|
on Financial Development and Growth |
| By: | Wishnu Badrawani; Citra Amanda; Novi Maryaningsih; Carla Sheila Wulandari |
| Abstract: | Using a panel payment system dataset of thirty-three provinces in Indonesia, we examine the impact of digital payment on the regional economy, considering structural breaks induced by unprecedented events and policies. Digital payments were determined to significantly affect regional income and consumption before and after the identified breakpoint, with the impact greater following the break. Employing a novel method for structural break analysis within interactive effects panel data, we demonstrate that the break in retail payment models is due to COVID-19, and the break in the wholesale payment model is associated with the central bank's payment system policy. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2508.02119 |
| By: | Marwil J. Davila-Fernandez; Serena Sordi |
| Abstract: | Behavioural finance offers a valuable framework for examining foreign exchange (FX) market dynamics, including puzzles such as excess volatility and fat-tailed distributions. Yet, when it comes to their interaction with the `real' side of the economy, existing scholarship has overlooked a critical feature of developing countries. They cannot trade in their national currencies and need US dollars to access modern production techniques as well as maintain consumption patterns similar to those of wealthier societies. To address this gap, we present a novel heterogeneous agents model from the perspective of a developing economy that distinguishes between speculative and non-speculative sectors in the FX market. We demonstrate that as long as non-speculative demand responds to domestic economic activity, a market-clearing output growth rate exists that, in steady-state, is equal to the ratio between FX supply growth and the income elasticity of demand for foreign assets, i.e., a generalised dynamic trade-multiplier. Numerical simulations reproduce key stylised facts of exchange rate dynamics and economic growth, including distributions that deviate from the typical bell-shaped curve. Data from a sample of Latin American countries reveal that FX fluctuations exhibit similar statistical properties. Furthermore, we employ time-varying parameter estimation techniques to show that the dynamic trade-multiplier closely tracks observed growth rates in these economies. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2508.02252 |
| By: | Shekhar Aiyar (Johns Hopkins SAIS, Bruegel and NCAER); Davide Malacrino (International Monetary Fund); Andrea F. Presbitero (International Monetary Fund and CEPR) |
| Abstract: | Firms and policy makers are increasingly looking at friend-shoring to make supply chains less vulnerable to geopolitical tensions. We test whether these considerations are shaping FDI flows, using investment-level data on over 300, 000 instances of greenfield FDI between 2003 and 2022. Estimates from a gravity model, which controls for standard push and pull factors, show an economically significant role for geopolitical alignment in driving the geographical footprint of bilateral investments. This result is robust to the inclusion of standard bilateral drivers of FDI—such as geographic distance and trade flows—and the strength of the effect has increased since 2018, with the resurgence of trade tensions between the U.S. and China. Moreover, our results are not limited to greenfield FDI, but hold also for M&As. |
| Keywords: | Foreign direct investment, Geoeconomics, Fragmentation, Political alignment |
| JEL: | F14 F60 I18 |
| Date: | 2024–01–01 |
| URL: | https://d.repec.org/n?u=RePEc:nca:ncaerw:158 |
| By: | Felipe Saffie; Liliana Varela; Kei-Mu Yi |
| Abstract: | We study empirically and theoretically the effects of international financial flows on resource allocation. Using the universe of firms in Hungary, we show that removing capital controls lowers firms’ cost of capital and increases household consumption, with the latter playing a dominant role. The consumption channel leads to reallocation of resources toward high expenditure elasticity activities—such as services—promoting both the expansion of incumbents and firm entry. A multi-sector heterogeneous firm model replicates these dynamics. Our model shows that non-homotheticity in consumption can quantitatively account for the reallocation of resources towards services and successfully replicates the dynamics of aggregate productivity following episodes of financial openness. |
| Keywords: | firm dynamics; financial liberalization; reallocation; capital flows; TFP; non-homothetic preferences |
| JEL: | F15 F41 F43 F63 |
| Date: | 2025–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:101404 |
| By: | Sow, Seydou |
| Abstract: | This study examines the impact of Official Development Assistance (ODA) on economic growth in the West African Economic and Monetary Union (WAEMU) over the period 2000-2022. Using a FMOLS econometric approach applied to panel data covering the eight member countries, the analysis reveals a complex and conditional relationship between development aid and economic growth. The results partially confirm the positive effect of ODA on growth, but demonstrate that this effectiveness crucially depends on specific internal conditions, particularly the level of domestic savings and governance quality. The study highlights a significant leverage effect between external and internal resources, with the ODA-savings interaction being positive and statistically significant. Regarding aid dependency, the analysis reveals the existence of a non-linear inverted U-shaped relationship, confirming the existence of an optimal threshold beyond which dependency becomes counterproductive for growth. Gross Fixed Capital Formation emerges as the most robust factor across all models, confirming the central role of domestic investment. These results advocate for a strategic reorientation of aid policies towards strengthening internal capacities, improving governance, and diversifying development financing sources from a perspective of economic sovereignty and endogenous growth. |
| Keywords: | Official development assistance, Economic growth, WAEMU, Governance, External dependence, Conditional effect |
| JEL: | F35 O11 O19 O55 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125549 |
| By: | Klingebiel, Stephan; Sumner, Andrew |
| Abstract: | This policy brief situates the crisis of Official Development Assistance (ODA) within a broader transformation of global development cooperation. Today's challenge goes beyond shrinking aid budgets; it reflects deeper pressures on the post-Cold War development consensus and its institutional architecture. Development cooperation is under strain due to spending cuts by the US and parts of Europe, alongside the rise of nationalist approaches, especially in the United States (US). The longstanding policy norms - framing development as a shared global endeavour, combining moral and strategic redistribution and favouring multilateral coordination - are eroding. Fiscal pressures and domestic priorities have weakened elite and public support for ODA, while populist movements often frame aid as conflicting with national interests. At the same time, development finance has become more geopolitical, increasingly tied to foreign policy, migration deterrence and economic diplomacy. This transactional approach coincides with a retreat from multilateralism, declining support for the UN system, and fragmentation among donors and recipients. The landscape has also diversified, with emerging actors such as China, the Gulf states and new development banks offering alternative financing, governance models and priorities. Many middle-income countries now access international financial markets, reducing dependency on OECD donors. As a result, development cooperation has become a field of strategic contestation. While these trends have evolved gradually over the past decade, the approach of the second administration of US President Donald Trump has accelerated them. Simultaneously, economic progress in parts of the Global South has fostered expectations for reciprocal partnerships rather than traditional donor-recipient hierarchies. The challenge, then, is to reimagine the future of development cooperation in ways that are politically feasible and institutionally resilient. This policy brief argues that this requires rethinking the foundations of development cooperation, rebuilding multilateral credibility and navigating a more pluralistic and geopolitically divided global order. We propose four plausible options, each reflecting a different configuration of value-based, institutional and political alignment: • Option 1 assumes a renewed political commitment to development as a global public good, and revitalised leadership from both North and South. • Option 2 suggests continuity with diminished ambition: multilateralism persists, but its core weakens, with development focused more on stability than transformation. • Option 3 offers a decentralised, experimental path driven by new actors and coalitions. While less coherent, it avoids the worst effects of fragmentation. • Option 4 reflects a marked shift towards increased bilateralism, ideological filtering, and instrumentalism. |
| Keywords: | development cooperation, development policy, Official Development Assistance, ODA, Global South, multilateralism, foreign aid, Donald Trump, geopolitisation, soft power |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:idospb:323249 |
| By: | Kunath, Gero |
| Abstract: | The Chinese economy has experienced strong economic growth for more than four decades since the implementation of the Open Door Policy in 1978. The local governments of the Chinese provinces played a decisive role in implementing the ambitious development goals envisioned by the central government. In particular during economic crises, local governments were responsible for turning the massive monetary and fiscal stimuli into economic growth. Indeed, they were quite successful in steering the Chinese economy during the Asian Financial Crisis in the late 1990s and the Great Financial Crisis (GFC) in the late 2000s by maintaining strong economic growth. To counter economic downturns, the Chinese leadership and local governments heavily relied on large-scale public and industrial infrastructure projects as well as on the booming real estate sector. This decades-long lasting growth miracle was heavily financed by debt. By the end of 2024, the debtto-GDP ratio of the Chinese economy had reached a staggering 290 percent. Especially the debt accumulated by local governments and their implicit debt hidden in so-called local government financing vehicles (LGFVs) have proven to be problematic. Since the 1994 budget law and tax-sharing reforms, the financial leeway for local governments to acquire funds for their extensive public expenditures had been severely limited. The legislation curtailed the fiscal revenue streams for local governments and prohibited them from issuing bonds and from running any deficit. Therefore, local governments established LGFVs, which enabled local governments to fund their public expenditures aside from their official balance-sheets. The number of LGFVs and their associated debts blew up ever since the Great Financial Crisis in 2008. The Covid pandemic then marked the breaking point for the debt-fuelled Chinese growth model and revealed the vulnerability of the LGFV system. Consumer confidence and private consumption eroded, the booming real estate sector imploded and land sales revenues for local governments plummeted. In consequence, the financial backbone of LGFVs and their debts became fragile raising concerns about financial stability. These worries are particularly pronounced given the staggering scale of both on- and off-balance local government debt. By the end of 2024, official local government debt had reached close to 48 trillion RMB and LGFV debt was estimated at more than 60 trillion RMB. The current local government debt crisis is the legacy of an in parts failed growth model focused on infrastructure development. It calls for a shift towards a more balanced growth model with a heightened role for domestic private consumption in the Chinese economy. Now, the Chinese leadership must manage the risks for financial stability originating from local government and in particular LGFV debt. In the near future, it must then set the course for an overhaul of the economic growth model by implementing a range of structural reforms improving the coverage of and the access to public social services such as a gradual liberalization of the hukou system and a basic social security coverage. Additional relevant measures include an improved provision of financial instruments suitable for private social security. |
| Abstract: | Mit der Einführung von Reformen und einer Politik der offenen Tür seit dem Jahr 1978 verzeichnete die chinesische Wirtschaft seit mehr als vier Jahrzehnten ein starkes Wirtschaftswachstum, das oft sogar als Wachstumswunder bezeichnet wurde. Die Lokalregierungen der chinesischen Provinzen spielten eine entscheidende Rolle bei der Umsetzung der ehrgeizigen Entwicklungsziele der Zentralregierung. Besonders während der Wirtschaftskrisen waren die Lokalregierungen dafür verantwortlich, durch massive monetäre und fiskalische Anreize das Wirtschaftswachstum voranzutreiben - mit Erfolg. Sie steuerten die chinesische Wirtschaft durch die asiatische Finanzkrise Ende der 1990er Jahre und die Weltfinanzkrise Ende der 2000er Jahre. Gegen wirtschaftliche Abschwünge setzten die chinesische Führung und die lokalen Regierungen stark auf öffentliche und industrielle Infrastrukturprojekte sowie auf den boomenden Immobiliensektor. Das Wachstumswunder war dabei in hohem Maße schuldenfinanziert. Bis Ende 2024 erreichte die Schuldenstandsquote der chinesischen Wirtschaft die schwindelerregende Höhe von 290 Prozent des Bruttoinlandsprodukts. Als problematisch erwiesen sich vor allem die von den Lokalregierungen angehäuften Schulden. Neben den offiziellen Schulden nutzen sie lange sogenannte Local Government Financing Vehicles(LGFVs), um zusätzliche Schulden abseits ihrer öffentlichen Haushalte machen zu können. Seit dem chinesischen Haushaltsgesetz von 1994 und den begleitenden Reformen des Steuersystems wurde der finanzielle Spielraum der Lokalregierungen für ihre umfangreichen öffentlichen Ausgaben stark eingeschränkt. Die Gesetzgebung begrenzte die Steuereinnahmen der Lokalregierungen und verbot ihnen, Anleihen auszugeben und sich zu verschulden. Daher führten die Lokalregierungen LGFVs ein, die es ihnen ermöglichten, ihre öffentlichen Ausgaben außerhalb ihrer offiziellen Bilanzen zu finanzieren. Die Zahl der LGFVs und deren Schulden stiegen seit der Weltfinanzkrise stark an. Die Coronapandemie brachte das schuldengetriebene chinesische Wachstumsmodell an seine Grenzen und offenbarte die Anfälligkeit des LGFV-Systems. Das Konsumentenvertrauen und der private Konsum erodierten, der Immobiliensektor implodierte und die Einnahmen aus Grundstücksverkäufen für die Lokalregierungen brachen ein. Damit brach das finanzielle Rückgrat der LGFVs samt zugehöriger Schulden. Angesichts des Ausmaßes der offiziellen und der impliziten Verschuldung der Lokalregierungen mehrten sich die Sorgen um die finanzielle Stabilität Chinas. Bis Ende 2024 erreichten die offiziellen Schulden der Lokalregierungen fast 48 Billionen RMB und die Schulden der LGFVs wurden auf über 60 Billionen RMB geschätzt. Die derzeitige Schuldenkrise der Lokalregierungen ist das Erbe eines in Teilen gescheiterten Wachstumsmodells, das zu stark auf Investitionen konzentriert war. China braucht ein ausgewogeneres Wachstumsmodell mit einer stärkeren Rolle des privaten Binnenkonsums. Zunächst muss die chinesische Führung die Risiken für die Finanzstabilität, die von der Verschuldung der Lokalregierungen und insbesondere der LGFVs ausgehen, in den in den Blick nehmen. In naher Zukunft muss sie dann die Weichen für eine Neuausrichtung des Wachstumsmodells stellen. Hierfür braucht es Strukturreformen, die beispielsweise die Abdeckung und den Umfang der öffentlichen Sozialleistungen verbessern, wie etwa eine schrittweise Liberalisierung des hukouSystems und eine soziale Grundabsicherung. Unter den weiteren Maßnahmen könnte eine verbesserte Bereitstellung von Finanzinstrumenten für die private Absicherung sein. |
| JEL: | H60 H63 H70 H74 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:iwkrep:321884 |
| By: | Max Miller; James D. Paron; Jessica Wachter |
| Abstract: | Sovereign debt yields have declined dramatically over the last half-century. Standard explanations, including aging populations and increases in asset demand from abroad, encounter difficulties when confronted with the full range of evidence. We propose an explanation based on a decline in inflation and default risk. We show that a model with sovereign default captures the decline in interest rates, the stability of equity valuation ratios, and the reduction in investment and output growth. Calibrations of the model post-Covid suggest that sovereign default risk may have returned. |
| JEL: | E31 E43 G12 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34021 |
| By: | Pawel Janas |
| Abstract: | I examine the effects of public debt on municipal services and real outcomes during financial crises using a unique archival dataset of U.S. cities from 1924 to 1943. Unlike today’s countercyclical fiscal policies, the Great Depression provides a rare setting to observe fiscal shocks without substantial intergovernmental or Federal Reserve support. My findings show that financial market frictions – especially the need to refinance debt – led cities to sharply cut expenditures, particularly on capital projects and police services. As urban development halted during the Depression, cities with high pre-crisis debt levels faced significant austerity pressures, a decline in population growth, a rise in crime, and a departure of skilled public servants from municipal governments. |
| JEL: | G01 H7 N3 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34011 |
| By: | Yang Bai; Shize Li; Jialu Shen |
| Abstract: | Should a household buy a home? Using data from 16 developed countries spanning 1870 to 2020, this study provides a resounding affirmative answer. Contrary to popular expert advice, homeownership enhances life cycle wealth by up to 9% and welfare by up to 23%, compared to all-equity investment strategy. Homeownership reduces wealth portfolio risk and improves wealth equality, though it comes at the cost of lower working-life wealth and curtailed financial asset holdings. Gains are heterogeneous: Low-income (high-income) households gain more in wealth (welfare), and home purchase during periods of moderately low interest rates and high housing prices maximizes these benefits. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2507.17624 |
| By: | Marina Azzimonti; Vincenzo Quadrini |
| Abstract: | The rise of the Digital Economy has the potential to reshape international financial markets and the role of traditional reserve assets such as the US dollar. While the creation of Stablecoins may increase the demand for safe dollar-denominated instruments due to reserve backing requirements, they may also serve as substitutes, reducing the global demand for traditional reserve assets. We develop a multicountry model featuring the US, the rest of the world, and a distinct Digital Economy to quantify the impact of the potential expansion of the digital economy. Our results show that, in the long run, the reserve demand effect dominates the substitution effect, leading to lower US interest rates and greater US foreign borrowing. We also find that the expansion of the Digital Economy increases idiosyncratic consumption volatility in the US, while reducing it in the rest of the world. |
| JEL: | F30 F40 G51 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34066 |
| By: | Isaac Otchere; Zia Mohammed; Witness Simbanegavi |
| Abstract: | In this paper we examine the relationship between fintech formations and the default risk and performance of incumbent financial institutions in South Africa. We find that the development of fintech startups is associated with lower bankruptcy risk, credit risk and stock return volatility among banks and other financial institutions. Fintech startup formations are also associated with improvement in incumbent institutions performance. Further analysis shows that the risk reduction effect of fintech development is more pronounced for smaller banks. Overall, our results are consistent with the assertion that fintech formations generally improve risk management efficiency and reduce incumbent financial institutions default risk. However, the relationship is nonlinear, suggesting that the initial collaboration, which reduces default risk, can turn into increased competition as more fintech startups enter the market. From a policy standpoint, efforts to promote more collaboration should be encouraged, but regulators need to be cautious of potential systemic risk. |
| Date: | 2025–08–04 |
| URL: | https://d.repec.org/n?u=RePEc:rbz:wpaper:11082 |
| By: | Xiaolin Yu (Yonsei University); Jin Seo Cho (Yonsei University) |
| Abstract: | The current study examines whether government-led digital finance initiatives promote firm-level digital innovation by leveraging the staggered rollout of China’s Fintech pilot programs as quasi-natural experiments. Our dataset comprises 26, 746 firm-year observations of A-share listed companies from 2009 to 2023. To measure innovation, we develop a text-based indicator derived from the frequency of digital-related keywords in the annual reports of the listed firms. Employing a multi-period difference-in-differences design, we find that designation as a pilot zone increases digital innovation intensity by 0.8225 per thousand report words. These results remain robust across parallel, propensity score matching, placebo, and robustness tests. Mediation analysis reveals that the part of the effect is attributable to increased R&D intensity, with the program raising the average R&D-to-sales ratio by 0.24 percentage points. Moreover, program effect is stronger among high-tech firms and those located in Central and Western China, regions characterized by relatively weaker financial and digital infrastructure. |
| Keywords: | Difference-in-differences; Fintech pilot programs; digital innovation; R&D investments; firm heterogeneity |
| JEL: | G18 G28 G38 O31 O32 O38 O53 P42 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2025rwp-257 |
| By: | Jesús Fernández-Villaverde (UNIVERSITY OF PENNSYLVANIA); Joël Marbet (BANCO DE ESPAÑA); Galo Nuño (BANCO DE ESPAÑA); Omar Rachedi (ESADE BUSINESS SCHOOL) |
| Abstract: | This paper studies how household inequality shapes the effects of the zero lower bound (ZLB) on nominal interest rates on aggregate dynamics. To do so, we consider a heterogeneous agent New Keynesian (HANK) model with an occasionally binding ZLB and solve for its fully non-linear stochastic equilibrium using a novel neural network algorithm. In this setting, changes in the monetary policy stance influence households’precautionary savings by altering the frequency of ZLB events. As a result, the model features monetary policy non-neutrality in the long run. The degree of long-run non-neutrality, i.e., by how much monetary policy shifts real rates in the ergodic distribution of the model, can be substantial when we combine low inflation targets and high levels of wealth inequality. |
| Keywords: | heterogeneous agents, HANK models, neural networks, non-linear dynamics |
| JEL: | D31 E12 E21 E31 E43 E52 E58 |
| Date: | 2024–02 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2407 |
| By: | Eliezer Borenstein (Bank of Israel) |
| Abstract: | I analyze a setting in which monetary policy has a state dependent effect due to an endogenously driven information channel. Specifically, I develop a model of investment in risky capital, where a central bank holds private information regarding the state of the economy and sets an interest rate accordingly in order to stabilize aggregate demand. Lowering the interest rate stimulates investment via the standard channel, but also signals weaker economic conditions, which reduces investors' confidence and their desire to invest. The information effect is negligible when the economy is strong, but can become significant when the economy is weaker. In a sufficiently weak economy, reducing the interest rate generates a decline in investment. Thus, a policy aimed at stimulating investment might unintentionally cause the opposite result, weakening aggregate demand even further. The reduction in aggregate demand is inefficient, as it reflects a coordination failure among investors. In line with the model's s prediction, I provide empirical evidence suggesting that the information effect of monetary policy is stronger in times of weaker economic conditions. |
| Keywords: | Central bank information effects, Monetary policy, Financial crisis, Stock market |
| JEL: | D83 E43 E44 E52 G01 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:boi:wpaper:2025.03 |
| By: | Adam Geršl (Charles University); Pervin Dadashova (National Bank of Ukraine); Yuliya Bazhenova (National Bank of Ukraine); Anatolii Hlazunov (National Bank of Ukraine; Kyiv School of Economics); Danylo Krasovytskyi (National Bank of Ukraine; Taras Shevchenko National University of Kyiv) |
| Abstract: | This study introduces the financial cycle index as a means to identify the position of the Ukrainian economy in the financial cycle. The index encompasses 16 indicators aggregated into four subindices that capture cyclical systemic risks stemming from the immoderate debt burden of the private sector, the easing of lending conditions, excessive growth of real estate prices, and macroeconomic imbalances. This financial cycle measure can be used as one of a number of guidelines when making policy decisions on the use of countercyclical prudential instruments to prevent the accumulation of cyclical systemic risks and to stabilize the financial system in a timely manner. |
| Keywords: | financial cycle, credit-to-GDP gap, financial cycle index, countercyclical capital buffer |
| JEL: | E32 E51 E58 G01 G21 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:ukb:wpaper:01/2025 |
| By: | Faruque Ahamed; Md Ataur Rahman Chowdhury |
| Abstract: | This study constructs an Aggregate Financial Stability Index (AFSI) for Bangladesh to evaluate the systemic health and resilience of the countrys financial system during the period from 2016 to 2024. The index incorporates 19 macrofinancial indicators across four key sectors Real Sector, Financial and Monetary Sector, Fiscal Sector and External Sector. Using a normalized scoring approach and equal weighting scheme, sub-indices were aggregated to form a comprehensive measure of financial stability. The findings indicate that while the Real and Fiscal sectors demonstrated modest improvements in FY2024, overall financial stability deteriorated, largely due to poor performance in the Financial and Monetary Sector and continued weakness in the External Sector. Key stress indicators include rising non-performing loans, declining capital adequacy ratios, weak capital market performance, growing external debt, and shrinking foreign exchange reserves. The study highlights the interconnectedness of macro-financial sectors and the urgent need for structural reforms, stronger regulatory oversight, and enhanced macroprudential policy coordination. The AFSI framework developed in this paper offers an early warning tool for policymakers and contributes to the literature on financial stability measurement in emerging economies. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2507.20340 |
| By: | Ozili, Peterson K |
| Abstract: | This article presents a literature review of the post-2020 bank non-performing loans (NPLs) research around the world and suggests directions for future research. Using the thematic and bibliometric literature review methodologies, we find that significant NPL research has emerged from the European, Asian, and African regions while fewer research has emerged from the Asia-Pacific, North America, Latin America and Caribbean regions as well as from SAARC and OECD countries. The new NPL determinants in the recent literature are corporate governance, fintech, financial inclusion, country risks, regulatory quality, political risks, shadow banking activity, the COVID-19 pandemic, public/external debt, country risks, real house prices, and the independence of the central bank. The common regional NPL determinants are corruption, GDP, debt, loan growth, inflation, capital adequacy ratio, lending rate, competition, the regulatory environment, and GDP growth. The common theories used in the recent literature to explain the behavior of NPL are agency theory, stakeholder theory, information asymmetry theory, and moral hazard theory while the common empirical methodologies used are the panel regression and system GMM regression methods. The implication is that financial regulators, bank supervisors and banking scholars should pay attention to the new emerging determinants of NPL. They should also understand the effect of NPL on financial/banking stability so that safeguards can be put in place to minimise the adverse effect of non-performing loans. More research is needed to provide insights into this area. |
| Keywords: | Banks, NPL, non-performing loans, research, determinants, literature review, world |
| JEL: | G21 G28 G29 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125217 |
| By: | Trust R. Mpofu |
| Abstract: | This paper investigates the impact of capital requirements regulations on problem loans in South Africa following the adoption of Basel II in 2008 and the implementation of Basel III between 2013 and 2019. Using dynamic panel techniques employing the difference and system generalised method of moments over the period 20002022, the study suggests that capital requirements regulations seem to increase problem loans in general. However, interacting the capital regulation index with the Lerner index, the results indicate a negative and significant effect. This suggests that capital requirements regulations are effective in reducing problem loans for banks with moderate market power. The results also show that both macroeconomic and bank-specific factors drive problem loans. |
| Date: | 2025–08–07 |
| URL: | https://d.repec.org/n?u=RePEc:rbz:wpaper:11083 |
| By: | Corell, Felix |
| Abstract: | In modern macroeconomics, the marginal propensity to consume out of transitory income shocks is a central object of interest. This paper empirically explores a parallel concept in banking: the marginal propensity to lend out of unsolicited deposit inflows (MPLD). Using county-level dividend payouts as an instrument for deposit inflows, I estimate the MPLD for U.S. banks and show that before QE, the average bank operated “hand-to-mouth” — it transformed approximately every dollar of deposit inflow into new loans, consistent with tight liquidity constraints. However, since then, the MPLD has dropped to 0.35. Moreover, the MPLD decreases in banks’ cash-to-asset ratio and deposit market power. The findings suggest that the QE-induced abundant reserves regime significantly relaxed liquidity constraints for the majority of banks, but did not eliminate them entirely. JEL Classification: G21, E42, E51 |
| Keywords: | banking, deposits, loans, money creation, reserves |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253085 |
| By: | Rodríguez-Pose, Andrés; Sandu, Alexandra |
| Abstract: | In this paper we investigate what determines access to banking in Central and Eastern Europe (CEE). The research uses different waves of the OeNB Euro Survey – covering over 91, 000 individuals during the period 2012–2020 – and pooled and multilevel logit models to analyse how the interplay of trust in institutions, socio-economic attributes and geographic contexts shapes access to bank accounts, savings deposits and loans across 10 CEE countries. The findings reveal significant disparities in banking inclusion across products: while institutional trust enhances access to current accounts and savings deposits, its impact on loans is weaker. Socio-economic factors and geographical contexts, particularly at the local NUTS3 level, also matter enormously for financial inclusion. National and local economic conditions are key in shaping variations in financial inclusion/exclusion across CEE. |
| Keywords: | banking access; institutional trust; financial inclusion; Central and Eastern Europe; multilevel analysis |
| JEL: | G21 O16 R11 |
| Date: | 2025–07–28 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:128413 |
| By: | Ozili, Peterson K |
| Abstract: | This study examines the effect of capital outflows, induced by geopolitical shocks, on financial inclusion and digital financial inclusion in emerging markets and developing economies. Several measures of financial inclusion and digital financial inclusion were analysed for 17 emerging markets and developing economies from 1999 to 2023. The data were estimated using the median quantile regression and generalized linear model regression methods. The findings reveal that capital outflows, induced by geopolitical shocks, have a negative effect on financial inclusion and digital financial inclusion. Greater capital outflows, induced by geopolitical shock, decrease the level of financial inclusion through a contraction in the number of commercial bank branches in emerging markets and developing economies. Also, greater capital outflows, induced by geopolitical shock, decrease the level of digital financial inclusion through a decrease in the number of people using the internet to access commercial bank branch services and automated teller machine services. Political stability, GDP growth, population growth, unemployment, tax revenue and regulatory quality are significant determinants of financial inclusion and digital financial inclusion. The social implication is that geopolitical shocks and capital outflows adversely affect society by limiting access to essential financial services. The managerial implication is that financial managers will constantly need to anticipate geopolitical risk, its effect on financial services and develop safeguards to cushion its effect on financial service providers and customers. |
| Keywords: | Geopolitical risk, shocks, financial inclusion, digital financial inclusion, capital outflow, foreign direct investment, financial inclusion index, bank branch, depositors, automated teller machines, fintech |
| JEL: | G21 G23 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125567 |
| By: | Maretha Roseline Syahnie (Department of Economics, Faculty of Economics & Business, Universitas Gadjah Mada); Muhammad Ryan Sanjaya (Department of Economics, Faculty of Economics & Business, Universitas Gadjah Mada) |
| Abstract: | MSMEs, also known as micro, small, and medium-sized enterprises, are the backbone of the economy in developing countries. Empirical studies indicate that SMEs generally face obstacles, particularly in financing. This study focuses on two main aspects: indexing financial inclusion using principal component analysis (PCA), and analyzing credit and financial inclusion using vector autoregression (VAR) for forecasting. Through a two-stage indexing methodology, the study emphasizes the importance of geographical reach in financial inclusion availability compared to demographic reach, with availability being the most crucial dimension compared to accessibility and usage. VAR models and forecasting were developed for the period from March 2012 to July 2022 in Indonesia, incorporating other variables, such as accessto credit, credit risk, and real GDP. The use of VAR demonstrates consistency, accuracy, and reliability in producing predictions that closely approximate reality, providing a critical basis for policymakers. |
| Keywords: | Micro, small, and medium enterprises (MSMEs) financing, principal component analysis (PCA), financial inclusion index, credit, vector autoregression (VAR), forecasting, Indonesia |
| JEL: | C32 E44 G21 O16 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:gme:wpaper:202407007 |
| By: | Ozili, Peterson K |
| Abstract: | Carbon emissions, or CO2 emissions, is an important but often overlooked factor affecting financial stability and bank profitability in non-crisis years. The effect of carbon emissions on financial stability and bank profitability in non-crisis years has not been examined in the literature. It is argued that carbon emissions can bring about changes in the environment that create health challenges and financial risks which affect bank profitability and pose a threat to the stability of the financial system in non-crisis years. This study examines the effect of carbon emissions on bank profitability and financial stability in non-crisis years. Twenty-two diverse countries were analysed in non-crisis years. The findings reveal that higher carbon emissions impair financial stability by decreasing banking sector solvency and capital buffer which impair financial stability. Institutional quality mitigates the adverse effect of carbon emissions on financial stability by ensuring greater banking sector solvency in carbon-intensive environments. Institutional quality also reinforces the positive relationship between carbon emissions and bank profitability, particularly banking sector non-interest income. Lagged nonperforming loans, institutional quality, economic growth and regulatory capital ratio are significant determinants of financial stability in non-crisis years while the determinants of bank profitability in non-crisis years are lagged return on asset, the efficiency ratio, institutional quality, inflation rate and unemployment rate. |
| Keywords: | CO2 emissions, carbon emissions, climate change, financial stability, bank profitability, enviornment, economic growth, unemployment, inflation, pollution |
| JEL: | G21 G28 Q01 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125566 |
| By: | Laura Álvarez-Román (Banco de España); Sergio Mayordomo (Banco de España); Carles Vergara-Alert (IESE Business School); Xavier Vives (IESE Business School) |
| Abstract: | We study a model of the impact of climate risk on credit supply and test its predictions using data on all wildfires and corporate loans in Spain. Our findings reveal a significant decrease in credit following climate-driven events. This result is driven by outsider banks (large and diversified), which reduce lending significantly to firms in affected areas. By contrast, due to their access to soft information, local banks (geographically concentrated) reduce their loans to opaque affected firms to a lesser extent without increasing their risk. We also find that employment decreases in affected areas where local banks are not present. |
| Keywords: | wildfire, asymmetric information, bank heterogeneity, firm lending. |
| JEL: | Q54 G21 G32 |
| Date: | 2024–02 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2406 |