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on Financial Development and Growth |
| By: | Tomohiro Hirano; Joseph E. Stiglitz |
| Abstract: | This paper considers growth and fluctuations in a standard Overlapping Generations (OLG) model with rational expectations, with land (a non-produced asset), credit frictions, and endogenous growth. Under plausible conditions, there can be multiple momentary equilibria, with the multiplicity itself depending on capital and land prices; this can give rise in turn to an infinity of rational expectations trajectories, all operating within bounds that can be calculated. Improvements in technology, while in the short run increasing GDP, may result in the equilibrium being unstable and fragile—and in the long run lead to a stagnation trap with lower GDP. The introduction of land increases the scope for fluctuations; the only rational expectations trajectories may entail fluctuations, with episodic unemployment and dynamic inefficiencies. With credit frictions, expansionary credit and financial policies may lead to lower growth, with the additional funds unevenly going to land speculation, diverting savings from productive investments, results consistent with empirical evidence. The analysis resolves several theoretical puzzles, such as how can land prices be finite with an interest rate less than the growth rate. It shows that even with two state variables, a tractable OLG model can be constructed providing a global analysis of complex dynamics. |
| JEL: | C61 E32 O11 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33589 |
| By: | Delfina Ricordi; Martín Sola; Fabio Spagnolo; Nicola Spagnolo |
| Abstract: | This paper investigates the relationship between financial markets and real economic activity. Based on a bivariate Markov switching model, we propose a procedure for analysing links between stock market volatility and output growth. The method provides a convenient way of interpreting the predictive content of different series’ first and second moments. We examine and discuss an empirical application of this procedure for a subset of developed countries (U.S., U.K., Japan, Germany, Italy and France). In the empirical analysis, we test whether changes in stock market volatility precede the change in the state of output growth. |
| Keywords: | Volatility of Stock Prices, Booms and Recessions, Markov Switching. |
| JEL: | C32 C52 C58 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:udt:wpecon:2025_03 |
| By: | Davis, Carter (Indiana U Bloomington); Knupfer, Samuli (Aalto U and BI Norwegian Business School); Kvaerner, Jens Soerlie (Tilburg U); Dogan, Bahar Sen (Tilburg U); Vokata, Petra (Ohio State U) |
| Abstract: | Contrary to the common assertion that households have little impact on stock prices, we find their relevance is of first order. We quantify their impact using an assetdemand system applied to the complete ownership data for all Norwegian stocks from 2007 to 2020. Households contribute the most to stock market volatility relative to their market share. Even in absolute terms, they come second, surpassed only by institutional investors. Our granular data on households reveal a strong factor structure in household demand: The demand of the rich is distinct from less affluent investors, accounts for the bulk of volatility attributable to households, tilts away from ESG, and is informative about future firm fundamentals. We conclude by using the demand system to measure the profits one can make from trading on household demand shocks. |
| JEL: | G11 G12 G50 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecl:ohidic:2024-23 |
| By: | Karsten Müller; Chenzi Xu; Mohamed Lehbib; Ziliang Chen |
| Abstract: | The Global Macro Database is an open-source, continuously updated dataset of macroeconomic statistics that unifies and extends existing resources. By harmonizing and integrating data from 32 major contemporary sources—including the IMF, World Bank, and OECD—with historical records from 78 additional datasets, we construct comprehensive annual time series for 46 variables across 243 countries. This database covers global macroeconomic trends from the origins of modern data collection to projected estimates for 2030. Using this extensive database, we study the long-run output losses of financial crises and global temperature shocks, two applications in which historical time series are a crucial input. Our findings show that financial crises are associated with statistically detectable contractions in real GDP for five decades into the future, which are considerably larger than previously estimated. Temperature shocks also predict real GDP contractions up to 30 years ahead, especially in emerging economies. |
| JEL: | E01 F01 N01 N10 O10 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33714 |
| By: | Hunter L. Clark; Jeffrey B. Dawson |
| Abstract: | Amid increasing pressure on the Chinese economy from China’s trade conflict with the U.S., assessing the strength of the Chinese economy will be an important watch point. In this post, we provide an update on China’s recent economic performance and policy changes. While China is likely to counter growth headwinds from the escalating trade tensions with additional policy stimulus, the country’s complex fiscal dynamics and the varying interpretations of the strength of its economic growth made judgments of the efficacy of China’s policy response challenging even in a more predictable environment. In this respect, we argue that aggregate credit is a simple and effective measure to gauge policy stimulus in China. At present, China’s “credit impulse”—the change in the flow of new aggregate credit to the economy relative to GDP—appears likely sufficient to allow it to muddle through with steady but not strong growth over the next year despite the intensifying trade conflict. |
| Keywords: | China |
| JEL: | F0 |
| Date: | 2025–04–24 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99899 |
| By: | Liu, Lang; Plouffe, Michael (University College London) |
| Abstract: | Both foreign direct investment (FD) and special economic zones (SEZs) lie at the heart of the Chinese economic growth project. Research on this topic has largely debated the bidirectional causal relationship between FDI inflows and growth or described the mixed effects of FDI on economic and social development, both at the national level. However the link between inbound FDI and SEZ economic growth itself has bee ignored. Using an original panel dataset covering 19 Chinese SEZs (and SEZ-like zones) over 1996-2017, we explore the link between FDI and regional economic growth using a series of econometric models. We also examine the impact of the 2008 financial crisis on this relationship. Our results indicate a significant positive effect of inbound FDI on economic growth in SEZs. Following the 2008 crisis, the effect of FDI inflows on economic growth was reduced, pointing to the possibility of a lasting reduction in the relationship between the two as a result of the crisis. Finally, we identify the implications of our results for promoting sustainable economic development in SEZs, as well as potential points for reform in Chinese FDI policies more broadly. |
| Date: | 2025–03–05 |
| URL: | https://d.repec.org/n?u=RePEc:osf:osfxxx:nxv6a_v1 |
| By: | Bo Wu |
| Abstract: | Domestic and foreign scholars have conducted many studies on the influencing factors of digital inclusive finance, but few studies on the impact of the "Belt and Road" and the establishment of node cities on digital inclusive finance. Therefore, it is necessary to study the impact of the establishment of node cities in the "Belt and Road" on the development of digital inclusive finance. This paper mainly uses descriptive analysis and literature analysis to summarize and analyze the development status of China's digital inclusive finance and relevant theoretical research on the development of the "Belt and Road" Initiative, and analyzes and collates the background knowledge needed for the demonstration from the aspects of the development status of China's digital inclusive finance and the impact of digital inclusive finance on the economy. In this process, referring to the relevant economic theories, the theoretical model of this paper is proposed and the influence machine analysis is carried out. Empirically, this paper selects the development level of digital inclusive finance in 31 provinces in China from 2011 to 2020 as the explained variable, takes the establishment of "Belt and Road" node cities as a quasi-natural experiment, and verifies the promoting effect of the establishment of "Belt and Road" node cities on the development of digital inclusive finance in provinces through the differential differential method. And verify whether the level of Internet development is a mediating variable. The empirical results show that the establishment of node cities in the "Belt and Road" does promote the development of digital inclusive finance in provinces with the level of Internet development as an intermediary variable. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.15316 |
| By: | Chen, Yehning; Hasan, Iftekhar; Takalo, Tuomas |
| Abstract: | We study the effects of bank transparency on both banks' asset and liquidity risks, and ultimately, on banking sector stability and welfare. We show how enhanced bank transparency increases banks' vulnerability to excessive deposit outflows, but this threat of a liquidity crisis incentivizes banks to choose safer assets. We find that bank stability and welfare are a nonmonotonic function of transparency, and that they are maximized at an intermediate level of transparency, which is larger than the one preferred by banks but lower than what would result in excessive deposit outflows. Our model also suggests that bank transparency and deposit insurance are complementary policy tools, and that bank regulators should adjust disclosure requirements for banks procyclically |
| Keywords: | bank transparency, bank runs, asset risk taking, banking stability, deposit insurance |
| JEL: | G21 G28 D83 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:316423 |
| By: | Robert S. Chirinko |
| Abstract: | Interest in the United States in creating banks owned and operated by the state has increased dramatically in recent years. In 2023 or 2024, legislation was introduced in eight states to start a bank. In 2019, similar legislation was enacted in California for the creation of municipal banks. Chicago’s new mayor is evaluating plans for a city bank. An important development in favor of a state bank is the long and impressive record of the only state bank in the United States, the Bank of North Dakota (BND). It has been in existence for over a century and has been very profitable in recent years. On the surface, these facts present a strong case for starting a state bank addressing the financing needs for infrastructure, education, and underserved communities.To gain a better understanding of BND’s success and the possibilities for a successful state bank, this paper compares the financial performance of the BND to that of national commercial banks. Claims by the BND as to the sources of its success (low-cost deposits and lending acuity) are evaluated and rejected by the data. Instead, the BND’s abnormal profitability is explained fully by the exceptional growth in the North Dakota economy (largely the fracking boom), its tax-free status, and shifting risk to the State of North Dakota. The former factor is not portable to other states; the latter two factors are merely taxpayer subsidies. There is no ‘secret sauce.’The BND is a well-run bank that contributes to the North Dakota economy and, after suitable adjustments, earns normal profits. Its organization as a state bank does not create any unique efficiencies, and the BND does not provide support for a special role for a state bank. Absent efficiencies, a state bank might be interpreted as a quasi-fiscal authority that is outside the control of the legislature and avoids balanced budget restrictions operational in North Dakota and 48 other states. |
| Keywords: | state bank, public bank, local economic development, credit allocation. |
| JEL: | G21 G28 H70 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11819 |
| By: | Steven Ongena (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Vasileios Pappas (University of Surrey - Surrey Business School); Athina Petropoulou (University of Sussex Business School) |
| Abstract: | In 2012 the U.S. Federal Deposit Insurance Corporation defined community banks and recognized their distinct role. In 2020 this definition was reaffirmed. But what makes community banks special? To answer this question, we measure the efficiency of community banks versus comparable other banks using a stochastic frontier model. We decompose cost efficiency into long-and short-run components. We find that community banks are almost 20% more efficient on average, with structural factors-not managerial performance-driving this "efficiency premium". Especially smaller community banks outperform larger competitors. Efficiency gains also stem from micropolitan presence and agricultural lending, while income diversification weakens efficiency. A one standard deviation increase in core deposits raises long-run efficiency by almost 5%. Despite overall efficiency improvements during COVID-19, community banks' efficiency has remained stable. These findings highlight the need for regulators to support innovation while preserving locally focused financial institutions. |
| Keywords: | Community bank, relationship banking, cost frontier, bank capability, local economy, Federal Deposit Insurance Corporation (FDIC) |
| JEL: | G14 G21 G38 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2529 |
| By: | Jie Cui (Dongbei University of Finance and Economics); Mamiza Haq (Newcastle University Business School); Steven Ongena (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Eric K. M. Tan (University of Queensland) |
| Abstract: | We investigate the impact of macroprudential policies on bank earnings management, analysing data from individual banks across 68 countries between 1996 and 2019. Our findings indicate that macroprudential policies exert differential effects on earnings quality and opportunistic earnings management. On average, tightening policies related to bank capital and loan supply result in an 8% reduction in earnings quality, while concurrently decreasing earnings management by approximately 2.5%. Moreover, the easing of macroprudential policies appears to have a more pronounced impact on earnings management than on earnings quality. The results remain robust to endogeneity checks and subsample analyses, and hold across various model specifications. Overall, our findings emphasize the importance of balanced macroprudential policies to at once address information asymmetries, regulatory arbitrage, and agency issues, and to promote financial stability. |
| Keywords: | macroprudential policies, opportunistic earnings management, earnings quality, cross-country analysis |
| JEL: | G02 G20 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2533 |
| By: | James Morley; Benjamin Wong |
| Abstract: | We study the relevance of global shocks in determining r-star for a set of typically studied advanced open economies (Australia, Canada, Euro Area, New Zealand, Norway, Sweden, and the United Kingdom). To do so, we build on the multivariate Beveridge-Nelson decomposition to account for open economy features by developing an empirical two-block open economy model and also embedding restrictions used in the open economy literature to identify the role of foreign shocks. We document three key findings: (i) shocks driving r-star for the United States are almost entirely sufficient to understand the role of the global r-star for these open economies; (ii) local shocks are also important in determining domestic r-stars, leaving open the potential that domestic economic policies can complement or offset the global forces determining r-star; and (iii) even though local shocks are important, global forces played the leading role in the long-term decline in r-stars for all seven open economies since the global financial crisis. |
| Keywords: | global r-star, Beveridge-Nelson decomposition, block exogeneity, foreign shocks |
| JEL: | C32 E52 F41 F43 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-24 |
| By: | Stefan Avdjiev; Leonardo Gambacorta; Linda S. Goldberg; Stefano Schiaffi |
| Abstract: | The period after the Global Financial Crisis (GFC) was characterized by a considerable risk migration within global liquidity flows, away from cross-border bank lending towards international bond issuance. We show that the post-GFC shifts in the risk sensitivities of global liquidity flows are related to the tightness of the balance sheet (capital and leverage) constraints faced by international (bank and non-bank) lenders and to the migration of borrowers across funding sources. We document that the risk sensitivity of global liquidity flows is higher when funding is provided by financial intermediaries that are facing greater balance sheet constraints. We also provide evidence that the post-GFC migration of borrowers from cross-border loans to international debt securities was associated with a decline in the risk sensitivity of global liquidity flows to EME borrowers. |
| JEL: | F30 F34 F42 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33674 |
| By: | Grégory Donnat (Université Côte d'Azur, CNRS, GREDEG, France) |
| Abstract: | Developing countries implement policies to maintain a stable exchange rate, with export-led growth strategies to spur economic growth and stability. The real exchange rate is a key factor of external competitiveness but can also cause economic and financial disruptions. These countries are dependent on external financing which impacts the real exchange rate movements over the medium and long run. We empirically explore the response of the real exchange rate to external public indebtedness in developing countries, from 1975 to 2017, using the iterative Bayesian shrinkage procedure to handle the cross-country differences in panel data. The contribution to the literature is twofold. First, we find that the change in the real exchange rate depends on the external public indebtedness in an inverted U-shape relationship in developing countries. Second, we determine an external debt threshold that minimizes changes in the real exchange rate for each country. |
| Keywords: | Real Exchange Rate, External Debt, Developing Countries, Heterogeneity |
| JEL: | F31 F34 O16 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:gre:wpaper:2025-15 |
| By: | Paloma Péligry (CEPS - Centre d'Economie de l'ENS Paris-Saclay - Université Paris-Saclay - ENS Paris Saclay - Ecole Normale Supérieure Paris-Saclay); Xavier Ragot (Sciences Po - Sciences Po) |
| Abstract: | We analyze the convergence or divergence of the diversity of fiscal systems after the financial crisis of 2007. Studying 29 countries, we first document the evolution of the taxation of households, firms, labour, consumption and capital. We identify three types of fiscal systems: liberal, intermediate and high-redistribution, which can be ranked in ascending order of tax rates, confirming known typologies in the diversity of capitalism literature. Only the tax rate on corporate profits shows signs of downward convergence over the period. The other tax rates show rather signs of divergence. Second, a divergence is observed among the liberal and high-redistribution group over the period. The European countries are converging towards the high-redistribution model, with the exception of Great Britain, which is moving towards the liberal model. Thus, the financial crisis seems to contribute not to the convergence, but to the divergence of fiscal systems. |
| Keywords: | tax systems, globalization, capital taxation |
| Date: | 2024–04 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05033579 |
| By: | Lin William Cong; Simon Mayer |
| Abstract: | We model the competition between digital forms of fiat money and private digital money (PDM). Countries strategically digitize their fiat money — upgrading existing or launching new payment systems (including CBDCs) — to enhance adoption and counter PDM competition. A pecking order emerges: less dominant currencies digitize earlier, reflecting a first-mover advantage; dominant currencies delay digitization until they face competition; the weakest currencies forgo digitization. Delayed digitization allows PDM to gain dominance, eventually weakening fiat money’s role. We also highlight how geopolitical considerations, stablecoins, and interoperability between fiat and private digital money shape the digitization of money and monetary competition. |
| JEL: | E50 E58 F30 G18 G50 O33 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33593 |
| By: | Alin Marius Andries (Alexandru Ioan Cuza University of Iasi; Romanian Academy - Institute for Economic Forecasting); Steven Ongena (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Nicu Sprincean (Faculty of Economics and Business Administration, Alexandru Ioan Cuza University of Iași; National Institute for Economic Research, Romanian Academy) |
| Abstract: | We examine the relationship between climate-related financial policies (CRFPs) and banks' systemic risk. Using a sample of 458 banks in 47 countries over the period 2000-2020, we document that more stringent CRFPs are detrimental to overall financial stability and contribute to increased system-wide distress. These findings raise the possibility that overly stringent green finance policies could lead to a disorderly transition. In addition, measures that restrict banks' exposure to carbon-intensive counterparties, both directly and indirectly, may lead to less lending to the real economy and higher lending rates. The latter increase, in turn, could lead to significant credit losses, reduced bank profitability and other spillover effects with the potential to undermine systemic resilience. However, the implementation and ratification of the Paris Agreement, more robust adaptation strategies to cope with climate shocks and a higher incidence of natural disasters and a larger number of people affected by extreme climate events may counteract the amplifying effects of CRFPs on systemic risk. Moreover, banks with stronger environmental, social, and governance (ESG) commitments experience less systemic distress when exposed to green financial policies. Our findings have critical policy implications for public authorities formulating green financial policies to achieve the goals of the Paris Agreement. |
| Keywords: | systemic risk, climate change, climate-related financial policy |
| JEL: | G21 G32 Q54 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2530 |