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on Financial Development and Growth |
| By: | Gabriel, Shalom; Ndanshau, Michael O.A. |
| Abstract: | The primary objective of this study was to empirically establish the nature of the relationship between external debt and economic growth in Tanzania, both in the short run and long run. The ARDL bounds test and the error correction model (ECM) were applied to annual time-series data for the period from 1980 to 2023. Both ARDL and ECM econometric results revealed a long-run equilibrium relationship among economic growth, external debt, and some covariates relevant to Tanzania. The results revealed a less-than-proportional negative effect of a unit change in external debt on economic growth in the long run, but a significant positive effect in the short run. The finding emphasizes the importance of prudent fiscal policy as a prerequisite for effective debt management to achieve sustainable and inclusive economic growth and development. This study may benefit from a follow-up study on threshold debt, domestic debt, and debt servicing in relation to economic growth in Tanzania. |
| Keywords: | External debt, economic growth, ARDL model, Tanzania |
| JEL: | E62 O47 O55 |
| Date: | 2026–04–26 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128876 |
| By: | Mohamud, Ibrahim Hussein |
| Abstract: | ABSTRACT This study empirically investigates the influence of trade openness and external debt on economic growth in Somalia from 1990–2022, utilising a vector error correction model (VECM). The findings confirm a consistent long-term link among the factors. Trade openness exerts a substantial negative long-term effect on growth, indicative of structural limitations such as reliance on imports and inadequate export capability, but external debt demonstrates a negative albeit negligible influence. Conversely, foreign direct investment fosters long-term growth, whereas inflation adversely affects growth in the short term. The results indicate that sustainable growth necessitates structural reforms, enhanced institutions, and superior macroeconomic management. IMPACT STATEMENT This report presents a comprehensive analysis of trade openness, external debt, and economic growth in Somalia, delivering critical insights for vulnerable economies. The findings indicate a "trade openness paradox, " wherein heightened global integration does not inherently promote growth due to structural deficiencies. It demonstrates that external debt alone cannot stimulate growth without proficient management and robust institutions. This study critiques traditional development assumptions by underscoring the necessity for export diversification, enhancement of domestic capacities, and better governance. The findings provide pragmatic, evidence-supported recommendations for governments pursuing sustainable and resilient economic growth. |
| Keywords: | Trade openness; external debt; economic growth; foreign direct investment; macroeconomic dynamics; VECM; cointegration; time series analysis; Somalia |
| JEL: | C32 F14 F21 F34 O11 O47 O55 |
| Date: | 2026–04–19 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128813 |
| By: | Ryan Niladri Banerjee; Hyun Song Shin; Jose María Vidal Pastor |
| Abstract: | The elastic supply of money through overdrafts and credit lines overcomes cash-in-advance con straints, enabling large-value payments without waiting for incoming cash. This elasticity is crucial in long supply chains, where cash-in-advance constraints could otherwise cause gridlock. In essence, money elasticity and the supply of working capital are two sides of the same coin, with undrawn credit lines serving as the operative link. This paper examines how shifts in financial conditions influence money elasticity and, in turn, impact firm activity within produc tion networks. Using granular firm-level data, we demonstrate that production-network-driven working capital needs introduce a cyclical element that dances to the tune of financial conditions. Tighter conditions, such as rising credit spreads or a stronger US dollar, significantly reduce output, with spillovers through production networks amplifying the effects. These findings underscore the importance of money elasticity in supporting economic stability. |
| Keywords: | money elasticity, working capital, credit lines, financial conditions, input-output linkages |
| JEL: | E23 E32 E41 E44 E51 F65 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1350 |
| By: | Yeo Joon Yoon (Pusan National University); Wongi Kim (SUNGSHIN WOMEN'S UNIVERSITY) |
| Abstract: | We analyze how the size and composition of official development assistance (ODA) shape aggregate performance and informality in the Philippines using a small open-economy dynamic general equilibrium model with a formal and informal sector. Two main scenarios are considered: (i) an increase in total ODA and (ii) a higher share of tied aid, given a fixed amount of ODA. Both scenarios raise capital, output, and consumption in steady state, but through distinct mechanisms. The first scenario primarily increases demand and appreciates the relative price of informal goods, expanding informality. By contrast, the second scenario expands public capital, crowds in formal investment, lowers the relative price of informal good, and shifts resources toward the formal sector, despite short-run reallocation costs. |
| Keywords: | Foreign Aid;Official Development Aid;Informal Sector;Philippines;APEC |
| JEL: | E26 O17 O53 |
| Date: | 2025–12–05 |
| URL: | https://d.repec.org/n?u=RePEc:ris:kiepas:022540 |
| By: | Shuhei NISHITATENO; Yasuyuki TODO |
| Abstract: | How Western donors respond to China’s expanding development finance remains contested, with competing hypotheses and limited systematic evidence. This study estimates the effect of Chinese aid on bilateral official development assistance (ODA) provided by donors in the OECD Development Assistance Committee (OECD-DAC). Using a Poisson pseudo-maximum likelihood estimator on a four-dimensional panel covering 31 donors, 130 recipients, and 13 sectors from 2001 to 2019, the analysis exploits within-recipient-sector-year variation in Chinese aid shocks and incorporates an extensive set of multi-way fixed effects to address endogeneity concerns. While no average competitive response is detected across all donors, we find consistent evidence that Japan systematically increased its ODA commitments in reaction to Chinese engagement—amounting to an estimated US$ 49.2 billion, or 22% of Japan’s total ODA commitments during the study period. Japan’s competitive responses are concentrated in geographically proximate and more democratic recipients, consistent with its geopolitical and normative priorities. No comparable response is detected for other major OECD-DAC donors, including the United States, Germany, France, and the United Kingdom. Taken together, the results show that Japan’s behaviour illustrates how a traditional donor can strategically deploy ODA as part of a broader foreign policy and industrial strategy, while the muted responses of other donors suggest that the OECD-DAC system remains more resilient than often assumed. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:26041 |
| By: | Tsendsuren Batsuuri; Chiara Ferrero; Kalika Likhi; Mr. Andrew J Swiston |
| Abstract: | IMF borrowers have demonstrated a very strong track record of timely repayments to the IMF since the 1990s—indeed, no new episodes of protracted overdue financial obligations (OFOs) have occurred since 2001. This represents a marked improvement from the experience of the 1980s and early 1990s. Through quantitative modeling we find that countries’ international reserves coverage of debt service due to the IMF and other creditors, external debt levels, macroeconomic conditions, and broad institutional strength played key roles in distinguishing between past cases with timely repayments and those with protracted arrears. However, we also find that policy reforms and changes in other qualitative factors since the 1990s weakened the relationship between quantitative indicators of repayment capacity and the likelihood of protracted arrears episodes. While stronger macroeconomic and institutional fundamentals of borrowers have contributed to greater timeliness of repayments, a large portion of the improvement remains unexplained by country-specific factors. The timing of this improvement is consistent with implementation of a cooperative strategy on OFOs and other policies that have incentivized cooperation and mitigated “residual” risks on IMF lending relative to the underlying fundamentals of borrowers. |
| Keywords: | IMF lending; sovereign debt; timely repayment; arrears; debt relief; machine learning; random forest; recursive feature elimination |
| Date: | 2026–05–29 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/104 |
| By: | Roman Horvath (Institute of Economic Studies, Charles University (Prague)); Matej Korinek (Institute of Economic Studies, Charles University (Prague)); Laurent Weill (LaRGE Research Center, Université de Strasbourg) |
| Abstract: | This paper investigates whether financial development shapes people’s preferences for redistribution. Although a large literature examines the effects of finance on growth and inequality, much less is known about its influence on the political demand for redistribution. Using individual-level data from the World Values Survey and the European Values Study, we estimate the relation between financial development and preferences for income equality. We find no significant average effect of financial development on redistributive demand. However, this aggregate neutrality masks significant individual-level heterogeneity. We find that financial development is associated with lower support for redistribution among men, married individuals, and right-leaning respondents. In contrast, the effect is significantly positive for more educated individuals. These results suggest that financial development reshapes the political landscape not by shifting average preferences, but by altering the composition and polarization of pro-redistribution coalitions. |
| JEL: | D31 D63 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:lar:wpaper:2026-01 |
| By: | Quaicoe, Nana |
| Abstract: | In economies where a portion of the population transacts through mobile money and the other portion strictly uses only cash, can any single interest rate rule serve both groups well? I develop a two-agent New Keynesian model calibrated to Ghana in which included households manage liquidity through mobile money under Baumol– Tobin demand, while excluded households depend on government transfers under fiscal dominance. I find a critical threshold at approximately 70 percent financial exclusion.Below it, aggressive inflation targeting is optimal for both household types. Above it, the welfare surface for included households develops an interior optimum, the optimal Taylor rule diverges across groups, and no single rule resolves the conflict. The distributional cost of monetary policy is convex in exclusion: the welfare variance ratio between household types rises from 7.6:1 at 50 percent exclusion to 98:1 at 80 per- cent, the range observed across Sub-Saharan Africa. Aggregate welfare statistics mask this entirely. The trade-off is reducible only through financial inclusion, not through monetary policy design. |
| Keywords: | monetary policy, financial inclusion, mobile money, TANK model, fiscal dominance, Taylor rule, distributional effects, Sub-Saharan Africa |
| JEL: | E52 E58 G23 O16 |
| Date: | 2026–04–18 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128793 |
| By: | Myeongju Kim (Yonsei University); Eunseong Ma (Yonsei University) |
| Abstract: | This paper studies how the macroeconomic effects of tax cuts depend on occupational targeting—toward entrepreneurs versus wageworkers. Using a new state-level panel of occupation specific federal tax shocks for the United States from 1981 to 2017, we find that entrepreneur targeted tax cuts generate substantially larger increases in output, consumption, and employment than revenue-equivalent worker-targeted cuts. These effects coincide with increases in both entrepreneurship and wage employment, pointing to business formation and firm expansion as key transmission channels. An incomplete-markets model with occupational choice attributes these findings to earnings-based borrowing constraints and demand-driven amplification that jointly produce large entrepreneur multipliers. |
| Keywords: | Tax policy, Entrepreneurship, Earnings-based constraints, Occupational choice |
| JEL: | E62 H25 J23 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2026rwp-291 |
| By: | Kunze Li (Beijing Normal University); Kanda Naknoi (University of Connecticut); Kai Zhao (University of Connecticut) |
| Abstract: | We provide empirical evidence that asset returns are correlated across genera-tions and that this correlation has significant consequences for the distribution of wealth. Using the Panel Study of Income Dynamics and asset price databases, we find that a 10-percentile increase in a father’s wealth return rank is associated with an approximately 3-percentile increase in his child’s corresponding rank. Next, we construct an overlapping-generations model in which dynasties are linked through returns, earnings, and bequests. Our counterfactual experiments show that the intergenerational correlation in returns (ICR) accounts for a significant fraction of top wealth shares and the ICR is an important driver of persistence at the top of the wealth distribution. Thus, incorporating the ICR alters predictions about the aggregate and distributional effects of estate taxation, with important policy implications. |
| Keywords: | wealth inequality, returns, intergenerational persistence, estate tax |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:uct:uconnp:2026-02 |
| By: | Ignazio Angeloni (SAFE Leibniz Institute for Financial Research, Institute for European Policymaking and Bocconi University); Marco Pagano (University of Naples Federico II, CSEF, EIEF, CEPR and ECGI.) |
| Abstract: | The European Union’s proposed Savings and Investments Union seeks to address a longstanding paradox: Europe has abundant private savings but struggles to channel them into productive, long-term and risk-bearing investment. This article argues that the SIU will succeed only if it avoids treating capital-market development as an alternative to banking integration. Europe remains a bank-centered financial system, especially in financing small and medium-sized enterprises, and its capital markets can realistically develop only through the active participation of stronger, larger, and more cross-border banks. The article proposes four mutually reinforcing lines of action: creating a country-blind regulatory framework for cross-border banking groups; resisting national political interference in banking consolidation; developing simple and portable savings and pension instruments that mobilize household wealth for risk capital; and reviving securitization through standardization, sound regulation, and market-making support. The central message is that the SIU can become more than another European policy slogan only if it connects Banking Union and Capital Markets Union in a practical institutional strategy: using banks as the bridge between European savings and European investment needs. |
| Keywords: | Savings and Investments Union, Banking Union, Capital Markets Union, financial Integration, cross-border banking; household savings, securitization, bank consolidation |
| JEL: | G21 G23 G28 F36 |
| Date: | 2026–05–19 |
| URL: | https://d.repec.org/n?u=RePEc:sef:csefwp:783 |
| By: | Mr. Luc Laeven; Mr. Fabian Valencia |
| Abstract: | This paper presents an updated version of the Laeven and Valencia (2013, 2020) database on systemic banking crises, extending the coverage through 2025. The update incorporates new episodes, while maintaining the definition established in previous editions, which emphasizes both significant signs of financial distress and substantial policy interventions. The update integrates textual tools to screen potential candidates that are then further scrutinized to confirm if our definition is met. The database includes information on banking crises episodes during 1970-2025, including starting dates, policy responses, fiscal costs, and output losses. It offers a comprehensive tool for assessing cross-country vulnerabilities and policies to resolve banking crises. |
| Date: | 2026–05–15 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/094 |
| By: | Katharina Bergant; Andres Fernandez; Mr. Ken Teoh; Martin Uribe |
| Abstract: | Employing large language models to analyze official documents, we construct a comprehensive record of daily changes in de jure restrictions on cross-border flows worldwide since the 1950s. Our analysis uncovers the wide array of instruments used to regulate cross-border financial flows over the past seven decades, leveraging the fine granularity of the new measures to characterize cross-country and time-series variation across eight categories of restrictions —- distinguishing by flow, direction, instrument type, intensity, and overall policy stance. We exploit the high frequency nature of the new data to document novel patterns in the use of these restrictions, as well as their relationship to crises and political economy determinants. |
| Keywords: | Cross-border flows; Controls; Large language models |
| Date: | 2026–05–15 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/098 |
| By: | Ruopu Hu (Graduate School of Economics, Kobe University) |
| Abstract: | We construct and estimate a small open economy DSGE model featuring a regime-switching reserve requirement (RR) ratio rule within a banking sector that has access to foreign assets. The model incorporates key financial characteristics of the Chinese economy and examines the implications of changes in the RR-ratio. Estimation results reveal that the RR-ratio follows a feedback rule with a regime-dependent coefficient on net foreign lending during two distinct phases between 2006 and 2017. The state-contingent rule is temporarily suspended during the Global Financial Crisis, but is reactivated in the post-crisis period amid recovered capital inflows. On the one hand, the RR-ratio has almost negligible real effects on output and inflation; but on the other hand, it proves effective as a macroprudential instrument by mitigating financial instability through a reduced risk of self-fulfilling bank runs by about 25%. |
| Keywords: | Reserve Requirement Ratioï¼› Macroprudential Policyï¼› Financial Stabilityï¼› Capitalï¼› Flow, Regime-switching DSGE |
| JEL: | C11 E58 F41 G18 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:koe:wpaper:2609 |
| By: | Celso Brunetti; Jeffrey H. Harris; Ioannis Spyridopoulos |
| Abstract: | No, in the mortgage market. Using confidential micro-level data combining mortgage contracts with credit and repayment records for 44 million loans spanning 5, 000 bank mergers over nearly three decades, we find no changes to mortgage rates, approval rates, or delinquency rates. Local mortgage markets remain remarkably competitive despite consolidation, averaging over 100 active lenders in each county every post-merger quarter. Our findings reveal significant merger selection motives: large acquiring banks target community banks with relationship-intensive, portfolio-lending business models, whereas community banks appear to merge together to gain scale and compete. Overall, our study challenges the view that bank mergers increase market concentration and create market power that harms household borrowers. |
| Keywords: | bank mergers; banking consolidation; mortgage lending; market power; competition; community banking; consumer welfare; credit access |
| Date: | 2026–05–13 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:103337 |
| By: | International Monetary Fund |
| Abstract: | The first Financial Sector Assessment Program (FSAP) of Greece since 2006 has found risks to financial stability were low prior to the start of the war in the Middle East and remain manageable. The Greek financial system has experienced significant consolidation since the Greek Sovereign Crisis and is dominated by four systemically important (SI) banks. These banks underwent major asset cleanups through the securitization and sales of non-performing loans (NPLs) since 2019. They now enjoy strong balance sheets, profitability, and liquidity on the back of low-cost deposit bases and loans to domestic non-financial corporates (NFCs). However, mortgage and SME lending markets remain limited, partly due to the slow pace of resolution of the large stock of NPLs now managed by credit servicers (approximately 2.9 million loans from 2.4 million borrowers out of a population of 10.4 million people). Other non-bank financial institutions (NBFIs) play only a limited role in the Greek financial system. |
| Date: | 2026–05–27 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfscr:2026/110 |
| By: | Andrea Bacchiocchi (Department of Economics, Society and Politics, University of Urbino Carlo Bo); Germana Giombini (Department of Economics, Society and Politics, University of Urbino Carlo Bo); Ludovica Segneri (Department of Economics, Society and Politics, University of Urbino Carlo Bo); Francesco Venturini (Department of Economics, Society and Politics, University of Urbino Carlo Bo) |
| Abstract: | Does financial risk affect the firm decision to develop a new technology? We study this issue in the context of the take-off of Artificial Intelligence (AI). Using data on 28, 000 Italian firms (2012–2019) matched with patent records, we find that companies handling higher cash-flow volatility are significantly more likely to innovate in AI. The role of financial risk is weaker for relatively more mature technologies, suggesting that firms more subject to financial uncertainty are more willing to undertake innovation in high-uncertainty, high-reward domains and drive frontier technological change. |
| Keywords: | Artificial Intelligence, Financial risk, Cash-flow volatility, Technological uncertainty. |
| JEL: | O31 G32 L25 C23 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:anc:wmofir:199 |
| By: | Sally Dubach |
| Abstract: | The literature on rational asset price bubbles has grown substantially, yet its internal logic is difficult to trace without reading across a large and technically demanding body of work. This paper provides a guide to the literature on rational asset price bubble theory, tracing its evolution from early overlapping generations models to environments with financial frictions, infinitely lived agents, and dividend-paying assets. Two mechanisms consistently sustain rational bubbles across these frameworks. The first is resale: investors buy above fundamental value, expecting to sell to subsequent buyers. The second is savings pressure that pushes the bubbleless equilibrium interest rate below the economy’s growth rate. Despite substantial theoretical progress, a gap remains between theoretical insights and the frameworks policymakers need. |
| Keywords: | Rational bubbles; asset prices; dividend-paying assets |
| JEL: | E12 E44 G12 D84 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:ube:dpvwib:dp2604 |
| By: | Eduard Gracia (Universitat de Barcelona) |
| Abstract: | Under very general conditions, the best predictor of any random variable’s observed time series is not its mean but its median. Hence, if we aim to model a variable with a skewed (a.k.a. asymmetric) probability distribution, so mean and median diverge, it is the model’s predicted median path that must be compared to that variable’s observed time series. Thus e.g. rational economic agents base their decisions on their target variables’ expected (a.k.a. mean) paths, which must as a result follow certain rules (mainly no arbitrage); but, if those variables are skewedly distributed, irrational-looking observations may not reflect irrationality, for the median is not subject to the rules rationality imposes on the mean. Yet economic models rarely pose this hypothesis and, when they do, their skewness assumptions often present major theoretical and/or empirical drawbacks. This paper proposes instead to assume normally distributed (hence symmetric) random perturbations and then rely on economics’ standard nonlinear assumptions (e.g. diminishing returns, decreasing marginal utility, etc.) to skew relevant variables’ distributions endogenously. To put this analytical framework to work, we build three new, rational expectations, frictionless markets’ macroeconomic models (two for market bubbles and one for Tobin’s q) and prove their predictions fit the stylized facts better, and more comprehensively, than the standard models’ while relying on more general, parsimonious standard assumptions. |
| Keywords: | Bubbles, cycles, rationality, macroeconomics |
| JEL: | C53 E32 E44 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ewp:wpaper:497web |
| By: | Gong Cheng; Stefano Finesi |
| Date: | 2026–05–18 |
| URL: | https://d.repec.org/n?u=RePEc:stm:dpaper:27 |
| By: | Bernd Hayo; Matthias Neuenkirch; Manuel Walz |
| Abstract: | This paper analyses the extensive and intensive margins of demand for a retail digital euro. We conducted a representative survey in France, Germany and Italy in November–December 2023. We find that 52–62% of respondents are willing to hold a digital euro, depending on the interest rate spread, with a higher share in Italy than in France or Germany. Design features (cash-like vs deposit-like) appear to play only a very limited role. Average demand depends on the hypothetical interest rate spread relative to current accounts and ranges from EUR 700 to EUR 1, 100, implying an aggregate demand of 1.5–2.5% of GDP. Willingness to hold a digital euro is associated with socio-demographic factors, trust in the ECB and the EU, digitalisation and payment behaviour. Negative interest rate spreads relative to current accounts reduce willingness to hold the digital euro more strongly than positive spreads increase it. Behavioural characteristics tend to be correlated with the likelihood of adoption, whereas economic factors, particularly income and interest rates, are mainly related to the level of demand. This distinction becomes more pronounced when conditioning on positive demand, suggesting that socio-demographic factors primarily influence participation decisions rather than quantities demanded. |
| Keywords: | CBDC demand, Digital euro, ECB, Household survey, Monetary policy |
| JEL: | E41 E42 E51 E58 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:trr:wpaper:202606 |