Korea. We identified key attributes, such as the discount rate and the issuance form, that shape the demand for payment methods. The predicted usage shares of existing payment methods closely align with their actual usage patterns in Korea, which lends credible support for the external validity of our experimental design. Building on this validation, we further predict that CBDC, when introduced, will be preferred over cash and mobile fast payment but less preferred than credit and debit cards, with its adoption rate as the most preferred payment method ranging 19−27% of respondents. |
| Keywords: | payment preference, retail CBDC, discrete choice experiment |
| JEL: | E40 E50 C90 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1296 |