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on Financial Development and Growth |
| By: | Carlos Madeira |
| Abstract: | This work shows the impact of financial crises across industries and the total manufacturing sector. I find both a direct impact of financial crises on all manufacturing growth and an additional effect through an external finance dependence channel. Externally dependent industries experience lower growth during banking and currency crises, especially in emerging markets and developing economies. Banking, currency and sovereign debt crises cause an average reduction in total manufacturing growth of 2.7%, 6% and 1%, respectively, with the direct effect being the most significant component. Finally, I show that macroprudential policies adopted after the Great Financial Crisis attenuated the fall in growth caused by banking crises. |
| Keywords: | financial crises, banking crises, growth, external finance dependence, credit frictions |
| JEL: | E44 G01 O10 O16 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1214 |
| By: | Andres Fernandez; Martin Hiti; Asani Sarkar |
| Abstract: | Recent events have heightened awareness of systemic risk stemming from nonbank financial sectors. For example, during the COVID-19 pandemic, liquidity demand from nonbank financial entities caused a “dash for cash” in financial markets that required government support. In this post, we provide a quantitative assessment of systemic risk in the nonbank sectors. Even though these sectors have heterogeneous business models, ranging from insurance to trading and asset management, we find that their systemic risk has common variation, and this commonality has increased over time. Moreover, nonbank sectors tend to become more systemic when banking sector systemic risk increases. |
| Keywords: | nonbank financial institutions (NBFIs); nonbanks; banks; systemic risk; Interconnections |
| JEL: | G01 G21 G22 G23 G24 |
| Date: | 2024–10–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98893 |
| By: | Hans Degryse (KU Leuven and CEPR); Olivier De Jonghe (National Bank of Belgium, Economics and Research Department, European Central Bank, Tilburg University and Ghent University); Leonardo Gambacorta (Bank for International Settlements and CEPR); Cédric Huylebroek (KU Leuven and FWO) |
| Abstract: | Theory offers conflicting predictions on whether and how lenders’ sectoral specialization would affect firms’ innovation activities. We show that the sign and magnitude of this effect vary with the degree of “asset overhang” across sectors, which is the risk that a new technology has negative spillovers on the value of a bank’s legacy loan portfolio. Using both patent data and micro-level innovation survey data, we find that lenders’ sectoral specialization improves innovation for firms operating in sectors with low asset overhang, but impedes innovation for firms operating in sectors with high asset overhang. These results hold for two distinct measures of asset overhang and using bank mergers as a source of exogenous variation in bank specialization. We further show that these heterogeneous effects arise through financial contracting. Overall, our findings provide novel insights into the dual facets of bank specialization and, more broadly, the link between banking and innovation |
| Keywords: | Bank specialization, Bank lending, Corporate innovation, Asset overhang, Financial frictions |
| JEL: | G20 O30 L20 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbb:reswpp:202410-458 |
| By: | Paul Bergin; Ling Feng; Ching-Yi Lin |
| Abstract: | While the trade literature has tended to view export activity and innovation as complementary activities, we present evidence that financial constraints are a reason the two activities can act as substitutes for small exporters. In particular, we find that small exporters have lower expenditure on R&D than comparable non-exporters, and we find a corresponding pattern in the leverage ratio of the capital structure of small firms. A model that combines firm decisions regarding the amount of innovation, exporting, and endogenous financial capital structure is able to account for these empirical findings. The model implies that small firms are unable to fully reap the gains from exporting due to financial constraints, as they reduce R&D to finance the costs of export participation. |
| JEL: | E44 F41 G32 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32904 |
| By: | Elie Bouri (School of Business, Lebanese American University, Lebanon); Oguzhan Cepni (Ostim Technical University, Ankara, Turkiye; University of Edinburgh Business School, Centre for Business, Climate Change, and Sustainability; Department of Economics, Copenhagen Business School, Denmark.); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Ruipeng Liu (Department of Finance, Deakin Business School, Deakin University, Melbourne, VIC 3125, Australia) |
| Abstract: | This paper analyses the effect of supply constraints on international stock market volatility and while also considering their effect on stock returns. Using higher-order nonparametric causality-in-quantiles tests and daily data for China, France, Germany, Italy, Spain, the United Kingdom, the United States, and overall Europe, we find strong evidence of Granger causality flowing from supply constraints to the entire conditional distribution of stock returns and volatility. Notably, supply constraints positively predict stock volatility. This positive predictability remains robust when using alternative measures, including monthly realized variance and different metrics of supply constraints. Our findings have implications for investors and policymakers. |
| Keywords: | Supply Constraints, Stock Markets Volatility, Higher-Order Nonparametric Causality-in-Quantiles Test |
| JEL: | C21 C22 E23 G15 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:pre:wpaper:202441 |
| By: | Sagade, Satchit; Scharnowski, Stefan; Theissen, Erik; Westheide, Christian |
| Abstract: | We examine the impact of increasing competition among the fastest traders by analyzing a new low-latency microwave network connecting exchanges trading the same stocks. Using a difference-in-differences approach comparing German stocks with similar French stocks, we find improved market integration, faster incorporation of stock-specific information, and an increased contribution to price discovery by the smaller exchange. Liquidity worsens for large caps due to increased sniping but improves for mid caps due to fast liquidity provision. Trading volume on the smaller exchange declines across all stocks. We thus uncover nuanced effects of fast trader participation that depend on their prior involvement. |
| Keywords: | Latency, Market Fragmentation, Arbitrage, Liquidity, Price Efficiency, High-Frequency Trading |
| JEL: | G10 G14 G15 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:safewp:303051 |
| By: | Balila Acurio (Central Bank of Peru); Alessandro Tomarchio (University of Michigan, Ann Arbor and Central Bank of Peru) |
| Abstract: | Government-backed business loan programs have commonly been used as a policy tool for mitigating the impact of adverse scenarios such as the recent pandemic. However, the effects of these policies on micro, small and medium enterprises remain unclear, particularly in developing countries. Using firmlevel data and a Fuzzy Regression Discontinuity Design, we studied the impact of a large credit support program deployed in Peru in 2020 (Reactiva Perú). We examined real outcomes such as employment, sales, and survival. A positive and significant effect of the Reactiva loans on the number of employees was found; this effect continues to linger three years after the pandemic. |
| Keywords: | government-backed loans; regression discontinuity; small and medium-sized enterprises; developing country; business loans; crisis |
| JEL: | H81 E26 H32 G20 |
| Date: | 2024–09–26 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp20-2024 |
| By: | Timo Boppart; Per Krusell; Jonna Olsson |
| Abstract: | A production efficiency perspective naturally leads to the prescription that more productive individuals should work more than less productive individuals. Yet, systematic differences in actual hours worked across high- and low-wage individuals are barely noticeable. We highlight that the insurance available to households is an important determinant behind this fact. Using a dynamic heterogeneous-agent model with insurance frictions, income effects calibrated to match aggregate hours across time and space, and financial frictions that deliver realistic wealth dispersion, we report stark effects of insurance: perfect insurance would raise aggregate labor productivity by 9.6 percent and decrease hours worked by 7.7 percent. |
| JEL: | E0 E2 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32977 |
| By: | Guilio Fella; Martin B. Holm; Thomas M. Pugh |
| Abstract: | We use administrative data for Norway to estimate an incomplete-market life-cycle model of retired singles and couples with a bequest motive, health-dependent utility, and uncertain longevity and health. We allow the parameters of the bequest utility to differ between households with and without offspring. Our estimates imply a very strong utility of residual wealth (bequest motive), in line with the estimates by Lockwood (2018). The bequest motive accounts for approximately three-quarters of aggregate wealth at age 85. More surprisingly, we estimate similar utility of residual wealth for households with and without offspring. We interpret this as, prima facie, evidence that the utility of residual wealth represents forces beyond an altruistic bequest motive. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:bbq:wpaper:0008 |
| By: | Ella Getz Wold; Knut Are Aastveit; Eirik Eylands Brandsaas; Ragnar Enger Juelsrud; Gisle James Natvik |
| Abstract: | We use Norwegian micro data and a life-cycle model with housing to study how wealth transmits across generations through the housing market. A mediation analysis reveals large housing gaps based on parental wealth. A shift-share IV-analysis using stock market returns supports a causal interpretation. Using the timing of intra-family deaths, we further show that housing outcomes when young are important determinants of later-in-life wealth. Nearly 15% of intergenerational wealth persistence occurs through the housing market, making housing equally important as the combined impact of parental wealth via a broad range of offspring characteristics, including income and education. |
| Keywords: | Housing market, intergenerational wealth, wealth inequality |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:bbq:wpaper:0013 |
| By: | Congressional Budget Office |
| Abstract: | This report examines changes in the distribution of family wealth from 1989 to 2022. Building on earlier work, CBO used an expanded measure of wealth that includes families’ projected Social Security benefits. Over the 33-year period, family wealth was unevenly distributed, and wealth inequality—measured as the share of wealth held by families in the top 10 percent of the wealth distribution—increased. Wealth was less equally distributed in all years covered by the analysis if future income from Social Security benefits is excluded from the measure of wealth. |
| JEL: | D14 D31 |
| Date: | 2024–10–02 |
| URL: | https://d.repec.org/n?u=RePEc:cbo:report:60343 |
| By: | K. R. Shanmugam (Director and Professor (Corresponding Author), Madras School of Economics, Gandhi Mandapam Road, Chennai); P.S. Renjith (Assistant Professor, Gulati Institute of Finance and Taxation, India) |
| Abstract: | This study analyzes the sustainability and the threshold level of public debt in Karnataka using the modern time series methods and threshold regression method. The results of the study indicate that Karnataka’s public debt level is unsustainable, and its debt sustainability threshold is about 20 percent. Since Karnataka’s debt is negatively related to growth, the state should control its debt to a sustainable level. The simulation exercise based on the debt dynamics of the state suggests that the state GSDP (nominal) should grow at 14 percent and the fiscal deficit target should be 2 percent from 2024-25 onwards to attain the debt sustainability target in 2028-29 and with 13 percent growth the state could reach the target in 2030-31. The relevant policy strategy for the state is to increase its revenue-GSDP ratio by 1 percent. |
| Keywords: | sustainability, threshold value, public debt, FRBM, debt solvency, Karnataka |
| JEL: | Q54 H63 C23 D72 |
| Date: | 2024–04 |
| URL: | https://d.repec.org/n?u=RePEc:mad:wpaper:2024-256 |
| By: | Carlos Alba; Julio A. Carrillo; Raúl Ibarra |
| Abstract: | This paper analyzes, using a VAR model, the effects of US central bank monetary policy announcements, and information shocks from this authority regarding its economic outlook on Mexican financial and macroeconomic variables. Shocks are identified by combining a high-frequency strategy with sign restrictions, which exploits the co-movement between the policy rate and the stock market in the US around FOMC announcements. A restrictive monetary policy shock in the US is identified by an increase in the interest rate and a drop in stock prices, while a positive information shock is identified when both variables rise simultaneously. The results show that positive information shocks from the US central bank improve financial conditions in Mexico, appreciate the peso/dollar exchange rate, lower the sovereign risk premium and forex volatility, and increase stock prices, real activity and prices in Mexico. In contrast, restrictive US monetary policy shocks tighten financial conditions, and reduce real activity and prices in Mexico. |
| Keywords: | Monetary policy;international policy transmission;high-frequency identification;central bank information;VAR model |
| JEL: | E43 E52 E58 F42 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bdm:wpaper:2024-14 |
| By: | Rajeswari Sengupta (Indira Gandhi Institute of Development Research); Harsh Vardhan; Akhilesh Verma (ESRI & Trinity College) |
| Abstract: | This paper explores the role of bank capital in monetary policy transmission within the Indian economy, where the banking sector is the primary channel for financial intermediation. Using a panel dataset of 18 commercial banks from 2002 to 2018, we assess how varying levels of bank capital influence monetary policy transmission. Our findings reveal that though monetary contractions reduce credit growth, yet banks holding higher capital show significantly lower sensitivity to monetary policy changes compared to those with lower capital. This effect is stronger in well-capitalized private sector banks. Our results suggest that bank capital helps mitigate the adverse impact of higher interest rates on credit supply, thereby weakening the overall effectiveness of monetary transmission. However, the buffering effect of bank capital on credit growth diminishes during periods of high nonperforming assets (NPAs). These results highlight the Reserve Bank of India's challenge in balancing financial stability with effective monetary policy implementation. |
| Keywords: | Bank capital, Monetary transmission, Balance sheet channel, Non-performing assets, Public-sector banks |
| JEL: | E4 E5 G2 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:ind:igiwpp:2024-019 |
| By: | Luca Benati, Juan-Pablo Nicolini |
| Abstract: | We revisit the estimation of the welfare costs of inflation originating from lack of liquidity satiation for 11 low-inflation and 5 high-inflation countries, and for Weimar Republic’s hyperinflation. Our evidence suggests that, contrary to the implicit assumption in much of the literature, these costs are far from negligible. For the U.S. our point estimates are equal to about one-third of those computed by Lucas (2000), and an order of magnitude larger than those obtained by Ireland (2009). Crucially, the most empirically plausible moneydemand functional form points towards sizeable ‘upward risks’ for these costs, with the 90% confidence interval associated with a 4% nominal interest rate stretching beyond 0.5 per cent of GDP. The welfare costs of inflation in the Euro area are about twice as large as in the U.S., thus suggesting that, ceteris paribus, the inflation target should be materially lower. At the peak of the inflation episodes, welfare costs had ranged between 0.3 and 1.9 per cent of GDP for low-inflation countries; between 4 and nearly 7 per cent for highinflation ones; and between 26 and 36 per cent for Weimar’s hyperinflation. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:ube:dpvwib:dp2408 |
| By: | Rohan Kekre; Moritz Lenel |
| Abstract: | We study the source of exchange rate fluctuations using a general equilibrium model accommodating shocks in goods and financial markets. These shocks differ in their induced comovements between exchange rates, interest rates, and quantities. A calibration matching data from the U.S. and G10 currency countries implies that persistent shocks to relative demand, reflected in persistent interest rate differentials, account for 75% of the variance in the dollar/G10 exchange rate. Shocks to currency intermediation are important, however, in generating deviations from uncovered interest parity at high frequencies and explaining the dollar appreciation in crises. |
| JEL: | E44 F31 G15 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32976 |