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on Financial Development and Growth |
| By: | Sarah Quincy; Chenzi Xu |
| Abstract: | We study the long-run effects of the first wave of U.S. banking market integration on capital mobility and manufacturing productivity. Using newly digitized bank and branch balance sheet data matched to state and county panels, we provide direct evidence that branching produced lasting productivity gains without aggregate capital deepening by leveraging internal capital markets to improve the geographic allocation of capital. Our novel ``deposit market access'' measure shows that bank funding grew most in capital-constrained counties within branching states. Both market access and border discontinuity designs indicate that branching’s organizational structure reduced capital allocation frictions to generate persistent growth. |
| JEL: | G21 G28 N12 N22 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34457 |
| By: | J. Scott Davis; Kevin X. D. Huang; Zheng Liu; Mark M. Spiegel |
| Abstract: | We document evidence of a U-shaped relationship between financial development and the adjustments of foreign exchange (FX) reserve holdings in response to a U.S. interest rate increase. Countries with intermediate levels of financial development sell reserves aggressively, while those with low or high development adjust little. Domestic interest rate responses are not systematically related to financial development. A model with borrowing constraints and foreign-currency debt rationalizes these findings: the associated pecuniary externality is maximized at intermediate levels of financial development. Calibrated to match the observed leverage and currency composition, the model reproduces the empirical U-shaped relationship under optimal FX reserve policy, and this relation is robust under a range of conventional interest-rate policy regimes. |
| Keywords: | foreign reserves; financial development; capital flows; optimal policy |
| JEL: | F32 F38 E52 |
| Date: | 2025–11–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:102072 |
| By: | Sya In Chzhen (School of Economics, University of East Anglia) |
| Abstract: | This study investigates the global drivers for the adoption and usage of digital financial services (DFS) using three waves of repeated cross-sectional data from 160 countries, exploiting a pooled logit regression and the Heckman selection model. We predict the impact of proxies of digital nancial services, including mobile money account ownership, mobile or internet transactions, as well as the ownership and usage of credit and debit cards, into the adoption and usage of digital fi nancial services. While con rming ndings from existing literature, our fi ndings highlight several original insights. We fi nd that the diffusion of informal digital fi nancial services begins in countries with negative net migration, whereas the di usion of formal digital fi nancial services begins in countries with positive net migration. Population density is an adverse driver of adoption and usage of informal digital financial services, and of the transition from adopting to using debit cards. The historical level of digital infrastructure has a strong legacy e ect on the usage of digital fi nancial services, at both extensive and intensive margins. Population density is an adverse driver of adoption and usage of informal digital financial services and debit cards, as well as the transition from adopting to using debit cards. This study offers guidance to policymakers and other stakeholders by identifying the global determinants of both adoption and usage of formal and informal digital financial services, independent of market-speci c contexts, and the key determinants influencing the transition from adoption to e ective usage of speci c digital fi nancial services tools. |
| Keywords: | Digital nance; Financial inclusion; Technological di usion; ROC |
| JEL: | C35 G21 O33 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:uea:ueaeco:2025-03 |
| By: | Colin Davis (The Institute for the Liberal Arts, Doshisha University, JAPAN); Laixun Zhao (Research Institute for Economics and Business Administration, Kobe University, JAPAN) |
| Abstract: | We study how tax and transfer policies affect economic growth and income inequality in a framework in which growth, market structure and time preferences are all endogenously determined. Firm-level investment in product quality drives economic growth, creating a demand for household savings to finance both market entry and in-house R&D. By distinguishing between affluent households that invest in financial assets and poor households that live hand-to-mouth, and linking the former's savings to an endogenously determined discount rate, we derive the conditions for a stable balanced growth path. We then explore the effects of taxing the wage income and asset income of affluent households, while redistributing the proceeds to poor households, and find that diminishing marginal impatience introduces a new channel where both higher growth and lower inequality can be achieved, through tax policies that influence market concentration. |
| Keywords: | Endogenous time preferences; Diminishing marginal impatience; Endogenous quality growth; Wage income taxes; Interest income taxes |
| JEL: | E00 O31 O41 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:kob:dpaper:dp2025-27 |
| By: | Andre Brunelli; Bruno Martins; Carlos Carvalho |
| Abstract: | This paper examines how individual consumers adjust consumption and debt in response to a large, exogenous financial windfall, using Brazil’s 2017 FGTS reform, which allowed early access to previously illiquid severance fund balances. Leveraging rich administrative data linking credit registry and labor records, we use a difference-in-differences design exploiting quasi-exogenous eligibility timing based on birth month. We decompose the shock into liquidity and wealth components: the liquidity channel reflects early access to illiquid savings, while the wealth component arises from the present-value gain due to FGTS yields being persistently below market interest rates. Credit-constrained individuals primarily used the funds to reduce debt and lower default risk, while unconstrained consumers increased credit-financed spending, raising financial fragility. Liquidity components drove deleveraging and stability, whereas wealth components led to durable consumption and greater credit exposure. These results provide rare empirical validation of key Heterogeneous Agent New Keynesian (HANK) mechanisms and offer policy-relevant insights into how the composition of financial transfers influences consumer behavior and financial stability. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:634 |
| By: | Luo, Xubei; Rajasekaran, Arvind Balaji; Scruggs, Andrew Conner |
| Abstract: | Effective monitoring of development aid is the foundation for assessing the alignment of flows with their intended development objectives. Existing reporting systems, such as the Organisation for Economic Co-operation and Development’s Creditor Reporting System, provide standardized classification of aid activities but have limitations when it comes to capturing new areas like climate change, digitalization, and other cross-cutting themes. This paper proposes a bottom-up, unsupervised machine learning framework that leverages textual descriptions of aid projects to generate highly granular activity clusters. Using the 2021 Creditor Reporting System data set of nearly 400, 000 records, the model produces 841 clusters, which are then grouped into 80 subsectors. These clusters reveal 36 emerging aid areas not tracked in the current Creditor Reporting System taxonomy, allow unpacking of “multi-sectoral” and “sector not specified” classifications, and enable estimation of flows to new themes, including World Bank Global Challenge Programs, International Development Association–20 Special Themes, and Cross-Cutting Issues. Validation against both Creditor Reporting System benchmarks and International Development Association commitment data demonstrates robustness. This approach illustrates how machine learning and the new advances in large language models can enhance the monitoring of global aid flows and inform future improvements in aid classification and reporting. It offers a useful tool that can support more responsive and evidence-based decision-making, helping to better align resources with evolving development priorities. |
| Date: | 2025–11–04 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:11248 |
| By: | Sarah Clifford; Jakob Miethe |
| Abstract: | This study shows that internal capital markets confer a significant resilience advantage to multinational enterprises (MNEs) during banking crises. First, we document that MNEs experience half the debt contraction of domestic firms during these events. Second, subsidiaries affected by a crisis increase their reliance on intra-group borrowing, offsetting declines in external debt. Third, this ‘multinational capital advantage’ translates into higher post-crisis growth in employment and investment. While this improves the resilience of the host economy to banking crises, the multinational capital advantage may also contribute to the rising market shares of MNEs and increasing firm concentration observed in recent decades. |
| Keywords: | multinational enterprises, internal capital markets, banking crises |
| JEL: | F21 F23 G15 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12244 |
| By: | Moder, Isabella; Spital, Tajda |
| Abstract: | Motivated by current events, this paper assesses the impact of tariff increases on bilateral greenfield foreign direct investment (FDI) over the period 2016-2023. Leveraging a comprehensive dataset of announced greenfield investment projects, official FDI statistics, and bilateral product-level tariff data, we estimate a series of gravity equations to uncover key relationships. Our results show that, at an aggregate level, tariff increases are associated with a rise in greenfield FDI, consistent with the tariff-jumping hypothesis. However, this positive effect reverses for greenfield manufacturing FDI, where high-intensity tariff increases significantly deter investment. A sectoral analysis reveals substantial heterogeneity: consumer-facing industries tend to attract more investment following tariff hikes, while input-intensive sectors experience declines. Overall, our findings suggest that using tariffs to stimulate foreign manufacturing investment is a risky strategy. JEL Classification: F13, F21, F23, F68 |
| Keywords: | gravity model, greenfield FDI, protectionism, tariffs, trade policy |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253144 |
| By: | Barrales-Ruiz, Jose; Mendieta-Munoz, Ivan |
| Abstract: | This paper investigates the importance of time-varying parameters in US macro-financial linkages. To do so, we adopt a flexible hybrid time-varying parameter Bayesian vector autoregression with stochastic volatility empirical framework. We find that, first, macro-financial linkages are mainly characterized as hybrid time-varying interactions, adequately captured by a combination of stochastic volatility, constant parameters on most lagged effects, and time-varying parameters that mainly capture the contemporaneous effects of macroeconomic variables on financial variables. Second, the relative change in the size of financial shocks, captured by their respective stochastic volatility components, is the main driver of the observed time-varying effects of financial variables on macroeconomic outcomes during periods of financial stress. Third, the combined contribution of credit spread, house and stock prices shocks to unemployment (GDP growth and inflation) fluctuates from approximately 20% (5%) in normal times to 60% (30%) during the Global Financial Crisis, thus indicating that financial shocks affect more importantly labor market outcomes. Fourth, macroeconomic variables respond more significantly to credit spread and house price shocks. Fifth, GDP growth and inflation react differently to financial shocks: while house price shocks and stock price shocks act as demand-type shocks by moving both variables in the same direction; credit spread shocks act as supply-type shocks by moving both variables in opposite directions. |
| Keywords: | financial shocks, macro-financial linkages, model selection, time-varying parameter vector autoregressions, stochastic volatility |
| JEL: | C11 C32 C52 E30 E44 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:esprep:330707 |
| By: | Juselius, Mikael |
| Abstract: | Recent inflationary trends have reignited debates about the natural real interest rate (r∗). This paper reviews the literature on estimating r∗ and its drivers, highlighting significant uncertainty and variability in estimates. The challenges in achieving consensus on r∗ is mostly due to differing methodologies and model assumptions. Understanding these sources of uncertainty is essential for shaping future monetary policy, especially in a low interest rate environment where conventional policy tools may be limited. |
| Keywords: | natural real interest rate, monetary policy |
| JEL: | E43 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofecr:331241 |
| By: | Abango, Mohammed A; Yusif, Hadrat M.; Asiama, Johnson Pandit; Mawuli, Francis Abude |
| Abstract: | The shock-absorbing capacity of Ghana’s inflation targeting (IT) policy has been under scrutiny, especially following COVID-induced inflationary pressures that drove real interest rates to a negative territory with implications for saving. This study examines IT policy’s role in moderating the real interest rate-saving nexus through the lens of the McKinnon-Shaw Hypothesis (MSH), from the perspective of private savings’ adaptation to real interest rate fluctuations. The study applies linear autoregressive distributed lag (ARDL) model to time series data spanning 1986-2023, augmented by non-linear ARDL analysis. We uncover no stable long-run relationship between real deposit interest rate and private financial saving as there prevails only a short run nexus. This finding suggests that the MSH might be delayed than implied by theory, which is likely due to asymmetric responses in the saving-interest rate nexus with positive and negative interest rates affecting saving differently. Results indicate a short run positive nexus between financial saving and negative real interest rate, while the relationship between positive real interest rate and saving is insignificant. IT policy, however, strengthens the relationship between saving and real interest rate over the long run, indicating that further strengthening of the policy could address asymmetric responses in the saving-interest rate nexus and help realize the MSH. |
| Date: | 2025–10–31 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:k25qz_v1 |
| By: | Junming Chen |
| Abstract: | This paper studies the issue of “should monetary policy lean against rational asset price bubbles†by establishing an analytically tractable New Keynesian model with endogenous capital accumulation. Rational bubbles may exist in equilibrium because of the extra liquidity they generate for financially constrained firms when a lumpy investment opportunity arrives. Under certain conditions, bounded bubble-driven fluctuations (in output) may emerge via both supply-side and demand-side mechanisms. The monetary policy analyses of the model do not strongly favor a leaning-against-the-bubble strategy and emphasize a special overreaction risk that it may suffer from relative to its conventional counterpart. |
| Keywords: | rational asset price bubbles, monetary policy, financing constraints, New Keynesian model |
| JEL: | E12 E22 E32 E44 E52 E63 G12 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:yor:yorken:25/04 |
| By: | Ferrando, Annalisa; Lamboglia, Sara; Offner, Eric |
| Abstract: | We study how survey-based measures of funding needs and availability influence the transmission of euro area monetary policy to investment. We first provide evidence that funding needs are primarily driven by fundamentals, while perceived funding availability captures financial conditions. Using these two measures, we assess how the effectiveness of monetary policy varies with fundamentals and financial conditions. Our results indicate that monetary policy is most effective when firms’ fundamentals are strong. In contrast, firms with favorable financial conditions exhibit a more muted investment response to monetary policy. By combining these two survey-based measures, we construct an indicator of financial constraints and show that financially constrained firms are more sensitive to monetary policy. These findings offer new light on the transmission of monetary policy to corporate investment, emphasizing not only the role of financial conditions, but also the importance of fundamentals, which are beyond the direct influence of central banks JEL Classification: C83, E22, E52 |
| Keywords: | central banking, financial conditions, firm heterogeneity, investment opportunities, survey data |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253150 |
| By: | Hodula, Martin; Mimun, Anisa Tiza |
| Abstract: | Is there an undesired side-effect of banking regulation on the non-bank sector? How effective is the non-bank transmission channel of monetary policy in the presence of macroprudential policy? Using a state-dependent local projection approach and a rich dataset capturing macroprudential tightening across euro area countries, we present strong cross-country heterogeneity. In financially conservative markets (Germany, France, the Netherlands), tight monetary policy combined with stricter macroprudential measures significantly contracts investment fund assets. Conversely, financial hubs (Luxembourg, Ireland, Italy) experience counterintuitive expansions under the same policy mix. We introduce a simple balance-sheet framework that shows how interacting funding-cost and collateral-constraint channels generate these opposing responses. Further disaggregation shows that equity funds are more vulnerable to joint tightening in conservative systems, while bond funds partly offset contractionary forces in hubs through higher yields. JEL Classification: E58, G21, G28, G51 |
| Keywords: | macroprudential policy, monetary policy, non-bank financial intermediaries, state-dependent local projections |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253151 |
| By: | Bäckman, Claes |
| Abstract: | Macroprudential policies are a key policy tool for financial regulators, but concerns persist that these policies restrict access to homeownership. I examine this concern using crosscountry data on homeownership for 28 countries. I find little evidence that macroprudential policies reduce homeownership rates in aggregate or for select groups such as low-income households. The estimates are precise enough to rule out large negative effects of macroprudential policies on homeownership rates. The null effects are consistent with models where credit shocks primarily affect prices rather than quantities. My results alleviate concerns that macroprudential policies systematically exclude certain households from ownership, but also indicate that relaxing such policies is unlikely to increase access to homeownership. |
| Keywords: | Macroprudential policy, Homeownership, Household credit, Housing affordability |
| JEL: | R21 G28 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:safewp:330673 |
| By: | Beverly Hirtle; Matthew Plosser |
| Abstract: | Bank failures and distress can be costly to the economy, causing losses to creditors and reducing the flow of credit and other financial intermediation services. Thus, there is significant value in being able to identify “at risk” banks in a timely and accurate way. In a previous post, we presented a new solvency metric, Economic Capital, and showed how solvency risks in the U.S. banking industry have evolved over time according to this measure. In this post, we continue to draw on our recent Staff Report to present analysis showing that Economic Capital identifies failing banks earlier and more accurately than more conventional solvency measures. |
| Keywords: | bank capital; economic capital; bank solvency |
| JEL: | G21 G28 G20 |
| Date: | 2025–11–06 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:102061 |
| By: | Javier Ojea Ferreiro |
| Abstract: | This article investigates market scenarios that lead to extreme losses in international financial markets. We propose two systemic measures: (1) identifying the foreign event among those with equal probability leading to the worst outcome for the domestic financial system; and (2) classifying tail returns of financial institutions into four groups based on whether losses occur alongside domestic institutions only, foreign institutions only, both, or neither. Using 20 years of weekly equity returns from over 150 institutions across four developed financial systems, results highlight the central role of US and European institutions, with growing importance for Canada and non-bank financial intermediaries. |
| Keywords: | Financial institutions; Financial stability |
| JEL: | C02 C32 C58 G21 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:25-32 |
| By: | Sergei Glebkin (INSEAD); Semyon Malamud (Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Alberto Mokak Teguia (University of British Columbia (UBC)) |
| Abstract: | We develop a tractable model to study how asset concentration among a few large investors impacts asset prices and liquidity. Consistent with existing empirical evidence: (i) greater concentration is associated with higher volatility and returns, and (ii) large investors' turnover share is smaller than their proportion of total wealth. Surprisingly, higher concentration enhances liquidity, aligning with our new empirical findings. We show that increased concentration can benefit all investors in sufficiently non-competitive markets. We link the wedge between competitive and non-competitive outcomes to the Herfindahl-Hirschman Index measuring wealth concentration. The wedge can remain positive even in large markets. |
| Keywords: | Market Liquidity, Funding Liquidity, Price Impact, Strategic Trading |
| JEL: | G31 G32 G35 L11 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2597 |
| By: | Bassa, Karolina (The Institute for New Economic Thinking at the Oxford Martin School, University of Oxford); Cont, Rama (Mathematical Institute, University of Oxford) |
| Abstract: | We propose an empirically grounded quantitative framework for modeling sovereign credit risk and evaluating the sustainability of sovereign debt. We study the impact of fiscal and public investment policies on the sovereign's borrowing cost and credit risk in the presence of stochastic output shocks and credit-sensitive funding from investors, with a focus on the dynamics of liquidity flows and the sustainability of sovereign debt. The model is able to replicate a range of empirical observations on sovereign credit risk and sovereign defaults, in particular Argentina's 2001 default and Greece's 2012 debt restructuring events, with realistic dynamics for debt, spreads and credit ratings conditional on output. The framework is useful for debt sustainability analysis and to estimate the impact of fiscal policy on debt and output. Finally, we propose a transparent methodology for sovereign credit ratings based on this approach. |
| Keywords: | sovereign debt, fiscal policy, sovereign credit risk, sovereign default, liquidity risk, debt sustainability analysis, sovereign credit ratings |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:amz:wpaper:2025-24 |
| By: | Mr. Francisco Roldan; Cesar Sosa Padilla |
| Abstract: | We study the interaction between private and official sovereign debts. We develop a quantitative sovereign default model featuring a senior creditor with whom borrowing terms are negotiated. We use this model to evaluate implications of the emergence of new official lenders not bound by the Paris Club framework. The dynamics of bilateral bargaining lead the government to issue more market debt, raising default risk and creating welfare losses. This relational overborrowing effect arises in the model due to an endogenous cross-elasticity of bilateral terms to market debt, which can be assessed in practice to evaluate new forms of bilateral sovereign debt. |
| Keywords: | Sovereign debt; debt dilution; bilateral bargaining; official debt |
| Date: | 2025–11–07 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/235 |
| By: | Pasquale Della Corte (Imperial College Business School; Centre for Economic Policy Research (CEPR)); Can Gao (University of St.Gallen; Swiss Finance Institute; Swisss Institute for Banking and Finance); Daniel P. A. Preve (Singapore Management University); Giorgio Valente (Hong Kong Institute for Monetary and Financial Research (HKIMR)) |
| Abstract: | This paper investigates the long-horizon predictive variance of an international bondstrategy where a U.S. investor holds unhedged positions in constant-maturity long-term foreign bonds funded at domestic short-term interest rates. Using over two centuries of data from major economies, the study finds that predictive variance grows with the investment horizon, driven primarily by uncertainties in interest rate differentials and exchange rate returns, which outweigh mean reversion effects. The analysis, incorporating both observable and unobservable predictors, highlights that unobservable predictors linked to shifts in monetary and exchange rate regimes are the dominant source of long-term risk, offering fresh insights into international bond investment strategies. |
| Keywords: | Currency risk, Long-term bonds, Predictability, Long-term investments |
| JEL: | F31 G12 G15 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2595 |
| By: | Corsetti, G.; Lloyd, S.; Marin, E.; Ostry, D. |
| Abstract: | We document a rise in investors' assessment of U.S. risk relative to other G.7 economies since the late 1990s, driven by higher permanent risk but not reflected in currency returns. Using a two-country framework with trade in a rich maturity structure of bonds which earn convenience yields, alongside risky assets and currencies, we establish an equilibrium relationship between cross-border convenience yields, relative country risk and carry-trade returns. Empirically, we identify a cointegrating relationship between relative permanent risk and long-maturity convenience yields. Counterfactual experiments show rising relative permanent risk explains around one-third of declining long-maturity convenience yields over 2002-2006 and 2010-2014. |
| Keywords: | Convenience Yields, Exchange Rates, Long-Run Risk, U.S. Safety, Equity Risk Premium |
| JEL: | F30 F31 G12 |
| Date: | 2025–09–16 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camjip:2526 |
| By: | Carlos Díaz (Universidad Externado de Colombia); James Torres (Universidad de los Andes) |
| Abstract: | In 1798, the Spanish Crown enacted a law to consolidate the public debt by collecting and converting public bonds into a new, lower-interest liability. Known as decreto de consolidación de vales reales, the restructuring involved selling a significant portion of the clerical holdings, with the sale proceeds becoming interest-bearing loans payable by the Crown. In 1804, Spanish authorities extended the consolidación to the Spanish American realms, causing major changes in credit and land markets. This paper explores the impact of the measure by assembling the most extensive data set on consolidación payments in the viceroyalty of the New Kingdom of Granada (present-day Colombia and Ecuador). The research focuses on two related topics. First, the size and structure of the payments, including the importance of property sales and clerical loan recalls in the overall financial flows of the consolidación. Second, the paper examines the policy’s effect on land tenure inequality by analyzing the distribution of payments across social groups and regions. The evidence suggests that New Granada’s structure of land ownership remained largely unscathed, as most of the expropriation targeted the clerical capital borrowed by the laity. The valuation of rural estates proved difficult, while large landowners, through co-optation or litigation, managed to avoid loan recalls. Yet, the paper argues that the consolidación spurred inequality by affecting small and mid-size borrowers. |
| Keywords: | Inequality, Expropriations, Land Tenure, Fiscal History, Colombia |
| JEL: | N16 N26 N46 D6 Q15 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:col:000089:021759 |