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on Financial Development and Growth |
| By: | Filip, Marinela-Daniela; Setzer, Ralph; Peréz-González, Diego |
| Abstract: | This paper examines whether differences in the composition of investment help explain economic growth disparities in the EU and other advanced economies from 1996 to 2021. While overall investment levels in the EU and the US are broadly similar, the EU invests less in intangible and tangible ICT capital. This difference in composition is associated with part of the EU’s productivity gap with the US. Employing panel fixed effects and local projection methods, we find that intangible and tangible ICT investments -particularly in communications equipment, R&D, and other intellectual property products- are associated with higher GDP per capita growth than other forms of investment. To quantify these differences, we construct a novel investment efficiency ratio that relates the estimated economic growth contribution of each asset to its share in total investment. The results are robust across empirical methods, country samples, and time periods, and reveal substantial heterogeneity: the growth association of ICT-related investment is stronger in countries with higher income levels and greater human capital. Overall, the findings suggest that improving the allocation and efficiency of investment, rather than simply increasing its volume, is key to enhancing long-term growth. JEL Classification: E22, O47, O50, J24, C23 |
| Keywords: | intangible investment, investment efficiency, investment human capital, panel data, tangible ICT |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263242 |
| By: | Ben Soltane, Bassem |
| Abstract: | This study examines the dynamic interrelationship between transport infrastructure, foreign direct investment (FDI), and economic growth in Tunisia over the period 1996–2022. Motivated by the hypothesis that transport infrastructure stimulates FDI, which in turn enhances GDP per capita, the analysis adopts a Vector Autoregression (VAR) framework to capture the bidirectional linkages among the three variables. The study relies on annual time-series data drawn from the World Bank Open Data platform and the International Road Statistics (IRS). The results confirm that transport infrastructure positively influences FDI inflows, and that FDI subsequently contributes to economic growth, revealing a reinforcing cycle wherein improved infrastructure attracts investment, which then drives development. Granger causality tests support these directional links, while impulse response functions and variance decomposition illustrate the transmission mechanisms and evolving contribution of each variable to economic performance. These findings underscore the strategic importance of transport infrastructure in Tunisia’s development model and highlight the need for spatially inclusive investment, macroeconomic stability, and institutional efficiency. The study also addresses practical challenges, such as fiscal constraints and political uncertainty, and calls for future research focused on infrastructure typologies, private sector participation, and economic resilience in the face of global disruptions. |
| Keywords: | Transport infrastructure, Foreign Direct Investment (FDI), Economic growth, Vector Autoregression (VAR), Tunisia. |
| JEL: | C32 F21 F43 O11 O55 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:127901 |
| By: | Tahir, Sumiya; Audi, Marc; Ali, Amjad |
| Abstract: | This paper examined the effect of green and brown foreign direct investment on economic growth in ten Central and Eastern European countries. It also examines how trade openness, inflation, and consumption of renewable energy determine long and short-term economic performance, and the asymmetric impacts of foreign direct investment composition are also highlighted. The Annual data between 1995 and 2024 was estimated by Autoregressive Distributed Lag (ARDL) and Nonlinear ARDL (NARDL) models to estimate the short-run dynamics and long-run equilibrium relationships. To establish the order of integration, stationarity tests, such as the Augmented Dickey-Fuller and Phillips-Perron, were performed. The analysis of cointegration and asymmetry effects was done to measure the relative contribution of green and brown foreign direct investment to GDP growth. Empirical evidence shows that the impact of green foreign direct investment on the GDP is positive and statistically significant both in the long-term and in the short-term (effective only limited or even negative) in the short-term. Trade openness and the consumption of renewable energy have a positive effect on the growth of the economy, which shows the advantages of entering global markets and producing low-carbon technologies. Inflation negatively impacts the GDP, which proves the significance of macroeconomic stability in investment productivity. The results of the analysis also indicate a cointegration relationship amongst variables in the long run, and the asymmetric tests indicate that positive inflows of green foreign direct investment have stronger growth effects compared to the similar effects of reductions. The paper highlights how green foreign direct investment should be encouraged with strategic significance to support the long-term economic growth of transition economies. The policy measures that promote environment-based investments, trade facilitation strategy, and energy transition strategies have a significant impact on the attainment of low-carbon and inclusive development. The findings suggest that policy frameworks should prioritize environmentally sustainable investment and strengthen renewable energy transitions to achieve long-term economic growth. |
| Keywords: | Green Foreign Direct Investment, Brown Foreign Direct Investment, Economic Growth, Trade Openness, Inflation, Renewable Energy, Central and Eastern Europe |
| JEL: | F21 O4 Q3 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128997 |
| By: | Bagde, Rakshit |
| Abstract: | Digital payment technologies have significantly transformed financial systems across emerging economies. In India, the rapid expansion of the Unified Payments Interface (UPI) has reshaped payment infrastructure and expanded access to financial services. Introduced by the National Payments Corporation of India under the supervision of the Reserve Bank of India, UPI has enabled seamless real-time transactions between bank accounts through mobile devices. This study examines the relationship between digital payment adoption, financial inclusion, and rural development in India during the period 2016–2024. Using secondary data from official financial databases and national payment statistics, the research applies panel regression models and diagnostic tests to evaluate the impact of UPI transaction growth on rural income and financial access indicators. The results indicate that digital payment expansion is significantly associated with improvements in financial accessibility and rural economic outcomes. The findings highlight the role of digital payment infrastructure in promoting inclusive economic growth and strengthening financial ecosystems in developing economies. |
| Keywords: | Digital payments, UPI, Financial Inclusion, Rural Development, Fintech, India. |
| JEL: | G21 G28 G29 |
| Date: | 2026–01–01 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128929 |
| By: | Ndanshau, Michael O.A.; Mgonja, Haika V. |
| Abstract: | The main objective of this paper was to investigate the impact of the real lending rate on private investment in Tanzania, using annual time-series data for the period between 1967 and 2020. The two-step Engle-Granger cointegration test and an error correction model (ECM) were estimated to establish the long-run and short-run dynamics among private investment, the real interest rate, and other covariates relevant to Tanzania. The Engel-Granger procedure revealed private investment was cointegrated with the real lending rate and other covariates –real income per capita, bank credit, and economic openness. The OLS results revealed the long-run real interest rate elasticity with respect to private investment was negative, as expected, but was statistically insignificant. The ECM results revealed that the short-run interest rate elasticity of private investment was positive and statistically significant. The study also found that bank credit, inflation, and financial sector reforms were theoretically consistent determinants of private investment over the long run. Besides, the study found that the short-run effects of openness and financial sector reforms were statistically significant, but negative and positive, respectively. The basic results indicate the limited relevance of interest rate policy to the conduct of monetary policy aimed at fostering private investment in Tanzania. The results, however, emphasize the importance of price stability in promoting private investment and economic growth. The results also underscore the importance of a liberalized financial sector in the process of economic development and growth, at least in Tanzania and per the chosen sample period. |
| Keywords: | Real interest rate, private investment, Cointegration test |
| JEL: | E22 E5 O55 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128930 |
| By: | Tiamiyu, Kehinde |
| Abstract: | This study verified the crowding-out hypothesis in the Nigerian economy for the period 1981 to 2020. This was done in a bid to refute or otherwise the age-old claim in economic literature that government budget deficits trigger both aggregate demand and interest rates, thereby crowding out private investment. The analysis was done with the aid of the ARDL technique, given the fact that there was an admixture of stationary and nonstationary series in the model, as found out in the ADF unit root test. This study confirms the presence of the crowding-out effect in both the short run and the long run. Irrespective of the model considered, whether in the short run or long run, GDP has been a strong fundamental driver of private investment in Nigeria. Both the short-run and long-run estimates are statistically significant at the 1% level, suggesting that investment typically exceeds savings when income grows in Nigeria. In other words, private investment in Nigeria is income-driven. This result is in line with Duesenberry’s financial theory of investment. Although a positive relationship between government capital expenditure and private investment in Nigeria was confirmed in both the short run and the long run, capital expenditure is not yet a significant determinant of private investment growth. This suggests that Nigeria has not yet achieved a breakthrough in infrastructure development, particularly in critical sectors such as transportation and communication, which are essential for attracting private investment. Furthermore, the findings reiterate that most private investments in Nigeria are income-induced rather than autonomous. Consequently, the government is strongly advised to provide more incentives to indigenous manufacturers and businesses, invest heavily in infrastructure to secure Nigeria's economic future, and create a more conducive macroeconomic environment for businesses. In addition, government spending should be directed towards stimulating the productive sectors of the economy, rather than supporting consumptive activities. |
| Keywords: | Budget deficit, private investment, interest rate, government expenditure, ARDL Model |
| JEL: | C5 E2 E22 E4 E6 E62 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129249 |
| By: | Mue, Kelvin |
| Abstract: | This paper seeks to provide an analysis of the "African premium”, that is, the excess yield or cost that African sovereign and corporate issuers pay relative to comparable emerging market peers. Drawing from academic literature, market data, and institutional reports spanning 2008-2026, we document that African sovereigns systematically pay higher borrowing costs than justified by fundamental risk factors alone. In 2018, African Eurobond yields averaged 6.0%, which equated to a 50-basis point premium compared to the 5.5% emerging market average, coupled with a 200-basis point premium compared to the 4.0% Asia-Pacific average. On careful observation, my analysis has shown that as important as macroeconomic factors such as debt ratios, growth prospects, and inflation rates are, along with credit rating, governance, and global factors, they do not explain the high borrowing costs for African countries. This unexplained component suggests the presence of a so-called "prejudice premium" or structural mispricing, potentially costing African economies billions annually in excess interest payments. The African fixed income market has experienced tremendous growth, with Sub-Saharan Africa Eurobond issuance growing from less than $1 billion in 2008 to $18 billion in 2025. However, ongoing challenges include low market liquidity, investor bases, bond maturities, as well as exposure to global financial shocks. Notwithstanding, as of mid-2025, a sovereign spread crisis, as measured by distressed levels above 1, 000 basis points, did not affect any African country. This is a milestone not achieved since 2015. The policy implications relevant to this paper thereafter relate to issues like strengthening macroeconomic fundamentals, better governance, better institutions, better debt transparency, better development of local currency markets, and better addressing issues like information asymmetries through initiatives like the Africa Credit Rating Agency (AfCRA), which was recently established on January 27th 2026. These measures could potentially substantially reduce the African premium and lower financing costs for governments and corporations across the continent. |
| Keywords: | African premium, sovereign bond spreads, fixed income markets, emerging markets, money markets, credit risk premium, Sub-Saharan Africa, Eurobond yields, sovereign debt, market development, credit ratings, fiscal fundamentals, governance indicators, market liquidity |
| JEL: | E0 E02 G1 G14 G15 |
| Date: | 2026–02–10 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128017 |
| By: | Ndanshau, Michael O.A.; Joseph, Cornel |
| Abstract: | This study sought to establish the relevance of the classical view that foreign aid complements domestic savings, using Tanzania’s time-series data for 1966-2023. The empirical investigation was based on the Autoregressive Distributed Lag (ARDL) bounds cointegration technique. The empirical results show that aid augmented and substituted for domestic savings in Tanzania in both the short and long run. The study's findings suggest that the government in Tanzania should be wary of seeking aid, as doing so significantly reduces domestic savings in the short run. Moreover, the government should continue implementing policies that support aid for sustainable long-term growth. |
| Keywords: | Foreign aid, domestic savings, ARDL |
| JEL: | F35 O55 |
| Date: | 2025–09–06 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128783 |
| By: | Mattias Antar; Adel Daoud; Connor T. Jerzak |
| Abstract: | Subnational studies of aid effectiveness often rely on repeated cross-sections or nighttime lights, making it difficult to separate local treatment effects from baseline differences and potentially favoring infrastructure-heavy projects. We address these limitations by studying World Bank and Chinese development projects in Africa with a balanced panel of 2, 166 DHS clusters across 35 countries from 2002 to 2013. Geocoded AidData projects are linked to satellite-imputed International Wealth Index estimates, a household-centered measure of material living standards. We compare a conventional two-way fixed effects (TWFE) event-study with the switcher--stayer estimator of de Chaisemartin and D'Haultfoeuille (dCdH), which avoids contaminated comparisons under staggered treatment timing. Pre-treatment diagnostics show that project placement is frequently selective: clusters that later receive projects often begin from weaker relative positions before treatment onset. Consequently, TWFE often implies larger post-treatment gains than the preferred staggered-treatment design supports. Under dCdH, the evidence becomes more selective and sector-specific. For the World Bank, positive evidence is strongest in Health, while Education shows positive but less cleanly identified gains. For China, Water Supply and Sanitation and Other Social Infrastructure and Services show positive associations with local wealth, although residual selection concerns remain. By contrast, Chinese Energy Generation and Supply appears strongly positive under TWFE but falls close to zero under dCdH. Overall, the results do not support a donor-wide claim that either the World Bank or China uniformly improves local wealth. Instead, estimated effects are concentrated in a limited set of donor--sector panels and depend strongly on how treatment timing, selection, and outcome measurement are handled. |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2606.06651 |
| By: | Emanuele Colonnelli; Marcio Cruz; Mariana Pereira-Lopez; Tommaso Porzio; Chun Zhao |
| Abstract: | We build new data on startups in Africa to study which types of financing these firms demand, how financing is allocated in practice, and the implications for startup creation and the composition of the sector. We combine a continent-wide founder survey, an incentive-compatible experiment estimating financing preferences, and venture capital (VC) deal records matched to founders’ education and work histories. We find that startups strongly prefer equity over debt, but equity is supplied mainly by foreign investors and flows disproportionately to foreign-connected founders. About 80 percent of VC deals involve a foreign investor, and more than 60 percent of funded founders have studied or worked outside Africa. A simple accounting framework shows that this foreignness reflects three main forces: scarce local equity capital, a thin pool of local entrepreneurs able to access startup finance, and frictions limiting local entrepreneurs’ access to foreign investors. Together, these forces reduce startup creation and tilt the sector toward foreign investors and foreign-connected founders. |
| JEL: | F0 G0 O10 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35261 |
| By: | MIYAMOTO, Hiroaki; SHINOHARA, Hiroaki |
| Abstract: | We study how rising longevity affects the long-run real interest rate in an overlapping-generations model with mortality risk and accidental bequests to the young. Longer lives increase retirement saving, which tends to lower the interest rate, but they also reduce such bequests and shift asset payoffs from young savers to surviving retirees, weakening aggregate saving. Public debt amplifies this second force. When debt is sufficiently high, further increases in longevity eventually raise the steady-state interest rate. Thus, longevity need not continue to depress interest rates: with large public debt, the relationship between longevity and the interest rate becomes non-monotonic. |
| Keywords: | demographic trend, fiscal policy, interest rate |
| JEL: | E21 E43 J11 |
| Date: | 2026–04–28 |
| URL: | https://d.repec.org/n?u=RePEc:hit:cisdps:711 |
| By: | Ali, Amjad; Umrani, Zeeshan; Jadoon, Atif Khan |
| Abstract: | This study presents a comprehensive analysis of the key factors affecting the market value of equity securities by integrating macroeconomic variables and financial indicators within a panel data framework. Data were collected from 40 listed British firms from 2015 to 2024. The research utilizes fixed effects and robust regression models to examine the relationship between market valuation and variables such as book value per share, earnings per share, dividends per share, debt-to-equity ratio, return on equity, inflation, interest rate, exchange rate, and gross domestic product growth. The results indicate that dividends per share, earnings per share, return on equity, and book value per share each exert a significant and positive influence on market value. Conversely, macroeconomic instability, including fluctuations in exchange rates and elevated interest rates, negatively impacts equity valuations. Robustness checks and diagnostic tests confirm the stability of the models. This study contributes to the literature by empirically validating both modern and classical valuation theories and offering practical implications for policymakers, investors, and corporate managers. Limitations are acknowledged, and directions for future research are proposed, including the incorporation of non-financial variables and the adoption of dynamic modeling approaches. |
| Keywords: | Equity Valuation, Macroeconomic Variables, Financial Indicators |
| JEL: | E0 G3 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128753 |
| By: | Nag, Arindam |
| Abstract: | This paper investigates whether artificial intelligence amplifies systemic risk in equity markets using daily data spanning February 2023 to December 2025, comprising 721 observations across the CBOE Volatility Index, S&P 500 and NASDAQ Composite returns, abnormal trading volume, and the Amihud illiquidity ratio. Employing descriptive statistical analysis, an event study framework, OLS regression with Newey-West HAC-corrected standard errors, and a six-lag Vector Autoregression, the results provide evidence broadly consistent with systemic risk amplification through the liquidity withdrawal channel. The regression results indicate that market illiquidity, as measured by the Amihud ratio, is a statistically significant predictor of volatility (coefficient = 1, 144, 957; p |
| Keywords: | Artificial Intelligence, Algorithmic Trading, Systemic Risk, Market Volatility, Financial Stability, Liquidity Risk |
| JEL: | G0 G10 G14 G18 G3 G33 O33 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128853 |
| By: | Celso Brunetti; Christoph Frei |
| Abstract: | We study the rise of nonbank financial intermediation and its implications for systemic risk. We develop a structural network model of banks and nonbank financial institutions (NBFIs) that decomposes intermediation into a capacity channel, driven by bank balance-sheet constraints, and a reliance channel, reflecting NBFI funding reliance. Using U.S. banking confidential supervisory data, we estimate key structural parameters and quantify both channels. We find that fluctuations in bank-NBFI intermediation are primarily explained by the reliance channel, with variation in NBFI fragility emerging as the dominant driver. We show that NBFI intermediation can amplify shocks through funding interconnectedness. |
| Keywords: | bank regulation; nonbank financial intermediation; systemic risk; financial networks; balance-sheet constraints; nonbank financial institution (NBFI) fragility; capacity and reliance channels; supervisory data |
| JEL: | G21 G23 G28 C51 D85 |
| Date: | 2026–05–11 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:103340 |
| By: | Rajashri Chakrabarti; Gabriel Leonard; Donald P. Morgan; Thu Pham; Lee Seltzer |
| Abstract: | In imperial China, 3 percent was the maximum legal monthly loan rate; charging more was punishable by 40 to 100 blows with the “light cane.” (Rockoff 2003) Centuries later, many U.S. states are imposing the same cap (without corporal penalties) on alternative credit providers, such as payday, installment, and auto-title lenders, with the goal of lowering credit costs and delinquency for the high-risk borrowers that rely on these funding sources. A concern, however, is that lenders will simply refuse to lend to these borrowers at lower interest rates. Our recent Staff Report studies how interest rate caps have played out in several states that recently adopted them. Using household-level data from a major credit bureau, we find that loan balances for the riskiest borrowers declined substantially relative to counterparts in states without caps. Despite taking on less debt, these borrowers did not experience an improvement in delinquencies. |
| Keywords: | usury limit; household debt; consumer finance |
| JEL: | D12 D18 |
| Date: | 2026–06–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:103389 |
| By: | Giulio Cornelli; Leonardo Gambacorta; Boris Hofmann; Michael Brei |
| Abstract: | This paper examines the implications of two coincident digital trends - the digitalisation of banking and the widespread adoption of social media - for the pricing of deposits in the United States. Using branch-level data, we analyse how both trends interact to influence the level of deposit rates as well as their adjustment to changes in the policy rate. Our analysis distinguishes between traditional banks with physical branch networks and digital banks. Using panel regression analysis and local projections, we find that digital banks' deposit rates are higher and more reactive to changes in policy rates, consistent with the view that their customers are more price sensitive. We further find that digital banks offer higher deposit rates and react more sharply to policy rate changes in counties with higher social media activity, as measured by Twitter usage, supporting the notion that high social media use further increases price sensitivity. |
| Keywords: | deposit rate pass-through, digital banking, monetary policy transmission, social media activity, branch-level data, policy rate |
| JEL: | E43 E52 G21 O33 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1357 |
| By: | bouzayani, Rajab |
| Abstract: | The objective of this research is to explain the link between the inflation threshold and economic growth, a major concern for economic and policy decision-makers. However, there is a contentious debate regarding whether inflation stimulates or hinders economic growth. In this context, this study seeks to answer the following question: to what extent can inflation be considered favorable to economic growth? Failing that, it examines the nature of the relationship between inflation and economic growth, as well as the determination of the inflation threshold level that allows for a linear relationship to be maintained. To do so, the study employs the non-linear least squares (SNLS) method with fixed effects, applied to five-year averages and annual data, as well as the likelihood ratio (LR) test. These tools provide appropriate estimation and inference procedures for a sample of 128 countries, including both industrialized and developing countries, over the period 1980–2019. The data primarily come from the World Bank databases (2024) and Netcraft (2022). The econometric results indicate that, to ensure sustainable economic growth, the inflation threshold should be between 1% and 3% for industrialized countries and between 11% and 12% for developing countries. The inverse relationship between inflation and economic growth, when the inflation rate exceeds this threshold, remains robust to the non-linear least squares (SNLS) technique and linear models. These results are not affected by fixed effects, transformations of the inflation level, the removal of observations with high inflation rates, data frequency, or alternative specifications. |
| Keywords: | Dynamic Panel Threshold Inflation Economic Growth |
| JEL: | E0 |
| Date: | 2025–06–08 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:127996 |
| By: | Salumu, Jonathan |
| Abstract: | Inflation remains one of the most critical macroeconomic challenges facing the Democratic Republic of the Congo (DRC) due to its adverse effects on household purchasing power and economic stability. This study investigates the impact of inflation on purchasing power in the DRC over the period 2005–2023 using a Vector AutoRegressive (VAR) model. The analysis is based on three key macroeconomic variables: the inflation rate, the real interest rate used as a proxy for purchasing power, and the economic growth rate. Descriptive statistical analysis was first conducted, followed by Augmented Dickey-Fuller (ADF) unit root tests to assess the stationarity properties of the series. Subsequently, a VAR model was estimated to examine the dynamic interactions among the variables. The analysis was further complemented by impulse response functions and forecast error variance decomposition. The empirical findings indicate that inflationary shocks exert a significant negative effect on purchasing power by reducing households’ real income. The impulse response analysis reveals that the adverse effects of inflation persist over several periods before gradually diminishing. Moreover, variance decomposition results show that economic growth plays a substantial role in explaining long-term fluctuations in purchasing power. These findings are consistent with the monetarist theory, which identifies inflation as a major determinant of purchasing power erosion. The study therefore recommends strengthening macroeconomic stabilization policies, enhancing inflation control mechanisms, promoting domestic production, and fostering inclusive and sustainable economic growth in order to improve living standards and support long-term economic welfare in the Democratic Republic of the Congo. |
| Keywords: | Inflation, Purchasing Power, Economic Growth, VAR Model, Democratic Republic of the Congo. |
| JEL: | C5 |
| Date: | 2025–12–05 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129434 |
| By: | Adviye Hazal Guzel (Department of Economics, Middle East Technical University, Ankara, Turkiye) |
| Abstract: | Inflation targeting (IT) is a widely used monetary policy. We examine the effects of it on emerging and developing countries’ inflation, output growth, dollarization, real effective exchange rate (REER), REER volatility, fiscal balance, output volatility and inflation volatility via propensity score matching. Propensity score matching is based on matching IT adopters and non-IT adopters on their propensity scores. The mean difference of the outcomes between these two is the average treatment effect (ATT). The main aim of it is to solve the self-selection problem. Propensity scores indicate the likelihood of adaptation of IT and these can be estimated via a probit model. In our main analysis, there is evidence of a decrease in inflation after the introduction of IT. Note that there is a decrease in GDP growth. Moreover, there is a decrease in REER suggesting there is a depreciation. The increase in fiscal balance implies the government becomes more efficient in tax collection to compensate the loss of the seignorage income. There is also an increase in GDP per capita volatility and GDP volatility. Our results are robust to different probit model specifications. By moving beyond inflation outcomes alone, this study provides new empirical evidence on the broader macroeconomic trade-offs associated with IT adoption in emerging and developing countries. The findings highlight that IT must be supported by institutional and structural reforms to achieve stable growth in these economies. |
| Keywords: | dollarization, emerging countries, inflation targeting, macroeconomic volatility, propensity score matching, real effective exchange rate |
| JEL: | E4 E5 E6 F3 H6 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:met:wpaper:2603 |
| By: | Felipe Benguria; Eugenio I. Rojas; Felipe Saffie |
| Abstract: | Countries borrow in dollars because dollar debt markets are deep and liquid. This paper develops a theory of when that dominance becomes fragile because countries have inherited dollar liabilities but increasingly earn yuan-linked revenues. In the model, countries begin with dollar-denominated sovereign debt. Geopolitical fragmentation raises their yuan revenue share through two channels: higher trade barriers with dollar-linked markets shift exports toward yuan-linked markets, and higher costs of using dollars in that trade make yuan settlement more attractive. Governments then face a choice: repay dollar debt using revenues that are less dollar-linked, default, or restructure into yuan. The paper identifies a liquidity spillover from restructuring: dollar-to-yuan restructurings deepen yuan debt markets, lowering refinancing costs and encouraging additional restructurings. The model shows when fragmentation produces limited restructuring and when it triggers a self-reinforcing shift from dollar debt to yuan debt. A cascade requires the liquidity feedback from yuan restructuring to be stronger than the dispersion in countries’ yuan revenue exposure. |
| JEL: | F36 F55 G15 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35272 |