nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2024‒07‒15
twenty papers chosen by
Georg Man,

  1. Financial Deepening and Economic Growth in Select Emerging Markets with Currency Board Systems: Theory and Evidence By Yujuan Qiu
  2. The Exchange Rate as an Industrial Policy By Pablo Ottonello; Diego J. Perez; William Witheridge
  3. Productivity spillovers from FDI- A firm-level cross-country analysis By JaeBin Ahn; Shekhar Aiyar; Andrea F. Presbitero
  4. Macroeconomic Perspectives on Productivity By Chadha J. S., Samiri, I.; Samiri, I.
  5. Access to credit and firm survival during a crisis: the case of zero-bank-debt firms By Roberto Blanco; Miguel García-Posada; Sergio Mayordomo; María Rodríguez-Moreno
  6. A Tale of Two Margins: Monetary Policy and Capital Misallocation By Silvia Albrizio; Beatriz Gonzalez; Dmitry Khametshin
  7. Procyclical Stocks Earn Higher Returns By William N. Goetzmann; Akiko Watanabe; Masahiro Watanabe
  8. Pollution, public debt, and growth: The question of sustainability By Marion Davin; Mouez Fodha; Thomas Seegmuller
  9. The Implications of Public Investment for Debt Sustainability By Gergő Motyovszki; Philipp Pfeiffer; Jan in ’t Veld
  10. Sovereign haircuts: 200 years of creditor losses By Graf von Luckner, Clemens M.; Meyer, Josefin; Reinhart, Carmen M.; Trebesch, Christoph
  11. Taxing Transitions: Inheritance Tax and Family Firm Succession By Philipp Krug; Dominika Langenmayr
  12. Taxing Mobile Money in Kenya: Impact on Financial Inclusion By Diouf, Awa; Carreras, Marco; Santoro, Fabrizio
  13. The Great Gatsby Curve and the Carnegie E§ect By Jaime Alonso-Carrera; Jordi Caballé; Xavier Raurich
  14. Regulating zombie mortgages By Lee, Jonathan; Nguyen, Duc Duy; Nguyen, Huyen
  15. Tracing Bank Runs in Real Time By Marco Cipriani; Thomas M. Eisenbach; Anna Kovner
  16. Rapid Bank Runs and Delayed Policy Responses By Ryuichiro Izumi; Yang LI
  17. Mitigating Too Big to Fail By Colleen Faherty; Wayne Passmore
  18. Decrypting New Age International Capital Flows By Clemens Graf von Luckner; Carmen Reinhart; Kenneth Rogoff
  19. The Role of Beliefs in Entering and Exiting the Bitcoin Market By Daniela Balutel; Christopher Henry; Jorge Vásquez; Marcel Voia
  20. Effets collatéraux : le rôle des Fintechs dans le financement des petites et moyennes entreprises By Paul Beaumont; Huan Tang; Eric Vansteenberghe

  1. By: Yujuan Qiu
    Abstract: This paper investigates some indicators of financial development in select countries with currency board systems and raises some questions about the connection between financial development and growth in currency board systems. Most of those cases are long past episodes of what we would now call emerging markets. However, the paper also looks at Hong Kong, the currency board system that is one of the world's largest and most advanced financial markets. The global financial crisis of 2008 09 created doubts about the efficiency of financial markets in advanced economies, including in Hong Kong, and unsettled the previous consensus that a large financial sector would be more stable than a smaller one.
    Date: 2024–06
  2. By: Pablo Ottonello; Diego J. Perez; William Witheridge
    Abstract: We study the role of exchange rates in industrial policy. We construct an open-economy macroeconomic framework with production externalities and show that the desirability of these policies critically depends on the dynamic patterns of externalities. When they are stronger in earlier stages of development, economies that are converging to the technological frontier can improve welfare by intervening in foreign exchange markets, keeping the exchange rate undervalued, and speeding the transition; economies that are not converging to the technological frontier are better off not using the exchange rate as an industrial policy tool. Capital-flow mobility and labor market dynamism play a central role in the effectiveness of these policies. We also discuss the role of capital controls as an industrial policy tool and use our framework to interpret historical experiences.
    JEL: F0 F3 F4
    Date: 2024–05
  3. By: JaeBin Ahn; Shekhar Aiyar; Andrea F. Presbitero
    Abstract: This paper provides cross-country firm-level evidence on productivity spillovers from foreign direct investment
    Date: 2024–07
  4. By: Chadha J. S., Samiri, I.; Samiri, I.
    Abstract: We investigate UK labour productivity over the long run, comparing it to other advanced economies and focus on the sharp slowdown since the global financial crisis. Using a growth accounting framework, we find a dominant role for total factor productivity (TFP), but it turns out that capital shallowing is also important. Two macroeconomic trends deepen the puzzle of this slowdown. There has been a decline in real interest rates over the past 30 years and an increase in labour supply since 2008, both of which ought to have increased investment. And yet, the ratio of (nominal) private and public investment to GDP has fallen over time. We go on to examine the UK’s productivity performance through the lens of standard neoclassical models and reconsider the secular stagnation debate in the UK context. Finally, we survey several explanations from recent economic literature for the poor performance of investment.
    Keywords: Productivity, Macroeconomics, Real Interest Rates, Investment
    JEL: E22 E24 E32 E44 E51 E62 O16 O42 O47
    Date: 2024–06–27
  5. By: Roberto Blanco (BANCO DE ESPAÑA); Miguel García-Posada (BANCO DE ESPAÑA); Sergio Mayordomo (BANCO DE ESPAÑA); María Rodríguez-Moreno (BANCO DE ESPAÑA)
    Abstract: We study the access to credit and the propensity to exit the market of firms with no bank debt (the main funding source of Spanish non-listed firms) around the COVID-19 crisis. Our methodology allows us to disentangle credit supply from credit demand, as having no bank debt may be the result of financial constraints or a deliberate strategy. Before the COVID-19 crisis, zero-bank-debt firms, especially risky ones, faced more difficult access to bank loans than firms that had previously held bank debt owing to their lack of credit history. These credit constraints were tightened by the COVID shock, regardless of firms’ risk, arguably because of increased information asymmetries during a period of high macroeconomic uncertainty. Zero-bank-debt firms, even those with a low probability of default, were much more likely to leave the market during the COVID-19 crisis than firms with a history of bank debt. Moreover, granting new credit to zero-bank-debt firms reduced their probability of exit, which suggests a causal relationship between the two aforementioned findings. Beyond the specific setting of the pandemic, this paper adds to the broader literature on a better understanding of supply and demand-side constraints for corporate external funding, as crystalised in zero-debt firms.
    Keywords: zero-debt firms, credit constraints, information asymmetries, guarantees, market exit
    JEL: G30 G32 G21
    Date: 2024–06
  6. By: Silvia Albrizio; Beatriz Gonzalez; Dmitry Khametshin
    Abstract: This paper investigates the impact of monetary policy on capital misallocation, focusing on its heterogeneous effects on firms. Using Spanish firm-level data spanning 1999 to 2019, we demonstrate that expansionary monetary policy leads to a reduction in capital misallocation, measured by the within-industry dispersion of firms’ marginal revenue product of capital (MRPK). To analyze the underlying mechanism, we first examine the intensive margin and find that high-MRPK firms exhibit a greater increase in investment and debt financing relative to low-MRPK firms following a monetary policy easing surprise. We also find that a firm’s MRPK serves as a stronger determinant of its investment sensitivity to monetary policy than factors such as age, leverage, or cash, suggesting that MRPK is a reliable proxy for financial frictions. Next, we explore the extensive margin and demonstrate that monetary policy easing stimulates entry and discourages exit, although the quantitative impact is small. Moreover, we find no significant changes in the composition of high- and low-MRPK entrants or exiters. Overall, our findings suggest that expansionary monetary policy primarily reduces capital misallocation by alleviating financial frictions among incumbent productive and constrained firms.
    Keywords: monetary policy; financial frictions; investment; misallocation; productivity
    Date: 2024–06–14
  7. By: William N. Goetzmann; Akiko Watanabe; Masahiro Watanabe
    Abstract: We find that procyclical stocks, whose returns comove with business cycles, earn higher average returns than countercyclical stocks. We use almost a three-quarter century of real GDP growth expectations from economists’ surveys to determine forecasted economic states. This approach largely avoids the confounding effects of econometric forecasting model error. The loading on the expected real GDP growth rate is a priced risk measure. A fully tradable, ex-ante portfolio formed on this loading generates a procyclicality premium that is statistically significant, economically large, long-lasting over a few years, and independent of the size, book-to-market, and momentum effects.
    JEL: E32 E44 G12 G14 G17
    Date: 2024–05
  8. By: Marion Davin (CEE-M, Univ Montpellier, CNRS, INRAE, SupAgro, Montpellier, France); Mouez Fodha (Paris School of Economics and University Paris 1 Panthéon-Sorbonne); Thomas Seegmuller (Aix Marseille Univ, CNRS, AMSE, Marseille, France)
    Abstract: This paper examines an endogenous growth model that allows us to consider the dynamics and sustainability of debt, pollution, and growth. Debt evolves according to the financing adaptation and mitigation efforts and to the damages caused by pollution. Three types of features are important for our analysis: The technology through the negative effect of pollution on TFP; The fiscal policy; The initial level of pollution and debt with respect to capital. Indeed, if the initial level of pollution is too high, the economy is relegated to an endogenous tipping zone where pollution perpetually increases relatively to capital. If the effect of pollution on TFP is too strong, the economy cannot converge to a stable and sustainable long-run balanced growth path. If the income tax rates are high enough, we can converge to a stable balanced growth path with low pollution and high debt relative to capital. This sustainable equilibrium can even be characterized by higher growth and welfare. This last result underlines the role that tax policy can play in reconciling debt and environmental sustainability.
    Keywords: Environmental damage, pollution, fiscal policy, public debt, sustainability
    JEL: E60 H63 Q54 Q58
    Date: 2024–06
  9. By: Gergő Motyovszki; Philipp Pfeiffer; Jan in ’t Veld
    Abstract: Rising public investment needs raise the issue of debt sustainability. This paper analyses the implications of public investments for debt dynamics using quantitative model simulations. Without offsetting fiscal adjustments via the primary balance, a temporary increase in public investment implies a lasting increase in the debt-to-GDP ratio. While a significant boost to real GDP can create some backing for the additional public debt, the direct budgetary costs of the stimulus outweigh this denominator effect. In the medium and long run, as these endogenous effects fade, debt dynamics becomes increasingly driven by the longterm r−g differential, which is assumed to be positive in our central scenario, putting debt-to-GDP on an increasing trajectory. In contrast, negative r − g could ensure that debt-to-GDP eventually reverts to its baseline level, even without budgetary adjustments. Alternatively, letting the primary balance adjust beyond the impact of the fiscal shock can provide another mechanism for debt stabilisation. In particular, if non-stimulus spending is fixed in real terms while taxes increase in line with expanding output, debt-toGDP falls below its baseline in the medium run, even in an economy with positive r−g. However, this constitutes a quasi-consolidation where the resulting higher primary balances reflect the inherent fiscal costs, underlining that public investment is not a “free lunch”. Nonetheless, the need for debt-financed public investments to be eventually paid for (in a narrow fiscal sense) does not preclude their potential to be welfare-improving for society, especially if they facilitate the climate transition – a channel our model does not explicitly consider.
    JEL: E62 E63 H62 H63
    Date: 2024–06
  10. By: Graf von Luckner, Clemens M.; Meyer, Josefin; Reinhart, Carmen M.; Trebesch, Christoph
    Abstract: We study sovereign external debt crises over the past 200 years, with a focus on creditor losses, or "haircuts". Our sample covers 327 sovereign debt restructurings with external private creditors over 205 default spells since 1815. Creditor losses vary widely (from none to 100%), but the statistical distribution has remained remarkably stable over two centuries, with an average haircut of around 45 percent. The data also reveal that 'serial restructurings', meaning two or more debt exchanges in the same default spell, are on the rise. To account for this trend toward serial renegotiation, we introduce the 'Bulow-Rogoff haircut' - a cumulative measure that captures the combined creditor loss across all restructurings during a single debt crisis. Using this measure, we show that longer debt crises deliver larger haircuts and that interim restructurings provide limited debt relief. We further examine past predictors of the size of haircuts and identify 'rules of thumb' applicable to future defaults. Poorer countries, first-time debt issuers, and those that borrowed heavily from external creditors all record significantly higher haircuts in case of a default. Geopolitical shocks - such as wars, revolutions, or the break-up of empires - deliver the deepest haircuts. Sovereign debt investment disasters are often linked to (geo-)political disasters.
    Keywords: Sovereign Default, Debt Restructuring, Credit Events, Financial Crises, Geopolitical Risk
    JEL: F34 H63 G15
    Date: 2024
  11. By: Philipp Krug; Dominika Langenmayr
    Abstract: In many OECD countries, family firms face lower or no succession taxes if they fulfill continuation requirements. We study the effects of such preferential treat- ment in a two-generation model. Preferential treatment of continued firms leads to more entrepreneurship and higher wages, as entrepreneurs invest more as they value passing on a larger firm. However, more low-ability heirs continue the firm, leading to efficiency losses. In the presence of financial frictions, richer (but less able) heirs may invest more than buyers from outside.
    Keywords: Inheritance taxation, family firms, preferential tax treatment, estate taxation
    Date: 2024–04
  12. By: Diouf, Awa; Carreras, Marco; Santoro, Fabrizio
    Abstract: Financial inclusion – where individuals and businesses have access to useful and affordable financial products and services that meet their needs, delivered in a responsible and sustainable way – is a critical component of economic development. It is particularly important in sub-Saharan Africa (SSA), where there can be little traditional banking infrastructure. The success of M-PESA in Kenya shows that mobile money is helping financial inclusion in the region. Those in rural or underserved areas can use mobile money to access basic financial services – savings, payments, and credit – through their mobile phones. This is critical for impoverished households, helping them to manage their finances, build resilience, and participate more actively in the economy. Financial inclusion aligns with broader development goals, such as poverty reduction and gender equality, by empowering marginalised groups, including women and small-scale entrepreneurs. However, taxation policies can be a threat to the adoption of mobile money in Africa. This study assesses the short and long-term impact of the Kenyan excise duty on the use of mobile money. Summary of ICTD Working Paper 168.
    Keywords: Finance,
    Date: 2024
  13. By: Jaime Alonso-Carrera; Jordi Caballé; Xavier Raurich
    Abstract: We show that US commuting zones with higher income inequality exhibit less upward social mobility at the bottom of the income distribution, more downward social mobility at the top, and lower average income. We explain this empirical evidence through a life-cycle model in which investment in education and effort increase labor income, and individuals are altruistic, suffer disutility from exerting effort, and face a credit constraint. We pro- pose two mechanisms driving those findings. First, due to the credit constraint, investment in education and income of individuals born into low-income families is constrained by parental wealth, which explains that upward social mobility at the bottom is lower in com- muting zones with higher inequality where low-income families have less wealth. Second, individuals born into a­ffluent families exert less effort and earn lower labor income when they inherit a larger wealth, which explains that downward social mobility at the top is larger in the most unequal commuting zones where affuent families are wealthier.
    Keywords: inequality, social mobility, education, effort
    JEL: D64 E21 E71 I24
    Date: 2024–06
  14. By: Lee, Jonathan; Nguyen, Duc Duy; Nguyen, Huyen
    Abstract: Using the adoption of Zombie Property Law (ZL) across several US states, we show that increased lender accountability in the foreclosure process affects mortgage lending decisions and standards. Difference-in-differences estimations using a state border design show that ZL incentivizes lenders to screen mortgage applications more carefully: they deny more applications and impose higher interest rates on originated loans, especially risky loans. In turn, these loans exhibit higher ex-post performance. ZL also affects lender behavior after borrowers become distressed, causing them to strategically keep delinquent mortgages alive. Our findings inform the debate on policy responses to foreclosure crises.
    Keywords: Zombie lending, mortgage screening, mortgage renegotiation
    JEL: G21 G28 K25
    Date: 2024
  15. By: Marco Cipriani; Thomas M. Eisenbach; Anna Kovner
    Abstract: We use high-frequency interbank payments data to trace deposit flows in March 2023 and identify twenty-two banks that suffered a run, significantly more than the two that failed but fewer than the number that experienced large negative stock returns. The runs were driven by large (institutional) depositors, rather than many small (retail) depositors. While the runs were related to weak fundamentals, we find evidence for the importance of coordination because run banks were disproportionately publicly traded and many banks with similarly bad fundamentals did not suffer a run. Banks that survived a run did so by borrowing new funds and then raising deposit rates, not by selling liquid securities.
    Keywords: bank runs; payments; coordination; public signals
    JEL: E41 E58 G01 G21 G28
    Date: 2024–05–01
  16. By: Ryuichiro Izumi (Department of Economics, Wesleyan University); Yang LI (Singapore University of Social Sciences)
    Abstract: The banking turmoil of 2023 highlighted how technological advancements have significantly accelerated the speed of bank runs. This paper investigates the impact of these faster bank runs on the effectiveness of policy interventions by interpreting them as a constraint on the relative speed of policy responses. Using a model of bank runs and ex-post policy responses, we examine how delays caused by this constraint affect financial fragility and welfare. We find that while delays exacerbate welfare loss by distorting allocations, they may also decrease fragility by making banks more cautious. We explore the optimal level of structural delay, balancing the trade-off between distributional distortions and financial fragility.
    Keywords: Bank runs, Delayed Intervention, Speed of Bank Runs
    JEL: G21 G28 E58
    Date: 2024–06
  17. By: Colleen Faherty; Wayne Passmore
    Abstract: Financial institutions that are "Too-Big-to-Fail" impede proper market functioning in financial services. These firms can undermine the disciplining effects of capital markets should their failure have substantial "knock-on" effects on the real economy.
    Date: 2024–06–14
  18. By: Clemens Graf von Luckner (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique); Carmen Reinhart (Harvard University); Kenneth Rogoff (Department of Economics, Harvard University - Harvard University)
    Abstract: This paper employs high frequency transactions data on the world's two oldest and most extensive centralized peer-to-peer Bitcoin markets, enabling trade in the currencies of more than 160 countries. We develop an algorithm that allows us, with high probability, to detect "crypto vehicle transactions" in which crypto currency is used to move capital across borders, and/or to exchange one fiat currency for another. The data suggest that the use of Bitcoin has become an increasingly important channel to receive remittances and evade capital controls in emerging markets. Two event studies on Venezuela and Argentina provide supporting evidence.
    Keywords: cryptocurrencies, bitcoin, international capital flows, transactions, speculative bubbles
    Date: 2023–09
  19. By: Daniela Balutel; Christopher Henry; Jorge Vásquez; Marcel Voia
    Abstract: Cryptoassets, such as Bitcoin, represent a new type of financial technology that has grown substantially in recent years in terms of market size. Previous research has documented the characteristics and motivations of early Bitcoin adopters, but less work has been done studying those who choose to exit the Bitcoin market. We develop a theoretical model of both entry and exit to the Bitcoin market, the dynamics of which are driven by agents’ beliefs about Bitcoin’s survival. We connect the model to micro-level data from Canada, allowing us to empirically test the role of beliefs in transitioning to past ownership. Using a control function approach with appropriate exclusion restrictions, we estimate the effects of beliefs while controlling both for selection into or out of Bitcoin ownership and for possible simultaneity. We find evidence that beliefs are significant predictors of exit, while the size and direction of these effects differ across time and ownership status.
    Keywords: Bank notes; Central bank research; Coronavirus disease (COVID-19); Financial services; International topics
    JEL: E41 E42 E58 F22
    Date: 2024–06
  20. By: Paul Beaumont; Huan Tang; Eric Vansteenberghe
    Abstract: Cet article examine l'impact de l'introduction de prêts non garantis juniors via les plateforme FinTech de crowdlending sur le marché du prêt aux petites entreprises. En utilisant des données administratives françaises, nous constatons que les emprunteurs FinTech connaissent une augmentation de 20% de leur crédit bancaire suite à l'origination du prêt FinTech. Nous établissons la causalité en utilisant un instrument dit shiftshare qui exploite l'exposition différentielle des entreprises aux exigences de garantie des banques. L'expansion du crédit ne se produit que lorsque les emprunteurs FinTech investissent dans de nouveaux actifs, et ces emprunteurs FinTech sont par la suite plus susceptibles de mettre en gage des garanties aux banques. Cela suggère que les entreprises utilisent les prêts FinTech pour acquérir des actifs qu'elles mettent ensuite en gage aux banques, augmentant ainsi leur capacité d'emprunt totale.

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