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on Financial Development and Growth |
| By: | Miroslav Gabrovski; Ioannis Kospentaris; Lucie Lebeau |
| Abstract: | An increasing share of corporate loans, a critical source of firm credit, are sold off banks’ balance sheets and actively traded in a secondary over-the-counter market. We develop a microfounded equilibrium search-theoretic model with labor, credit and financial markets to explore how this secondary loan market affects the real economy, highlighting a trade-off: while the market reduces the steady-state level of unemployment by 0.6pp, it amplifies its response to a 1% productivity drop from 3.6% to 4.3%. Secondary market frictions matter significantly: eliminating them would not only reduce unemployment by 1.2pp, but also dampen its volatility down to 2.7%. |
| Keywords: | search frictions; labor market; credit markets; financial linkages; secondary loan markets; over-the-counter markets |
| JEL: | E24 E44 E51 G11 G12 G21 J64 |
| Date: | 2024–10–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:99019 |
| By: | Jorge Abad (BANCO DE ESPAÑA); David Martínez-Miera (UC3M AND CEPR); Javier Suárez (CEMFI AND CEPR) |
| Abstract: | We study banks’ systemic risk-taking decisions in a dynamic general equilibrium model, highlighting the macroprudential role of bank capital requirements. Banks decide on their unobservable exposure to systemic shocks by balancing risk-shifting gains against the value of preserving their capital after such shocks. Capital requirements reduce systemic risk taking, but at the cost of reducing credit and output in calm times, generating welfare trade-offs. We find that systemic risk taking is maximal after long periods of calm and may worsen if capital requirements are countercyclically adjusted. Removing deposit insurance introduces market discipline but increases the bank capital necessary to support credit, implies lower (though far from zero) optimal capital requirements and has nuanced social welfare effects. |
| Keywords: | capital requirements, risk shifting, deposit insurance, systemic risk, financial crises, macroprudential policies |
| JEL: | G01 G21 G28 E44 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2441 |
| By: | Günnewig, Maximilian; Georgiadis-Harris, Alkis; Mitkov, Yuliyan |
| JEL: | D82 G2 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc24:302331 |
| By: | Yasin Kürsat Önder; Jose Villagas (-) |
| Abstract: | We evaluate the impact of Belgium’s 2020 Public Credit Guarantee Scheme (CGS) using administrative data. The CGS applied to all firms, with those employing fewer than 50 workers benefiting from a 25 basis point reduction in interest rates. Leveraging this policy-induced discontinuity, we compare firms around the employment threshold. Firms receiving the lower interest rates experienced increases in employment and investment, along with a reduction in firm exit rates. The scheme helped address the debt overhang problem by easing pricerelated credit constraints: for every €1 of guaranteed debt at a 25 basis points lower rate, non-guaranteed debt decreased by €0.13. |
| Keywords: | Credit guarantees, credit frictions, regression discontinuity design, debt overhang squares, efficiency, robustness |
| JEL: | E32 G21 H81 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:rug:rugwps:24/1097 |
| By: | Kevin Donovan; Will Jianyu Lu; Joseph H. Pedtke; Todd Schoellman |
| Abstract: | This paper uses two large datasets built from quarterly labor force surveys to provide a global perspective on labor market downturns. The distribution of the severity and duration of labor market downturns is strongly right skewed. The longest and most severe downturns are associated with crises, particularly financial crises, sudden stops, and house price busts. Manufacturing and construction are key sectors for propagation, as they account for more than half of the total decline in employment. Labor market downturns fall most on young and less-educated workers, who are less able to self-insure against idiosyncratic earnings risk. |
| JEL: | E24 E32 F0 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33061 |
| By: | Romain Bouis; Mr. Gaston Gelos; Fumitaka Nakamura; Mr. Paavo A Miettinen; Erlend Nier; Gabriel Soderberg |
| Abstract: | This paper offers a comprehensive analysis of the implications for financial stability of a central bank issuing a digital currency to the public at large. We start with a systematic analysis of balance sheet changes that arise from the new liability for the central bank and the banking system, and examine how they depend on preconditions, central bank choices, and banking system responses. Based on this, we discuss the range of implications for financial stability that may arise in steady state, in the context of adoption, and in crisis times. Threats to financial intermediation in steady state arise mainly in situations where the central bank balance sheet expands, and triggers adjustment mechanisms that lead to more costly or less stable funding of the banking system, while in crisis times run risk may increase. Our analysis of policy choices to control these effects considers macroprudential policy, and an expansion of central bank lending to commercial banks, but finds that a main contribution needs to come from a design of the CBDC that encourages its use as a means of payment rather than a store of value. |
| Keywords: | Central Bank Digital Currency; Financial Stability; Balance Sheets; Disintermediation; Bank Runs |
| Date: | 2024–10–11 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/226 |
| By: | Michael D. Bordo (Rutgers University); William Roberds (Federal Reserve Bank of Atlanta) |
| Abstract: | We consider the debut of a new monetary instrument, central bank digital currencies (CBDCs). Drawing on examples from monetary history, we argue that a successful monetary transformation must combine microeconomic efficiency with macroeconomic credibility. A paradoxical feature of these transformations is that success in the micro dimension can encourage macro failure. Overcoming this paradox may require politically uncomfortable compromises. We propose that such compromises will be necessary for the success of CBDCs. |
| Keywords: | monetary systems, banknotes, central banks, digital currencies |
| JEL: | E42 E58 N10 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:pri:cepsud:323 |
| By: | Jingyi TIAN; Jun NAGAYASU |
| Abstract: | As artificial intelligence (AI) emerges as a key driver of Industry 4.0, nations are vying for a competitive edge in AI advancements, innovation, and applications. This study investigates AI’s role in the financial system by delving into the intricate relationship between AI and financial systemic risk (FSR) across diverse contexts. The results show that, first, AI investment is generally associated with increased FSR. Second, global risk spillover is observed in the FSR of various countries. Extreme events can lead to a sharp and simultaneous increase in FSR across nations. In addition, after removing global risk spillover, the FSR dynamics of countries do not strictly conform to geographical proximity. Third, mechanism analysis reveals that AI increases FSR by enhancing the interconnectedness between entities and raising unemployment. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:toh:tupdaa:55 |
| By: | Kamanda Espoir, Delphin |
| Abstract: | From the early 1980s until the late 2000s, the Democratic Republic of Congo (DRC, thereafter) was in severe debt distress, which resulted in debt relief under the Heavily Indebted Poor Countries (HIPC) initiative. Surprisingly, the DRC's debt-to-GDP ratio increased significantly from around US$6.4 billion in 2019 to US$10.4 billion in 2022. With this in mind, we investigated the long-term impacts of public debt on growth by examining whether the debt-growth link is time-varying and state-dependent. Unlike the existing literature on country-specific studies that use parametric approaches, we employed the novel non-parametric Quantile-on-Quantile Regression (QQR) framework to uncover the non-linearity of the effect of public debt on growth using data covering the period 1970-2022. The results revealed asymmetric effects of public debt on growth across GDP growth quantiles. Specifically, we found positive impacts of public debt in lower quantiles (0.05-0.3) and middle quantiles (0.4-0.6) of GDP coupled with lower quantiles of Debt-to-GDP ratio (0.05-10). Moreover, the slope coefficient becomes negative in almost all quantiles of GDP coupled with the lower quantiles (0.2-0.3), middle quantiles (0.4-9.6), and higher quantiles (0.7-0.95) of Debt-to-GDP ratio. To check the robustness of our results, we used Markov Switching (MS) regression and the results were consistent with those of the QQR approach. Policy implications for robust growth in the DRC are provided. |
| Keywords: | Public debt, Economic growth, Threshold model, QQR model |
| JEL: | E6 H2 H6 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122415 |
| By: | Kailhao Cai; Mr. Edouard Martin; Mr. Felix J Vardy |
| Abstract: | This paper examines the macroeconomic frameworks of IMF-supported programs with low-income countries from 2009 to 2022, focusing on how macroeconomic targets and their achievement differ between fragile and conflicted-affected states (FCS) and non-FCS. Key findings include similar program targets for FCS and non-FCS, optimism in all dimensions considered other than inflation, and no significant correlation between targets and outcomes. For variables other than inflation, country-independent targets equal to the mean or median outcomes of other programs outperform program projections as predictors of actual outcomes. This underscores the challenges in setting realistic, country and program-specific targets in IMF-supported programs with low-income countries. Finally, we discuss potential caveats, including GDP rebenchmarking, non-linear relationship between initial conditions and targets, and repeat programs. We do not study, and make no claims about, causality. |
| Keywords: | IMF Programs; LICs; Fragility; Tailoring; Optimism |
| Date: | 2024–10–11 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/221 |
| By: | Daniel Dejuan-Bitria (BANCO DE ESPAÑA); Wayne R. Landsman (BANCO DE ESPAÑA); Sergio Mayordomo (KENAN-FLAGLER BUSINESS SCHOOL, UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL); Irene Roibás (BANCO DE ESPAÑA) |
| Abstract: | This paper analyses the effect of the expected credit loss model under IFRS 9 on relationship lending in Spain. We document that relationship exclusivity between a bank and a firm has a positive effect on the growth of credit. However, this positive effect is significantly reduced after implementation of IFRS 9. We estimate that in 2018 the negative impact of IFRS 9 on relationship lending led to a reduction in credit to Spanish non-financial firms of 2.8% of their total outstanding credit, suggesting a sizeable effect on the availability of credit. For borrowers with Stage 1 loans, we show that the new regulation has a negative impact on relationship lending at firms with a higher probability of default and whose credit quality has deteriorated. Our findings are consistent with a change in the incentives that underpin relationship lending. |
| Keywords: | relationship lending, IFRS 9, credit, probability of default |
| JEL: | D82 G21 G28 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2437 |
| By: | Jean-Baptiste Marigo (LaRGE Research Center, Université de Strasbourg); Laurent Weill (LaRGE Research Center, Université de Strasbourg) |
| Abstract: | We investigate the effect of folklore on firms’ access to credit. Using firm-level data on a large sample of 38, 000 firms covering 124 countries and 274 cultural societies over the 2005-2022 period, we test the hypothesis that oral traditions linking risk-taking to success or failure influence access to credit. We find that folklore affects access to credit. Oral traditions associated with successful challenges increase access to credit, while those associated with unsuccessful challenges decrease access to credit. We further show that folklore influences access to credit through borrower discouragement and loan approval. |
| Keywords: | culture, folklore, access to credit, borrower discouragement. |
| JEL: | G21 O16 Z10 Z13 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:lar:wpaper:2024-06 |
| By: | Axelle Heyert (LaRGE Research Center, Université de Strasbourg); Laurent Weill (LaRGE Research Center, Université de Strasbourg) |
| Abstract: | This paper investigates whether financial inclusion affects life satisfaction. We perform regressions at the individual level on a large dataset of 59, 209 individuals from 29 countries. We find evidence that financial inclusion improves life satisfaction. We further establish that the beneficial effect of financial inclusion takes place through a better health, education and to a lesser extent through the launch of a business. We observe that the positive impact of financial inclusion on life satisfaction is greater in countries with higher income per capita, and lower in countries recently struck by a financial crisis. Our results indicate that promoting financial inclusion can enhance happiness. |
| Keywords: | financial inclusion, life satisfaction, banking. |
| JEL: | G21 I31 O16 P46 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:lar:wpaper:2024-07 |
| By: | Mika Akesaka; Ryo Mikami; Yoshiyasu Ono |
| Abstract: | This study theoretically considers household behavior with wealth preference and empirically investigates the validity of insatiable wealth preference using a nationally representative survey. With wealth preference, the marginal rate of substitution of asset holdings for consumption depends on the nominal interest rates of assets at each point in time. From this property, we derive a reduced-form model and estimate it to find that the marginal utility of holding financial assets remains strictly positive as asset holdings increase and has a strictly positive lower bound; that is the insatiability of wealth preference. We also show that this property plays a crucial role in creating secular demand stagnation and expanding asset price bubbles. |
| Date: | 2024–04 |
| URL: | https://d.repec.org/n?u=RePEc:dpr:wpaper:1241rr |
| By: | Montes-Galdón, Carlos; Ajevskis, Viktors; Brázdik, František; Garcia, Pablo; Gatt, William; Lima, Diana; Mavromatis, Kostas; Ortega, Eva; Papadopoulou, Niki; De Lorenzo, Ivan; Kolb, Benedikt |
| Abstract: | Understanding asymmetric risks in macroeconomic variables is challenging. Most structural models used for policy analysis are linearised and therefore cannot generate asymmetries such as those documented in the empirical growth-at-risk (GaR) literature. This report examines how structural models can incorporate non-linearities to generate tail risks. The first part reviews the various extensions to dynamic stochastic general equilibrium (DSGE) models and the computational challenges involved in accounting for risk distributions. This includes the use of occasionally binding constraints and more recent developments, such as deep learning, to solve non-linear versions of DSGEs. The second part shows how the New Keynesian DSGE model, augmented with the vulnerability channel as proposed by Adrian et al. (2020a, b), satisfactorily replicates key empirical facts from the GaR literature for the euro area. Furthermore, introducing a vulnerability channel into an open-economy set-up and a medium-sized DSGE highlights the importance of foreign financial shocks and financial frictions, respectively. Other non-linearities arising from financial frictions are also addressed, such as borrowing constraints that are conditional on an asset’s value, and the way macroprudential policies acting against those constraints can help stabilise the economy and generate positive spillovers to monetary policy. Finally, the report examines how other types of tail risk beyond financial frictions – such as the recent asymmetric supply-side shocks – can be incorporated into macroeconomic models used for policy analysis. JEL Classification: E70, D50, G10, G12, E52 |
| Keywords: | asymmetric shocks, DSGE, macroprudential policies, non-linearities, structural models, tail risks, vulnerability channel |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2024357 |
| By: | Rodolfo G. Campos (BANCO DE ESPAÑA); Ana-Simona Manu (EUROPEAN CENTRAL BANK); Luis Molina (BANCO DE ESPAÑA); Marta Suárez-Varela (BANCO DE ESPAÑA) |
| Abstract: | This paper analyzes the financial spillovers of shocks originating in China to emerging markets. Using a high-frequency identification strategy based on sign and narrative restrictions, we find that equity markets react strongly and persistently to Chinese macroeconomic shocks, while monetary policy shocks have limited or no spillovers. The impact is particularly strong in Latin American equity markets, with the likely channel being the effect of shocks in China on international commodity prices. These effects extend to various financial variables, such as sovereign and corporate spreads and exchange rates, suggesting that macroeconomic shocks in China may have implications for economic cycles and financial stability in emerging markets. |
| Keywords: | China, emerging markets, financial spillovers |
| JEL: | F31 F37 F62 F65 G15 N26 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2435 |
| By: | Vahid Saadi |
| Abstract: | This paper shows that the rise in import competition from China forced U.S. banks to rebalance their credit portfolios away from business loans and towards mortgage lending during the period from 1999 to 2006. I show that while aggregate mortgage lending declines in exposed counties, banks that are more exposed to the rise in import competition increase their mortgage origination significantly in non-exposed areas, and expand their geographical reach into new counties. Mortgages originated by such banks in new counties are more likely to be high-interest loans issued to low-FICO score, high-LTV (loan-to-value) borrowers that would have otherwise been credit rationed. Overall, the findings show that banks that are more exposed experience a rebalancing of their loan portfolio towards residential loans during the sample period. These results highlight the role of increased import competition from China for the rapid increase in size and riskiness of the U.S. mortgage market prior to the 2007-09 mortgage crisis. |
| Keywords: | Bank portfolio reallocation; Financial Crisis; Import competition; Mortgage lending |
| JEL: | R3 |
| Date: | 2024–01–01 |
| URL: | https://d.repec.org/n?u=RePEc:arz:wpaper:eres2024-043 |
| By: | Borchert, Lea; de Haas, Ralph; Kirschenmann, Karolin; Schultz, Alison |
| Abstract: | We study how terminated correspondent banking relationships affect international trade. Drawing on firm-level export data from emerging Europe, we show that when local banks lose access to correspondent services, their corporate clients experience significant export declines. This trade contraction occurs on both the extensive margin, with fewer firms exporting, and the intensive margin, with existing exporters shipping lower values. Firms only partially offset lost exports with higher domestic sales, resulting in lower total revenues and employment. Other firms cease operations entirely. These firmlevel impacts aggregate to lower industry-level exports in countries more exposed to correspondent bank retrenchment. |
| Keywords: | Correspondent banking, trade finance, de-risking, global banks, international trade, anti-money laundering |
| JEL: | F14 F15 F36 G21 G28 L14 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofitp:304397 |
| By: | Dalgic, Husnu; Ozhan, Galip Kemal |
| JEL: | F31 F32 F41 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc24:302436 |
| By: | Angeloni, Ignazio; Haselmann, Rainer; Heider, Florian; Pelizzon, Loriana; Schlegel, Jonas; Tröger, Tobias |
| Abstract: | Over the past decade, the Single Supervisory Mechanism focused on making banks safer, resulting in stronger banks but limited euro area cross-border integration. We argue that overbanking hinders both cross-border integration for the EU and the development and integration of capital markets. In addition to a common supervisory authority and to attain the strong and integrated financial system Europe needs going forward, the Banking Union and Capital Markets Union need to coexist and complement each other. This document was provided/prepared by the Economic Governance and EMU Scrutiny Unit at the request of the ECON Committee. |
| Keywords: | Banking Union, Capital Markets Union, Market Integration, Overbanking |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:safewh:304307 |
| By: | Alejandro Casado (BANCO DE ESPAÑA); David Martínez-Miera (UNIVERSIDAD CARLOS III DE MADRID AND CEPR) |
| Abstract: | We provide evidence that bank loan supply reactions to monetary policy changes are market-specific, emphasizing the importance of banks’ local specialization. We analyze the U.S. mortgage market and find that when monetary policy eases, banks increase new mortgage lending growth more in markets in which they are geographically specialized relative to other markets and banks. This holds after controlling for local lending opportunities and (unobservable) bank differences. Further empirical findings, supported by a simple model, suggest that banks face market-specific differences in lending advantages, related to market-specific information, leading them to exhibit different reactions to monetary policy changes. We document the aggregate effects of this geographical specialization channel both at the county (regional) level on mortgage supply and house price growth, as well as at the bank level on average specialization growth. Our study underscores the relevance of banks’ local specialization in shaping the transmission of monetary policy. |
| Keywords: | bank lending, federal funds rate, geographical specialization, information, monetary policy, mortgage market |
| JEL: | D82 E52 E58 G21 G23 L10 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2440 |
| By: | Stefania Miricola; Giorgio Ricchiuti; Margherita Velucchi |
| Abstract: | In the context of a local economy, the attraction of foreign investment is key player, given the positive effects that arise, both directly and indirectly, within the host region. This paper assesses the impact of regional characteristics, such as an R&D-friendly economic environment and institutional quality, on the longevity of companies targeted by foreign investments. We examine the survival probability of a sample comprising over 100, 000 foreign-owned manufacturing firms operating within the European Union (EU-28). A multi-level approach enables the evaluation of both firm- and location-specific features at two distinct geographical scales. Our findings indicate that government quality within national boundaries plays a pivotal role, not only in attracting foreign capital but also in promoting a long-term presence. Financial development at the national level exerts a profound influence on the survival of foreign affiliates, reducing the risk of exit by approximately 99%. |
| Keywords: | Regional economy, Survival, Multinational Enterprises, Multilevel analysis, Local Institutions |
| JEL: | F23 C14 C41 L25 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:frz:wpaper:wp2024_19.rdf |
| By: | Otaviano Canuto; Sabrine Emran; Badr Mandri |
| Abstract: | Africa has a wealth of natural resources, including minerals, agriculture, and energy commodities, which provides an opportunity for the financialization of these commodities on the continent, a concept that has gained global attention and sparked debate on the potential benefits and drawbacks. Although the financialization of commodities has been studied in various contexts, including in African countries, challenges such as liquidity constraints and market readiness have emerged as critical impediments to its widespread adoption. This paper examines the existing literature to clarify the positive and negative aspects of commodity financialization, drawing on global examples and specific cases within Africa. By examining best practices and lessons learned, this paper offers guidance on how African countries can navigate the complexities of preparing for and embracing commodity financialization in order to unlock its potential benefits while mitigating the associated risks. |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:ocp:rpcoen:pp_08-24 |
| By: | International Monetary Fund |
| Abstract: | Selected Issues |
| Date: | 2024–09–11 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfscr:2024/291 |