|
on Financial Development and Growth |
| By: | Soumya Bhadury; Bhanu Pratap; Jay Surti |
| Abstract: | This paper empirically examines the dynamic linkages between financial conditions and economic growth across 18 major emerging market economies over the last two decades and the role that fiscal and trade balances play in shaping such associations. Using a reduced-form multivariate autoregressive state-space model, we document two opposing forces – growth-enhancing and growth-inhibiting linkages – that characterize macro-financial dynamics in these countries. Easing of domestic financial conditions is associated with stronger near-term GDP growth, a growth-enhancing link, albeit this acceleration in growth is followed by a tightening of financial conditions that can adversely impact future growth outcomes, a growth-inhibiting link. Both linkages are statistically significant at high frequencies for nearly half of the countries in our sample and appear to be driven by a weak twin-balance sheets condition of high public debt and external imbalances. External factors, notably the global financial cycle, are shown to play a crucial role in amplifying this feedback loop between economic growth and financial conditions. |
| Keywords: | Macro-financial linkages; emerging markets; twin-deficits; financial conditions; MARSS model; Kalman filter |
| Date: | 2025–10–24 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/216 |
| By: | Carmen Berta C. De Saituma Cagiza; Ilidio Cagiza |
| Abstract: | This study investigates the dynamic relationship between development finance institutions (DFIs), foreign direct investment (FDI), and economic development in Sub-Saharan Africa (SSA) from 1990 to 2018, using a quantitative panel dataset of annual data for five SSA countries (Nigeria, Ghana, Kenya, South Africa, and Zimbabwe) and a fixed-effects model estimated in STATA. Specifically, the analysis examines whether DFIs enhance FDI inflows, thereby promoting economic growth and contributing to the achievement of the Sustainable Development Goals (SDGs). The findings indicate that although DFIs have a theoretically positive impact on FDI, this relationship is not statistically significant across the sample, suggesting contextual dependencies influenced by regional economic variations. The study also analyzes how economic growth, trade openness, inflation, political stability, and the rule of law influence this nexus, elucidating their roles in shaping investment climates. A sectoral analysis indicates that DFI investments in infrastructure, agribusiness, and finance significantly affect FDI, with infrastructure having the greatest impact owing to its foundational role in economic systems. This research contributes by linking DFIs with FDI in SSA in a panel setting, thus providing a framework for policymakers to strengthen institutional and macroeconomic conditions to optimize the impact of DFIs on FDI and, ultimately, on sustainable development. The findings underscore the need for targeted policies to address regional disparities and enhance DFI effectiveness in fostering sustainable growth. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2510.16472 |
| By: | Carmen Berta C De Saituma Cagiza |
| Abstract: | This study investigates how Development Finance Institutions (DFIs) contribute to de-risking development in Sub-Saharan Africa by shaping Foreign Direct Investment (FDI) flows and supporting sustainable economic transformation. Focusing on Angola as a representative case, the research draws on qualitative interviews with international development advisors, foreign affairs professionals, and senior public sector stakeholders. The study explores how DFIs mitigate investment risk, enhance project credibility, and promote diversification beyond extractive sectors. While DFIs are widely recognized as catalysts for private sector engagement, particularly in infrastructure, agriculture, and manufacturing, their effectiveness is often constrained by institutional weaknesses and misalignment with national development priorities. The findings suggest that DFIs play a crucial enabling role in fragile and resource-dependent settings, but their long-term impact depends on complementary domestic reforms, improved governance, and strategic coordination. This research contributes to the literature on development finance by offering grounded empirical insights from an under examined Sub-Saharan context. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2510.18906 |
| By: | Tucci, Candelaria Fernández |
| Abstract: | This paper extends the post-Keynesian model of the firm to an open-economy context to investigate the determinants of firms' target profit rates in developing and emerging economies (DEEs) and the ways in which these rates have been affected by the financialisation phenomenon. Our findings show that firms' intrinsic vulnerabilities, persistent risks, and tighter financial constraints-stemming from the hierarchical structure of the international monetary system-lead to structurally higher target profit rates in DEEs compared to those in advanced economies. At the microeconomic level, we show that financialisation, in the form of increasing foreign indebtedness, can induce the firm to raise profitability targets through the finance, preference, and distribution transmission channels. Moreover, by establishing the link between the microeconomic effects of financialisation with its macroeconomic implications, we identify the conditions under which the changes in firm behaviour induced by financialisation generate either the same macroeconomic outcomes or micro-macro fallacies, giving rise to a paradox of profits, a paradox of growth, a paradox of risk and a paradox of liquidity. |
| Keywords: | target profit rates, financialisation, theory of the firm, foreign indebtedness, portfolio dollarisation |
| JEL: | D21 E12 F33 F41 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ipewps:330332 |
| By: | Philippe d’Astous; Vyacheslav Mikhed; Sahil Raina; Barry Scholnick |
| Abstract: | Using wealth windfalls from lottery winnings and matched employer-employee tax files, we compare the effect of additional wealth on the entrepreneurial activity of older and younger individuals. We find that additional wealth leads older winners (aged 55 to 64) to reduce business ownership and growth (as measured by sales, revenue, and employees). In contrast, extra wealth increases younger winners’ (aged 21 to 54) business ownership, but it has no effect on their business growth. The increase in business activity of a young winner does not offset the negative growth for an older winner, which may hurt economic growth. |
| Keywords: | Wealth; Age; Entrepreneurship; Retirement |
| JEL: | G5 G51 J22 L26 |
| Date: | 2025–10–21 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:101992 |
| By: | ARAWATARI, Ryo; TAKAHASHI, Yuta; TAKAYAMA, Naoki |
| Abstract: | After the boom-bust cycle, Japan experienced a marked slowdown in economic growth since 1990. Three features stand out: (1) a persistent decline in total factor productivity growth, (2) a sharp and lasting fall in private investment, and (3) an extended period of exceptionally low interest rates. This study develops a macro-finance model designed to account for these interconnected phenomena. The framework emphasizes the role of shifting expectations, risk-premium, and the interaction between financial conditions and real activity. By grounding the analysis in the Japanese experience, the model aims to explain not only the mechanisms behind the bubble’s rise and fall but also the persistence of the stagnation that followed. The broader goal is to clarify how financial booms and busts can leave long-lived imprints on growth trajectories, offering lessons for economies facing similar vulnerabilities today. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:hit:hituec:773 |
| By: | William N. Goetzmann; Akiko Watanabe; Masahiro Watanabe |
| Abstract: | We show that procyclical stocks–those whose cash flows rise with expected economic growth–earn higher average returns than countercyclical stocks. Leveraging nearly 75 years of economist survey data on real GDP growth expectations, we identify economic states while sidestepping model-driven forecast error. GDP forecasts comove with consumption and predict the market return, real GDP growth, and consumption growth. This approach builds on the literatures on both the Intertemporal and Consumption Capital Asset Pricing Models. We document a statistically significant, economically meaningful procyclicality premium that remains robust to standard factor controls. |
| JEL: | E32 E44 G12 G14 G17 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34402 |
| By: | Abraham Atsiwo |
| Abstract: | This study presents a three-step machine learning framework to predict bubbles in the S&P 500 stock market by combining financial news sentiment with macroeconomic indicators. Building on traditional econometric approaches, the proposed approach predicts bubble formation by integrating textual and quantitative data sources. In the first step, bubble periods in the S&P 500 index are identified using a right-tailed unit root test, a widely recognized real-time bubble detection method. The second step extracts sentiment features from large-scale financial news articles using natural language processing (NLP) techniques, which capture investors' expectations and behavioral patterns. In the final step, ensemble learning methods are applied to predict bubble occurrences based on high sentiment-based and macroeconomic predictors. Model performance is evaluated through k-fold cross-validation and compared against benchmark machine learning algorithms. Empirical results indicate that the proposed three-step ensemble approach significantly improves predictive accuracy and robustness, providing valuable early warning insights for investors, regulators, and policymakers in mitigating systemic financial risks. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2510.16636 |
| By: | SAKURAGAWA, Masaya; SAKURAGAWA, Yukie |
| Abstract: | This paper establishes a growth theory that enable us to study fiscal policies in economies of low interest rates on debt. In order to explain low interest rates, we introduce financial frictions, namely, uninsurable idiosyncratic risk in capital income and borrowing constraints faced by firms, into a standard endogenous growth model. Interest rates on debt can fall below the economic growth rate, and then the government can sustain debt by running primary deficits. Low interest rates on debt arise from the shortage in liquidity, and thus those low rates are associated with low investment and slow economic growth. The choice faced by the government is either the set of deficits and slow growth or the set of surpluses and fast growth. We show that the current Japanese economy falls into a region of liquidity shortage. We evaluate fiscal policies at aiming fiscal surpluses above zero from the perspective of our model. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:hit:hiasdp:hias-e-152 |
| By: | Vadim Elenev; Tim Landvoigt; Stijn Van Nieuwerburgh |
| Abstract: | We introduce a new indicator of fiscal capacity—the “austerity threshold”: the debt-to-GDP level above which the government must raise fiscal surpluses to ensure debt safety. In a model with realistic risk premia, nominal rigidities, and an intermediary sector, calibrated to the U.S., we estimate this threshold at 189%. We highlight the roles of safety premia and intermediation-driven convenience yields. The threshold varies with the source of surpluses: spending cuts reduce inflation and allow low interest rates, while tax increases distort labor supply and raise inflation. Uncertainty over the austerity regime—spending cuts or tax increases—sharply lowers fiscal capacity. The expected austerity regime affects asset prices and macro outcomes even when debt-to-GDP is well below the threshold. |
| JEL: | E10 E40 E60 G12 G18 G2 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34397 |
| By: | Grey Gordon; Pablo Guerrón-Quintana |
| Abstract: | Hard sovereign defaults—defaults with large haircuts—are associated with deeper recessions, longer durations, and, as we show, larger devaluations than soft defaults. We rationalize these regularities by developing a single-proposer noise bargaining game and embedding it in a two-sector sovereign default model. Creditors weigh the sovereign's haircut offers against likely future offers and idiosyncratic valuation shocks. In short-lived recessions, creditors tend to reject large proposed haircuts, anticipating better terms as the economy recovers—endogenously correlating default intensity with adverse outcomes. Two years after default, our decomposition attributes nearly 80% of the observed output differentials to selection on different shock realizations. |
| Keywords: | Default; Sovereign; Debt; Growth; Haircuts |
| JEL: | F34 C78 E32 |
| Date: | 2025–10–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedrwp:101987 |
| By: | Hélène Rey; Vania Stavrakeva |
| Abstract: | We study the anatomy of the international portfolio finance network. As global financial linkages have become denser over time, cross-border portfolio equity positions have grown in importance relative to debt for Emerging markets and Advanced economies. Using the framework developed by Stavrakeva and Rey (2024), we construct a novel proxy of daily foreign investor holdings in both equity and long-term sovereign debt markets across 32 currency areas. Leveraging an instrumental variable strategy, we identify an effect of foreign equity ETF inflows on exchange rates and local stock market prices. Our high-frequency proxy enables us to interpret episodes of turbulence in international finance. It should prove useful to assess how persistent the current shocks to the international financial system are likely to be. |
| JEL: | F3 F32 G15 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34409 |
| By: | Hanin Khawaja (Department of Economics, New School For Social Research, USA) |
| Abstract: | The international monetary system (IMS) has long been interpreted through the lens of singularity, where global stability hinges on a single dominant currency fulfilling all core monetary functions—store of value, medium of exchange, and unit of account. This paper challenges that paradigm by introducing the concept of functional fragmentation. The IMS is evolving toward different currencies increasingly specializing in specific roles, without any single issuer monopolizing the system. The transformation draws on wholesale central bank digital currencies (wCBDCs) and distributed ledger technologies (DLTs), but also reflects deliberate institutional choices shaped by geopolitical tensions and the erosion of trust in dollar-centric infrastructure. The U.S. dollar is likely to maintain its primacy in global reserves, but new platforms are enabling regional currencies to gain ground in payments and settlement. First, emerging markets are building wCBDC-based networks designed to bypass traditional correspondent banking. Second, the European Union is advancing interoperability and financial infrastructure resilience to safeguard the euro’s regional role. Third, the USA and the UK, slower to adopt CBDCs, are leveraging regulatory frameworks around stablecoins to reinforce dollar dominance through fintech intermediaries. The implications for global liquidity, reserve strategies, and financial stability are profound, requiring renewed attention to institutional coordination and systemic design in a modular, post-hegemonic IMS. |
| Keywords: | International Political Economy, international monetary system (IMS), singularity, world money, central bank digital currency (CBDC), functional fragmentation |
| JEL: | E42 F02 F53 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:new:wpaper:2514 |
| By: | Gianluca Benigno; Alessandro Rebucci; Aliaksandr Zaretski |
| Abstract: | In this paper, we revisit the question of how to manage financial crises using the framework proposed by Bianchi and Mendoza (2018). We show that this model economy exhibits a multiplicity of constrained-efficient equilibria, which arises because the private shadow value of collateral influences the forward-looking asset price. Among these equilibria, the specific one studied in Bianchi and Mendoza (2018) can be implemented using a tax/subsidy on debt alone. In that case, both the ex ante tax and ex post subsidy are quantitatively important for welfare under the optimal time-consistent policy. Limiting either component can lead to a welfare loss relative to the unregulated competitive equilibrium, highlighting the complementarity between crisis prevention and crisis resolution tools. We also show that, under certain conditions, all Pareto-dominant constrained-efficient equilibria entail the unconstrained allocation chosen by a social planner subject to the country budget constraint, and this allocation can be implemented with purely ex post policies. |
| JEL: | E61 F38 H23 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34410 |
| By: | Agus Sudjianto; Sandi Setiawan |
| Abstract: | This study introduces geometric algebra to decompose credit system relationships into their projective (correlation-like) and rotational (feedback-spiral) components. We represent economic states as multi-vectors in Clifford algebra, where bivector elements capture the rotational coupling between unemployment, consumption, savings, and credit utilization. This mathematical framework reveals interaction patterns invisible to conventional analysis: when unemployment and credit contraction enter simultaneous feedback loops, their geometric relationship shifts from simple correlation to dangerous rotational dynamics that characterize systemic crises. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2510.15892 |
| By: | Tatsuru Kikuchi |
| Abstract: | This paper develops a continuous functional framework for analyzing contagion dynamics in financial networks, extending the Navier-Stokes-based approach to network-structured spatial processes. We model financial distress propagation as a diffusion process on weighted networks, deriving a network diffusion equation from first principles that predicts contagion decay depends on the network's algebraic connectivity through the relation $\kappa = \sqrt{\lambda_2/D}$, where $\lambda_2$ is the second-smallest eigenvalue of the graph Laplacian and $D$ is the diffusion coefficient. Applying this framework to European banking data from the EBA stress tests (2018, 2021, 2023), we estimate interbank exposure networks using maximum entropy methods and track the evolution of systemic risk through the COVID-19 crisis. Our key finding is that network connectivity declined by 45\% from 2018 to 2023, implying a 26\% reduction in the contagion decay parameter. Difference-in-differences analysis reveals this structural change was driven by regulatory-induced deleveraging of systemically important banks, which experienced differential asset reductions of 17\% relative to smaller institutions. The networks exhibit lognormal rather than scale-free degree distributions, suggesting greater resilience than previously assumed in the literature. Extensive robustness checks across parametric and non-parametric estimation methods confirm declining systemic risk, with cross-method correlations exceeding 0.95. These findings demonstrate that post-COVID-19 regulatory reforms effectively reduced network interconnectedness and systemic vulnerability in the European banking system. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2510.19630 |
| By: | Daniel Maas; Roberto Panzica; Martín Saldías |
| Abstract: | This paper introduces the Macroprudential Two-Mode Network Analysis Toolbox (M2MN), a modular framework designed to assess credit risk shocks and contagion through overlapping exposures in banking systems. The M2MN toolbox uses a weighted two-mode network structure linking banks to grouped credit exposures, capturing indirect interconnectedness and systemic vulnerabilities arising from portfolio overlaps. The framework comprises three integrated modules: (i) a network diagnostics module that computes exposure-based metrics and community structures; (ii) a first-round sensitivity analysis simulating credit losses and capital impacts under CRR2 regulatory thresholds; and (iii) a second-round effects module. The toolbox is applied to supervisory data for 31 Portuguese banks, with calibrated scenarios targeting key exposures. Results show that most losses are absorbed by voluntary capital buffers, with limited contagion under conservative stress assumptions, reflecting the strong capitalization of the system. The M2MN toolbox provides a flexible and empirically grounded platform for systemic risk monitoring, buffer calibration, and supervisory scenario design, contributing to the refinement of macroprudential tools within the regulatory framework. |
| JEL: | C63 D85 G01 G10 G21 G28 G32 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202512 |
| By: | Bredl, Sebastian |
| Abstract: | The present paper utilizes AnaCredit loan-level data to examine the impact of regional loan market structure on lending rates. The analysis focuses on newly issued loans to small non-financial corporations in the euro area during the monetary policy tightening phase of 2022 and 2023. The findings suggest that banks tend to charge higher lending rates when they possess larger regional market shares. This outcome is driven by differences between banks rather than by individual banks adjusting their lending rates to regional market conditions. Overall, there is no strong evidence that market power conveyed by higher regional market concentration impeded the transmission of the monetary policy tightening to lending rates. If anything, there are indications that this type of market power may hinder the short-term pass-through of the unexpected component of monetary policy. |
| Keywords: | Lending rates, pass-through, loan market concentration |
| JEL: | D40 E43 G21 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:330309 |
| By: | SUI, Qing-yuan |
| Abstract: | We empirically investigate the impact of the Bank of Japan’s (BOJ) monetary policy on the lending behaviors of regional banks during the period of quantitative easing (QE). We focus particularly on the credit supply from banks to different industries or sectors, with an emphasis on manufacturing and real estate-related industries. Our results indicate that the BOJ’s QE policy promoted bank lending to the estate-related industries or sectors but not to the manufacturing industry. Our findings align with recent studies on the limitations of overall credit supply in influencing the business cycle and economic growth. Furthermore, Our results suggest that the BOJ has limited ability to halt the recession through lending channels under the QE policy. |
| Keywords: | quantitative easing, bank lending, regional banks, excess reserve, dynamic panel model |
| JEL: | E44 E52 E58 G21 |
| Date: | 2025–08–24 |
| URL: | https://d.repec.org/n?u=RePEc:hit:hiasdp:hias-e-144 |
| By: | L. Randall Wray |
| Abstract: | This working paper integrates the credit money approach (associated with Post Keynesian endogenous money theory) with the state money approach (associated with Modern Money Theory) by drawing on Wray's 1990 book (Money and Credit in Capitalist Economies: The Endogenous Money Approach, Edward Elgar), his 1998 book (Understanding Modern Money: the Key to Full Employment and Price Stability, Edward Elgar), and his 2004 edited book (Credit and State Theories of Money: The Contributions of A. Mitchell Innes, Edward Elgar). New sources and interpretation of the history of money make it clear that there is no contradiction between state money and private credit money--each played a role in the creation of the modern monetary system. Indeed, today's system was created by bringing state money into the private money giro, thereby strengthening both. |
| Keywords: | credit money; state money; Modern Money Theory (MMT); Bank of England; fiat money; giro money; history of money; central bank; nominalism; origins of money |
| JEL: | B25 B52 E42 E58 E62 N11 N20 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1076 |
| By: | Emilio Barucci; Andrea Gurgone; Giulia Iori; Michele Azzone |
| Abstract: | We analyse financial stability and welfare impacts associated with the introduction of a Central Bank Digital Currency (CBDC) in a macroeconomic agent-based model. The model considers firms, banks, and households interacting on labour, goods, credit, and interbank markets. Households move their liquidity from deposits to CBDC based on the perceived riskiness of their banks. We find that the introduction of CBDC exacerbates bank-runs and may lead to financial instability phenomena. The effect can be changed by introducing a limit on CBDC holdings. The adoption of CBDC has little effect on macroeconomic variables but the interest rate on loans to firms goes up and credit goes down in a limited way. CBDC leads to a redistribution of wealth from firms and banks to households with a higher bank default rate. CBDC may have negative welfare effects, but a bound on holding enables a welfare improvement. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2510.21071 |
| By: | Dirk Niepelt |
| Abstract: | We review the macroeconomic literature on retail central bank digital currency (CBDC), organizing the discussion around a CBDC-irrelevance result. We identify both fundamental and policy-related sources of relevance, or departures from neutrality. Bank disintermediation - the crowding out of deposits - does not, by itself, constitute such a source. We argue that the literature has primarily focused on policy-related sources of non-neutrality, often without making this focus explicit. From a macroeconomic perspective, CBDC is, at its core, a matter of monetary architecture, and political economy considerations are central to understanding CBDC policy design. |
| Keywords: | Monetary architecture, central bank digital currency, public money, private money, neutrality, lender of last resort. |
| JEL: | E42 E51 G21 G28 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:ube:dpvwib:dp2509 |
| By: | Diego Vallarino |
| Abstract: | This paper evaluates the redistributive and efficiency impacts of expanding access to positive credit information in a financially excluded economy. Using microdata from Uruguay's 2021 household survey, we simulate three data regimes negative only, partial positive (Score+), and synthetic full visibility and assess their effects on access to credit, interest burden, and inequality. Our findings reveal that enabling broader data sharing substantially reduces financial costs, compresses interest rate dispersion, and lowers the Gini coefficient of credit burden. While partial visibility benefits a subset of the population, full synthetic access delivers the most equitable and efficient outcomes. The analysis positions credit data as a non-rival public asset with transformative implications for financial inclusion and poverty reduction. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2510.16009 |