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on Financial Development and Growth |
| By: | Nicolás Butrón (Banco Central de Reserva del Perú); Jorge Pozo (Banco Central de Reserva del Perú) |
| Abstract: | This article empirically examines the relationship between credit and economic activity. The literature suggests that credit indicators can help explain and predict the evolution of economic activity. Using granular data, we test several specifications to capture the impact of credit growth on GDP growth. Our findings show a positive and statistically significant, though moderate, effect of credit on GDP when controlling for heterogeneity across economic sectors and regions. Moreover, this impact becomes more pronounced the greater the dependence of real activity on the credit market. |
| Keywords: | credit, GDP, economic sector, region. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:rbp:wpaper:2025-011 |
| By: | Miguel Faria-e-Castro; Pascal Paul; Juan M. Sanchez |
| Abstract: | Should firms in financial distress be saved to stabilize an economy, even if less productive ones are kept alive, possibly reducing economic growth? To assess this fundamental stabilization-vs.-growth trade-off, we develop a new dynamic general equilibrium model with business cycles, endogenous growth, and innovation externalities. We discipline key parameters using microeconomic data and an instrumental-variable approach that links firm productivity growth to R&D expenditure. Based on the calibrated model, we find that economies that save distressed firms with credit guarantees, debt restructuring, or loan evergreening experience lower volatility but also slower growth. Even though welfare is higher in an economy without such interventions, the various "soft credit" regimes can still arise as equilibrium outcomes when a benevolent government intervenes in credit markets under discretion. |
| Keywords: | business cycles; endogenous growth; financial frictions |
| JEL: | E43 E44 E60 G21 G32 |
| Date: | 2026–04–16 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:103046 |
| By: | Miricola Stefania (European Commission - JRC) |
| Abstract: | This note presents the trends of foreign direct investment into the EU27 for 2025H1, focusing on non-EU (i.e. foreign) investors. It looks at merger and acquisition (M&A) deals and other equity investments of at least 10% of capital of an EU target company, as well as at greenfield projects. A detailed overview of deals and projects corresponding to the first half of 2025 is provided, including half year and yearly comparisons. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ipt:iptwpa:jrc145614 |
| By: | Michele Battisti (University of Palermo); Antonio Francesco Gravina (University of Messina); Matteo Lanzafame (Asian Development Bank) |
| Abstract: | Structural transformation is widely recognized as a key driver of productivity growth and economic development, with industrial policies often playing a crucial role in this process. However, the challenge of premature deindustrialization—where economies experience a decline in manufacturing’s share of employment and gross domestic product at lower levels of income than historically observed in advanced economies—threatens to undermine these gains, particularly in developing economies. This paper provides a comprehensive overview of the literature on structural transformation and modern industrial policy, with a particular focus on Asia, a region characterized by economies at considerably different stages of development. Our research encompasses a review of current empirical methodologies for measuring structural transformation and its relationship with growth patterns; an examination of the evolution of industrial policy approaches in Asia; and a synthesis of available evidence on premature deindustrialization, highlighting variations across Asian subregions and policy implications. Additionally, we contribute to the existing literature by presenting new stylized facts on structural transformation and growth patterns in Asia, based on various indicators across economies and sectors. We also examine how institutional and economic factors—including financial sector development, public investment, and labor market regulations—correlate with indicators of structural transformation. Our analysis reveals key insights, including the strong link between manufacturing predominance and labor productivity growth; complex productivity–employment dynamics across sectors; and differentiated impacts of financial development, public investment, and labor market regulations on sectoral employment shifts. |
| Keywords: | structural transformation;economic growth;deindustrialization;industrial policy;Asia |
| JEL: | O11 O14 O25 |
| Date: | 2025–04–15 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbewp:022439 |
| By: | Dudley Cooke; Tatiana Damjanovic |
| Abstract: | This paper studies macroprudential policy in a small open economy with financial intermediation and nominal rigidity. Fluctuations in bank deposit rates - which depend on the focus of monetary policy - create liability-side volatility, destabilize net interest margins, and reduce output. A macroprudential policy which shifts bank funding away from deposits towards equity enhances domestic risk-sharing and mitigates volatility. Optimal macroprudential policy generates bank capital ratios that differ by up to 5 percentage points depending on whether monetary policy stabilizes domestic prices or the exchange rate. Relative to an unregulated economy, macroprudential policy raises welfare by between 0.4 percent and 0.9 percent of steady-stateconsumption. |
| JEL: | E52 F41 G11 G15 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202601 |
| By: | César Salinas (Universidad del Pacífico) |
| Abstract: | This paper examines the macroeconomic consequences of credit uncertainty using a structural vector autoregression model with stochastic volatility (SVAR-SV). Credit supply conditions in the U.S. is captured by the banks’ reports on how credit standards for approving loans have change over time (Bank Lending Standards). The empirical analysis shows that the volatility of macroeconomic and financial variables rises in response to an increase in the credit uncertainty shock. The economic activity falls and credit growth and related interest rates decrease persistently. Moreover, credit volatility shocks explain around 10% of the FEV of endogenous variables. A dissagregated analysis shows that the effect of these shocks are mainly explained by their effects on the corporate business sector. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:rbp:wpaper:2025-017 |
| By: | Sergio A. Correia; Stephan Luck; Emil Verner |
| Abstract: | Do banks fail because of runs or because they become insolvent? Answering this question is central to understanding financial crises and designing effective financial stability policies. Long-run historical evidence reveals that the root cause of bank failures is usually insolvency. The importance of bank runs is somewhat overstated. Runs matter, but in most cases they trigger or accelerate failure at already weak banks, rather than cause otherwise sound banks to fail. |
| Keywords: | bank runs; bank failures; deposit insurance; bank regulation; bank supervision |
| JEL: | H0 |
| Date: | 2026–04–16 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:103048 |
| By: | Charles W. Calomiris; Matthew S. Jaremski |
| Abstract: | Financial crises remain a recurrent feature of modern economies despite evidence that many are predictable and preventable. This chapter discusses how financial instability often reflects a political equilibrium rather than purely technocratic shortcomings. Contrasting economic and political perspectives on regulation, the chapter emphasizes how policymakers shape financial rules in ways that favor politically-influential groups but result in financial vulnerability. Key mechanisms include restricted bank chartering, safety nets, credit subsidies, and sovereign borrowing. Political forces also shape crisis management. Delayed interventions, selective support, and constrained policy responses can deepen and prolong crises. Together, these dynamics help explain the persistent and foreseeable nature of financial instability across time, legal origins, political structures, and institutional contexts. Instead of seeing financial crises as arising from an unavoidable vulnerability to external shocks they are better seen as a mirror of the societies in which they occur, reflecting their political structures, vying constituencies, cultural preferences, and blind spots. |
| JEL: | E44 F34 G01 H12 N1 N2 P16 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35101 |
| By: | Mr. Serhan Cevik; Sharayah Dominguez |
| Abstract: | Determining the appropriate size of government remains central for fiscal sustainability, social protection, and macroeconomic stability. Wagner’s law, formulated in the 19th century, posits that government expenditures rise with income, yet contemporary evidence is mixed. This paper revisits the relationship between economic growth and government spending in Europe over the period 1990–2024, with particular attention to the Balkans. Using an instrumental variable strategy based on trade-weighted partner growth, we find no evidence that rising income systematically expands government expenditure. On the contrary, faster growth is associated with modest declines in expenditure, particularly for current spending, while capital outlays remain largely unaffected. These patterns are stronger in high-debt countries, suggesting that fiscal rules and debt constraints increasingly shape spending decisions. The Balkan economies largely follow these trends, though heterogeneity reflects transition dynamics and EU integration. Our findings imply that Wagner’s law no longer describes spending behavior in modern European economies. Policymakers should focus less on income-driven expenditure growth and more on strengthening fiscal frameworks, improving spending efficiency, and prioritizing high-return investments in infrastructure and human capital. These measures can enhance fiscal resilience while supporting public service provision and long-term development goals. |
| Keywords: | Government spending; economic growth; Wagner’s Law |
| Date: | 2026–04–10 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/079 |
| By: | Mr. Plamen K Iossifov; Ali Abbas; Lennart Niermann |
| Abstract: | In this paper, we develop two complementary approaches for benchmarking the public debt trajectories of Low-Income Countries (LICs) to assess their dynamic stability. We compare the evolution of the overall public debt-to-GDP ratios of reference LICs with the historical experiences of other countries with similar characteristics, which are now further down the path of economic development and have not experienced public debt stress events. We rely on both direct comparison and a novel application of the synthetic control method (SCM). These public debt trajectories that are dynamically stable from a historical perspective can provide insights into debt sustainability analyses for LICs. |
| Keywords: | Dynamic Stability; Debt Sustainability; Synthetic Control Method; Low-Income Countries; public debt trajectory; IMF working papers; public debt-to-GDP ratio; scm robustness; ratios of Reference lics; Debt sustainability analysis; Fiscal stance; Global |
| Date: | 2026–04–10 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/075 |
| By: | Mr. Julien Acalin |
| Abstract: | Sovereign state-contingent bonds have rarely been issued despite their theoretical debt stabilization properties. This paper revisits this puzzle by analyzing when growth-indexed bonds are too limited in scale, and when they are too costly, to materially improve debt sustainability. The results show that the benefits of indexation are highly heterogeneous across countries. Under the realistic assumption that 20 percent of the debt stock is indexed, reductions in the upper tail of the debt distribution are modest. Full indexation yields more substantial improvements, especially when combined with an optimal loading on growth. Yet a sustained premium of 100 basis points would still offset most of the gains for many countries. These findings suggest that the debt-stabilization properties of growth-indexed bonds would be limited, unless a large-scale and coordinated effort achieves both broad adoption and low issuance premia. |
| Keywords: | Growth-indexed bonds; Debt sustainability; Monte Carlo simulations; debt-stabilization properties; growth-indexed bond; IMF working papers; debt distribution; sovereign state; Inflation-indexed bonds; Bonds; Fiscal stance; Output gap; Global |
| Date: | 2026–04–10 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/080 |
| By: | Jorge Pozo (Banco Central de Reserva del Perú.) |
| Abstract: | This article studies the impact of deposit dollarization on credit dollarization through the natural hedging and the excessive risk-taking hannels. We develop a theoretical model that helps us to describe both channels and how these determine the direction in which deposit dollarization might affect credit dollarization. The model shows that through the natural hedging channel, deposit dollarization positively affects credit dollarization, while through the excessive bank risk-taking channel, deposit dollarization negatively affects credit dollarization. Using regional data of credits and deposits in Peru, we find evidence of these two channels, with the natural hedging channel being the dominant one. In addition, we reveal that les credit market competition and high FX uncertainty amplify the role of the excessive bank risk-taking channel. |
| Keywords: | Bank risk-taking, dollarization, foreign exchange rate risk, limited liability, deposit insurance, bank competition |
| JEL: | D41 D42 E44 G11 G21 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:rbp:wpaper:2025-013 |
| By: | Joseph Abadi; Jesús Fernández-Villaverde; Daniel R. Sanches |
| Abstract: | We present a micro-founded monetary model of the world economy to study international currency competition. Our model features both “unipolar” equilibria, with a single dominant international currency, and “multipolar” equilibria, in which multiple currencies circulate internationally. Long-run equilibria are highly history-dependent and tend towards the emergence of a dominant currency. Governments can compete to internationalize their currencies by offering attractive interest rates on their sovereign debt, but large economies have a natural advantage in ensuring the dominance of their currencies. We calibrate the model to assess the quantitative importance of these mechanisms and study the dynamics of the international monetary system under counterfactual scenarios. |
| Keywords: | dominant currency; international monetary system; strategic complementarities; history dependence |
| JEL: | E42 E58 G21 |
| Date: | 2026–04–15 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:103040 |
| By: | Stefan Tanevski |
| Abstract: | This paper asks how institutional stock-market integration reshapes the transmission of monetary policy through asset prices in small open economies. Motivated by the persistent segmentation of Western Balkan capital markets, we develop a two-stage counterfactual transmission framework to identify how stock-exchange consolidation would alter the elasticity of market valuations to monetary shocks. First, a synthetic-control simulation constructs a counterfactual integrated Western Balkan stock exchange comprising Bosnia and Herzegovina, North Macedonia, and Serbia, benchmarked to the Baltic OMX merger, thereby quantifying the structural valuation gains of institutional integration. Second, we identify exogenous monetary-policy innovations using a Taylor-rule framework augmented with inflation and output forecasts and reserve adjustments. These shocks are then embedded within a Local-Projections estimator \`a la Jord\`a (2005) to trace the dynamic responses of market capitalisation under fragmented and integrated market regimes. The results point to a systematic amplification of monetary-policy transmission through the asset-price channel once markets are unified. Following a policy tightening of about 100 basis points, equity valuations fall roughly twice as strongly under integration than under fragmented markets. Additionally, we find that integration alters the sensitivity of monetary transmission itself: the initial pass-through intensifies, but its marginal responsiveness to further integration declines over time, signalling the consolidation of a new steady-state regime. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.18330 |
| By: | Maxime Saxena; Marco Pangallo; Fabio Caccioli; R. Maria del Rio-Chanona |
| Abstract: | As Large Language Models (LLMs) become increasingly integrated into financial systems, understanding their behavioural properties is crucial. Do LLMs conform to the rational expectations paradigm, do they exhibit human-like "animal spirits", or do they instead manifest distinct "machine spirits"? We investigate these questions with a simulated financial market, exploring the behaviour of 15 LLMs spanning a range of sizes, capabilities, and providers. Our results show that LLMs exhibit a spectrum of economic behaviours, from stable coordination on the fundamental value to human-like speculative bubbles. These behaviours are generally inconsistent with the rational expectations hypothesis. We also consider an ecology of heterogeneous agents, a more realistic setting compared to markets with identical LLM agents. These mixed markets can produce outcomes which vary substantially across repeated simulations. Even the most advanced models fail to consistently stabilise the market, with price bubbles sometimes forming despite only a minority of agents naturally forming bubbles. Instead, advanced models in mixed markets adapt their forecasting strategies to the behaviour of other agents. This adaptation can allow them to successfully exploit less sophisticated counterparts and achieve higher profits, but can also contribute to increased market volatility. These findings suggest that the introduction of AI agents into financial markets fundamentally reshapes their ecology. In particular, heterogeneous populations of LLMs can generate endogenous instability, while individual-level adaptation may amplify, rather than mitigate, market volatility. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.18602 |
| By: | Lu Yu; Xiang Li |
| Abstract: | Financial firms have gone through three major technological waves: computerization in the 1980s and 1990s, the rise of indexing and passive investing in the 2000s and 2010s, and the AI and automation wave from roughly 2015 to the present. This project studies how much labor is required to manage capital across those waves by tracking a simple productivity measure: assets under management per employee. Using a small panel of representative firms, we compare changes in AUM per employee, revenue per employee, and operating expense intensity over time. The goal is not to identify causal effects, but to document stylized facts about how technology changes the scale of asset management work. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.19833 |
| By: | Simone Lenzu |
| Abstract: | I develop a framework analyzing how artificial intelligence (AI) reshapes monetary policy through three interrelated channels: cyclical transmission, structural transition, and financial stability. In the short run, AI can alter inflation dynamics by changing how supply and demand disturbances map into prices—through shifts in production technologies, pricing behavior, cost pass-through, and expectations—even when conventional measures of economic slack are unchanged. Over longer horizons, AI may shift the natural benchmarks around which policy is calibrated, including potential output and the natural rate of interest. For financial stability, AI may improve credit allocation and risk assessment, but can also heighten systemic vulnerabilities through inflated expectation-driven asset valuations and model monocultures. A particular risk arises at the intersection of these channels: if AI initially depresses realized efficiency through adoption frictions while simultaneously fueling elevated asset valuations, the economy may face cost-push inflation and financial fragility at once—an AI-specific stagflation risk that the interest rate instrument alone is ill-suited to address. I argue that AI does not call for a redefinition of central banks’ objectives, but it does require a recalibration of existing frameworks: its diffusion blurs the distinction between cyclical fluctuations and structural shifts, raising the value of cost-side diagnostics and robust policy strategies over exclusive reliance on reduced-form inflation-gap relationships. |
| Keywords: | artificial intelligence; monetary policy; inflation; financial stability |
| JEL: | O33 E52 E58 E31 E32 E44 |
| Date: | 2026–04–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:103050 |
| By: | Bo Li; Mr. Tommaso Mancini-Griffoli; Mr. Marcello Miccoli; Brandon Joel Tan; Ms. Longmei Zhang |
| Abstract: | Payment stablecoins are privately issued digital money with the potential to enhance payment efficiency, foster innovation, and improve financial inclusion. At the same time, they are vulnerable to runs and associated welfare losses. One way to lower run risk is to require stablecoin issuers to hold safe assets. But doing so may lower issuers’ profitability and thus their incentive to provide stablecoins, hampering payment innovation and product variety. This paper offers a theoretical framework to navigate the tradeoff between maintaining stability and incentivizing issuance. Based on the Diamond and Dybvig (1983) model of bank runs, the paper shows that an unregulated private equilibrium is suboptimal. Stablecoin issuers hold risky assets to maximize profits, increasing run risk. A social planner can improve the equilibrium by requiring the backing of stablecoins with a safe asset (such as central bank reserves in a narrow bank setting), and creating conditions for other sources of revenue for issuers (such as central bank reserves remuneration or policies for payment data utilization). The model offers a baseline for the ongoing policy discussion while identifying considerations for further study. |
| Keywords: | Stablecoins; reserve backing; digital money; Stablecoin issuer; stablecoin issuer; payment innovation; payment efficiency; issuers' profitability; International reserves; Bank deposits; Commercial banks; Financial statements; Global |
| Date: | 2026–04–10 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/074 |
| By: | Daniel Aronoff; F. Christopher Calabia; Anders Brownworth; Ashwanth Samuel; Neha Narula |
| Abstract: | U.S. dollar stablecoins are increasingly used as payment and settlement instruments beyond cryptocurrency markets. With the enactment of the GENIUS Act in 2025, the United States established the first comprehensive federal framework governing their issuance, backing, and supervision. This paper evaluates the financial, technological, and regulatory risks that may arise as GENIUS-compliant stablecoins scale into mainstream use. We show that maintaining par-value redemption may depend not only on backing-asset quality, but also on the functioning of Treasury and repo markets, the balance-sheet capacity of broker-dealers, and the operational reliability of blockchain-based transaction rails. Even conservatively backed stablecoins can face stress from redemption surges, market-intermediation bottlenecks, or technological disruptions. We argue that durable stability will likely require an integrated approach spanning financial-market infrastructure, prudential regulation, and software governance. While grounded in U.S.\ law, the analysis identifies principles that are relevant for regulators in other jurisdictions developing stablecoin regimes. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.17167 |
| By: | Filippin, Maria Elena (Central Bank of Ireland and Uppsala University) |
| Abstract: | This paper examines how household-targeted government policies influence financial market participation conditional on financial literacy, focusing on potential Central Bank Digital Currency (CBDC) adoption. Due to the lack of empirical CBDC data, I use the 2012 introduction of retail Treasury bonds in Italy as a proxy to study how financial literacy affects households’ likelihood to engage with a new government-backed retail instrument. Using the Bank of Italy’s Survey on Household Income and Wealth, I show that households with some but low financial literacy are more likely to participate in the Treasury bond market than other groups following the introduction of the new instrument. Based on these findings, I develop a theoretical model to study how financial literacy affects CBDC demand through portfolio choice - low-financially literate households with limited access to risky assets allocate more resources to CBDC, while high-financially literate households use risky assets to safeguard against income risk. |
| Keywords: | Central Bank Digital Currency, Financial literacy, Government policies, Market participation, Treasury bonds. |
| JEL: | E42 E58 G11 G18 G53 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cbi:wpaper:05/rt/26 |
| By: | Filippin, Maria Elena (Central Bank of Ireland); Pelli, Michele (Central Bank of Ireland) |
| Abstract: | Trust is a central element of monetary and payment systems, and it plays a particularly important role when assessing the prospects for the digital euro. Ireland’s digitally advanced payment landscape provides useful context for understanding how households view the potential for digital euro adoption. Across the euro area, Irish respondents are the fourth most likely to report being willing to use the digital euro, with trust in the euro and institutions strongly associated with adoption intentions. While 90% of Irish respondents view the traditional form of physical euro positively, digital euro awareness remains below the euro area average (at 49%), highlighting the need for enhanced public communication as the project progresses. Digital euro awareness and adoption intentions within Ireland vary modestly across demographic groups, with men, older respondents, and the financially literate showing consistently higher awareness, willingness to adopt, and emphasis on key features such as security and business acceptance. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cbi:stafin:2/si/26 |