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on Financial Development and Growth |
| By: | Jean-Louis Arcand (Global Development Network and Geneva Graduate Institute); Enrico Berkes (University of Maryland, Baltimore County); Ugo Panizza (Geneva Graduate Institute and CEPR) |
| Abstract: | This paper revisits the "too much finance" hypothesis by reassessing the relationship between financial depth and economic growth using an expanded dataset (1960–2019) and a systematic estimation strategy that avoids reliance on any single, potentially arbitrary sample window. We estimate both cross-sectional and panel models for all feasible starting periods and focus on transparent specifications. We find a robust inverted-U relationship between private credit and growth: financial depth is growth-enhancing at low and moderate levels but exhibits diminishing returns and eventually becomes negative at high levels. The turning point generally lies between 70 and 120 percent of GDP, almost always below the 90th percentile of the global distribution of credit to the private sector. |
| Keywords: | Financial depth; Finance-growth Nexus; Too much finance |
| JEL: | G10 O16 F36 O40 |
| Date: | 2026–02–23 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp04-2026 |
| By: | Florian Léon (FERDI - Fondation pour les Etudes et Recherches sur le Développement International, CERDI - Centre d'Études et de Recherches sur le Développement International - IRD - Institut de Recherche pour le Développement - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne); Djeneba Dramé (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | Africa faces a major financial challenge: to achieve the Sustainable Development Goals (SDGs) and finance its demographic, ecological, and digital transitions, the continent must close a financing gap estimated at several hundred billion dollars per year. Public resources and official development aid will not be sufficient. The solution may lie in domestic private resources: Caisse de dépôt institutions, little-known yet strategic financial institutions, have the potential to mobilize local private savings—currently largely underutilized—to finance projects of public interest. Present in eleven African countries, they still struggle to fully play their role. How can they become an effective lever to transform national savings into a driver of development? |
| Keywords: | Development financing, Sustainable development goals, domestic revenue mobilisation |
| Date: | 2026–02–23 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05524903 |
| By: | Barry Hamidou Auteur; Malick Camara (UNC - Université nongo Conakry) |
| Abstract: | This study examines the effect of exchange rate volatility on FDI in West Africa (1996–2022), controlling for variables such as trade openness, economic growth, inflation, infrastructure, and institutions. The analysis is based on an ARDL panel model with the PMG estimator. Two institutional specifications were tested: corruption and political stability. The results show that in the long term, exchange rate volatility significantly reduces FDI, while in the short term, past volatility has a temporary positive effect. Trade openness and economic growth promote FDI, infrastructure has a negative effect, and corruption significantly hinders investment flows, unlike political stability. These results suggest prioritizing corruption reduction, improved governance, and the promotion of trade openness while stabilizing the economy. Keywords: Exchange rate volatility – FDI – Africa – ARDL |
| Abstract: | Résumé Cette étude examine l'effet de la volatilité du taux de change sur les IDE en Afrique de l'Ouest (1996–2022), en tenant compte de variables de contrôle telles que l'ouverture commerciale, la croissance économique, l'inflation, les infrastructures et les institutions. L'analyse repose sur un modèle ARDL panel avec l'estimateur PMG. Deux spécifications institutionnelles ont été testées : corruption et stabilité politique. Les résultats montrent qu'à long terme, la volatilité du taux de change réduit significativement les IDE, tandis qu'à court terme, la volatilité passée exerce un effet positif temporaire. L'ouverture commerciale et la croissance économique favorisent les IDE, les infrastructures ont un effet négatif et la corruption freine significativement les flux d'investissement, contrairement à la stabilité politique. Ces résultats suggèrent de prioriser la réduction de la corruption, l'amélioration de la gouvernance et la promotion de l'ouverture commerciale tout en stabilisant l'économie. Mots clés : Volatilité du taux de change – IDE – Afrique – ARDL |
| Keywords: | Exchange Rate Volatility and Foreign Direct Investment in West Africa, Volatilité du taux de change -IDE -Afrique -ARDL Exchange rate volatility -FDI -Africa -ARDL |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05422231 |
| By: | Ayse Sila Koc; Irfan Cercil |
| Abstract: | The rapid increase in climate change risks has given rise to multinational and country-level efforts to mitigate its effects. In recent decades, and particularly after the Paris Agreement in 2016, climate change policies (CCPs) have intensified across both advanced countries and emerging market economies. These developments have heightened transition risks stemming from the adaptation of green policies, with potential implications for international capital flows, most notably, foreign direct investment (FDI). This paper investigates the impact of country-specific CCPs on FDI flows using a panel of 40 advanced and EM economies over the period of 1990-2019, employing the local projections (LP) method. The results indicate that CCPs are significantly associated with a decline in both gross and net FDI inflows in EM economies, whereas the effects of CCPs on FDI flows in advanced economies are more muted and statistically insignificant. Further empirical analysis reveals no statistically robust relationship between CCPs and overall portfolio (equity and debt) flows. Our findings contribute to the growing literature on the macro-financial consequences of CCPs and offer valuable insights for both policymakers and international investors. |
| Keywords: | Climate change, Climate change policies, Emerging markets, Capital flows, Foreign direct investment, Local projections |
| JEL: | F21 F64 Q54 Q58 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:tcb:wpaper:2604 |
| By: | Nora Aboushady (Cairo University); Georges Harb (Lebanese American University); Chahir Zaki (University of Orléans) |
| Abstract: | This paper investigates the impact of aid for trade (AfT) targeted at trade policies on the participation of recipient countries in global value chains (GVCs), and how this impact varies with their prevailing political regimes. In democratic countries, the need for the authorities to account for the interests of various stakeholders (e.g., lobbies, trade unions) can compromise the allocation, use, and effectiveness of AfT. In contrast, less democratic regimes are typically more insulated from political pressures, which may lead to more effective outcomes of aid. At the same time, integration into some complex GVCs requires efficient and democratic institutions, to which these products are sensitive. Employing a sample of 110 countries and data covering 2002-2018, we control for standard determinants of GVC participation, while examining the effect of AfT and the moderating role of the political regime in place. Our estimation addresses the endogeneity of aid through an appropriate instrumentation strategy. Our results suggest that the effect of AfT is mostly positive in autocratic regimes, indicating more effective trade policy reforms. When we account for regional disparities, we find evidence that AfT for trade policy is also impactful in some democratic regimes. This might suggest that the efficacy of AfT is not strictly regime-dependent, but hinges on the government’s commitment to carry out significant reforms leading to greater participation in the global economy. |
| Date: | 2025–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:erg:wpaper:1806 |
| By: | Joseph Abadi |
| Abstract: | I develop a general equilibrium macro-finance model that integrates demand-based asset pricing. Assets are held by financial intermediaries (“funds”) with investment mandates that induce downward-sloping demand curves. A representative household seeks out profitable investment opportunities by shifting its savings across funds, but it does so only gradually due to frictions in adjusting its portfolio. The aggregate demand for assets in this economy is inelastic and depends on the distribution of net worth across funds. Consequently, shocks to asset supply and unanticipated financial flows have meaningful effects on asset prices. The framework is general enough to accommodate an arbitrary set of intermediaries and assets, so it can be applied to several questions in macro-finance. Analytically, I characterize sufficient statistics to construct counterfactual asset price responses to shocks and show how these statistics relate to estimates of asset demand elasticity in the literature. Quantitatively, I demonstrate that the model can account for the “excess volatility” in asset prices. |
| Keywords: | Asset Pricing; Macro-Finance; Financial Intermediation; Slow-Moving Capital |
| JEL: | E44 E50 E58 |
| Date: | 2026–02–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:102820 |
| By: | Berger, Allen N.; Karlström, Peter; Karolyi, Stephen A.; Ossandon Busch, Matias; Pinzon-Puerto, Freddy; Roman, Raluca A. |
| Abstract: | How does global banking impact financial stability and the real economy, particularly in emerging market economies? This paper revisits this question through the lens of new data and recent empirical findings in the banking literature. Considering this evidence, we illustrate how global banks are more prone to engaging in quantity and price credit rationing during crises, particularly when dealing with opaque borrowers abroad. However, in a context where shocks emerge in the real sector — for instance, through trade shocks — global banks can play a key role in making trade flows more resilient. We primarily use Latin America as our region of study as it is a region where globalization and deglobalization have had substantial impacts. Our findings support the notion that prudential financial stability frameworks can help to grasp the benefits of banking globalization while mitigating its downside risks. |
| Keywords: | international banking; global supply chains; financial stability; financial crises |
| JEL: | F15 F36 G15 G21 |
| Date: | 2026–02–23 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:130318 |
| By: | Tobias Krahnke; Wenjie Li |
| Abstract: | Capital flow restrictions have long been debated as a tool to manage external financial vulnerabilities, as volatile international capital flows and high external debt can contribute to financial crises. However, empirical evidence on whether capital flow management measures (CFMs) can shift the composition of countries’ external liabilities toward more stable types of funding is limited. Using a novel dataset of granular capital account openness indicators measuring policy intensity, we show that an asymmetric liberalization favoring equity over debt can tilt external capital structures toward equity. This effect is stronger in countries with higher institutional quality, underscoring the role of governance in attracting stable foreign investment. |
| Keywords: | Capital Controls; Foreign Direct Investment; Portfolio Equity; External Debt; External Liabilities |
| Date: | 2026–02–27 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/037 |
| By: | Anna Cole; Christopher J. Neely |
| Abstract: | One of the U.S. dollar’s influential international roles is as the dominant reserve currency, widely used in international foreign exchange reserves, which are rainy day funds for governments. |
| Date: | 2026–02–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:l00100:102817 |
| By: | Bletzinger, Tilman; Martorana, Giulia; Mistak, Jakub |
| Abstract: | Financial Conditions Indices (FCIs) are a widely used tool for assessing the broader monetary policy stance beyond the central bank’s direct control. This paper presents a novel vector autoregressive (VAR) model that includes key macroeconomic variables and maps financial variables into a single index, named Macro-Finance FCI. The VAR coefficients and the FCI weights are estimated jointly in one step, ensuring a model-consistent microfinance feedback. The model-implied long-run mean of the index provides a neutral benchmark to which financial conditions converge when inflation is at target and output is at potential. For the euro area, the proposed FCI incorporates nine asset prices – including risk-free rates, sovereign spreads, risk assets, and the exchange rate – and assigns a dominant role to nominal interest rates. It outperforms existing indices in out-of-sample forecasts of inflation and output. A structural identification of supply, demand, and financial shocks indicates that financial conditions require up to one year to transmit to the real economy and almost up to two years to inflation. JEL Classification: C32, E44, E52 |
| Keywords: | financial conditions index, monetary policy, structural macro-finance VAR |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263193 |
| By: | Ms. Laura Valderrama; Mr. Richard Varghese |
| Abstract: | This paper applies network analysis to examine the impact of non-bank financial institutions (NBFIs) and financial market stress on contagion risk within the interbank network. Using network-based simulations on euro area banks’ supervisory data, we find that banks’ strong capital and liquidity buffers significantly reduce contagion through interbank exposures: base-line scenarios show only modest capital losses and no cascading defaults. In contrast, stress originating from NBFIs under heightened market volatility markedly amplifies systemic risk. These findings highlight NBFIs and market volatility as key amplifiers of financial stress in the euro area. Our findings call for integrating contagion models into system-wide stress testing and designing macroprudential policies that encompass the entire financial ecosystem. Such policies should account for amplification risks from banks’ NBFI exposures when calibrating buffers and identifying systemic institutions. |
| Keywords: | Systemic Risk; Network Analysis; Interconnectedness; NBFIs; Market Risk |
| Date: | 2026–02–20 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/033 |
| By: | Mr. Serhan Cevik; Amit Kara |
| Abstract: | Financial intermediation in Montenegro has been on a declining trend since independence, with domestic credit to the private sector decreasing from a peak of 86.5 percent of GDP in 2008 to 46.4 percent in 2024. Net interest margin (NIM)—a common indicator of intermediation costs—has remained elevated, ranking among the highest in the Western Balkans. This paper analyzes the determinants of NIMs using a unique bank-level dataset comprising quarterly observations on all commercial banks in Montenegro during the period 2013–25. The empirical analysis reveals three key findings, each with important policy implications. First, larger banks tend to exhibit lower NIMs, reflecting economies of scale, diversification, and stronger market power. Second, higher asset quality is associated with narrower margins, underscoring the role of effective credit risk management. Third, greater operational efficiency correlates with lower NIMs, highlighting the importance of cost control and managerial effectiveness. Taken together, these results underscore the need for policy initiatives that support banking sector consolidation, reinforce credit risk management practices, and promote operational efficiency improvements. |
| Keywords: | Banks; financial intermediation; credit; net interest margin |
| Date: | 2026–02–20 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/029 |
| By: | Solveig Baylor; Jack Keane; Luke Morgan; Andrei Zlate |
| Abstract: | Relatively little is known about how banks form their expectations about future credit supply, with a nascent stream of work documenting the role of past experiences in shaping banks' expectations for macroeconomic and credit performance and, in turn, their credit supply decisions (Ma et al., 2022; Falato and Xiao, 2024). |
| Date: | 2026–02–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:102838 |
| By: | Michael Junho Lee; Donny Tou |
| Abstract: | We propose a theory of stablecoin disintermediation, whereby stablecoins not only erode banks’ deposit franchises but also transmit liquidity stress to the banking system. Using transaction-level data linking on-chain transactions to wholesale interbank payments, we document the first evidence of liquidity-driven bank disintermediation. Stablecoins directly transmit liquidity shocks to the banking system: banks with stablecoin deposits experience substantial increases in payment demand and heightened liquidity exposure to daily stablecoin primary market activity. Consistent with theory, banks operate “narrowly” to support liquidity-hungry stablecoin deposits – requiring substantially larger bank reserve balances to mitigate potential shortfalls. Even as beneficiaries of stablecoin growth within the banking system, partner banks’ loan share of assets contracts relative to peers. Our results substantially broaden the scope for stablecoins to disintermediate banks, impact bank lending, and complicate monetary policy implementation. |
| Keywords: | stablecoins; Bank disintermediation; payments; bank reserves |
| JEL: | D47 E41 E42 E58 G10 G21 |
| Date: | 2026–02–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:102830 |
| By: | Martin, Reiner; O’Brien, Edward; Peiris, Udara; Tsomocos, Dimitrios P. |
| Abstract: | When default losses elevate borrowing costs, expanding credit cannot stabilize the economy because default rates feedback to lending rates through bank balance sheets. Asset management companies (AMCs) break this loop by purchasing nonperforming loans at their long-run recovery values, thereby fixing the effective default rate that banks face. Government purchases of performing loans expand credit but leave this feedback intact. In a model calibrated to the eurozone, the AMC reduces quarterly default rates by 0.8 percentage points, lowers lending rates by 1.6 percentage points, and raises welfare by 0.2%. Government purchases crowd out bank deposits, contracting credit; default rates rise by 1.8 percentage points, lending rates increase by 1.2 percentage points, and welfare falls by 0.3%. JEL Classification: E44, G01, G21, G28 |
| Keywords: | asset management companies, bank balance sheets, credit stabilization, endogenous default, nonperforming loans |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263195 |
| By: | Nicolas Crouzet; Pulak Ghosh; Apoorv Gupta; Filippo Mezzanotti |
| Abstract: | We show that the age composition of the population can shape the speed at which businesses adopt new technologies, using evidence from mobile payments in India. Consumers' propensity to use new payment technologies declines with age, creating stronger incentives for businesses serving younger customers to accept these technologies. We document this pattern in the rollout of a mobile payment option by a major fintech company. A model where consumer attitudes toward technology vary by age implies that business adoption is inefficiently low, with the young bearing disproportionate welfare losses from network externalities. Jointly subsidizing transaction and adoption costs restores efficiency. |
| JEL: | G23 J11 O33 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34885 |
| By: | Balázs Zélity (Department of Economics, Wesleyan University) |
| Abstract: | This paper empirically investigates whether shifts in demographic structure have an im-pact on cross-border capital flows. Country-level panel data with global coverage is utilised in fixed effects regressions. Demographic variables are instrumented by their predicted values, which are calculated using a shift-share methodology. Local projections estimates complement the results with a dynamic perspective. The main finding is that there is a persistent positive relationship between a country’s old-age dependency ratio and its current and financial account balance – suggesting that population ageing increases net capital outflows. From the perspective of the current account, the mechanism is increased national saving, primarily by households, and exports. From the perspective of the financial account, the increased net outflows are happening primarily through a direct investment channel. |
| Keywords: | population ageing, FDI, saving, current account |
| JEL: | F21 J11 F30 F23 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:wes:weswpa:2026-005 |