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on Financial Development and Growth |
| By: | GUEI, KORE MARC ANTOINE |
| Abstract: | Economists and policy makers have argued about the role of financial structure on economic development. The bank-based, the market-based, and the financial services view are the three competing views of financial structure. Stock market development and the banking sector are regarded as avenues through which growth can be supported by providing liquidity for firm financing. Hence establishing the contribution of the financial structure on economic performance in South Africa is of crucial importance to policy makers and government officials. The study utilizes the autoregressive distributed lag model for econometric estimation. The data set covers the period 1975-2016. The results indicate financial structure does not matter for economic growth in South Africa. The results are robust to several sensitivity tests. The findings support the view that government should place an emphasis on improving the quality of the financial system as opposed to developing a particular financial system. The contribution to the existing literature is that the results support the financial services theory. Thus, financial structure does not matter for economic development even for an emerging country like South Africa which is predominantly market based. The implication of the results is that there is the need to enhance the quality of financial services to create real economic growth in South Africa. |
| Keywords: | Economic growth, Financial structure, Autoregressive distributed lag model. |
| JEL: | G1 G10 G2 G23 |
| Date: | 2018–12–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:92823&r=all |
| By: | Pablo A. Guerron-Quintana (Boston College and Espol); Tomohiro Hirano (University of Tokyo); Ryo Jinnai (Hitotsubashi University) |
| Abstract: | Some financial crises are preceded by the collapse of bubbles and followed by a long-lasting economic slump, the Great Recession being a recent example. To account for these features in the data, we develop a novel model of recurrent bubbles with endogenous growth, infinitely lived households, and financial frictions. Bubbles, once realized, promote economic growth because they provide liquidity to constrained investors. On the other hand, expectations about future bubbles crowd out investment, thereby reducing economic growth. With these competing e¤ects, the overall impact of recurrent bubbles, especially high-frequency bubbles, on economic growth and welfare depends on economic fundamentals. In economies with relatively developed (under-developed) financial markets, recurrent bubbles reduce (raise) the average economic growth and welfare compared to those situations where bubbles never materialize. We exploit these insights to map our model to the U.S. data for the period 1984 - 2017. The main findings from the empirical exercise are: 1) there is evidence of recurrent bubbles; 2) the asset price bubble fueled growth in the pre-Great Recession years; and 3) the bursting of the bubble is partially responsible for the post-Great Recession lukewarm recovery. |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf457&r=all |
| By: | Hidehiko Matsumoto (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: hidehiko.matsumoto@boj.or.jp)) |
| Abstract: | This paper develops a quantitative small-open-economy model to assess the optimal pace of foreign reserve accumulation by emerging and developing countries. In the model, reserve accumulation depreciates the real exchange rate and attracts foreign direct investment (FDI) inflows, which promotes productivity growth through endogenous firm dynamics. The economy is also subject to sudden stops in the form of an occasionally binding constraint on foreign borrowing, and accumulated reserves are used to prevent severe economic downturns. The model shows that two factors are the key determinants of the optimal pace of reserve accumulation: the elasticity of the foreign borrowing spread with respect to foreign debt, and the entry cost for FDI entry. The model suggests that these two factors can explain a substantial amount of the cross-country variation in the observed pace of reserve accumulation. |
| Keywords: | Foreign Reserve Accumulation, Foreign Direct Investment, Sudden Stops, Endogenous Growth, Real Exchange Rate, Gross Capital Flows |
| JEL: | F23 F31 F32 F41 F43 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:19-e-04&r=all |
| By: | Tayyar Buyukbasaran; Gokce Karasoy Can; Hande Kucuk |
| Abstract: | This paper aims to identify credit supply shocks and analyse their macroeconomic effects in Turkey. For this purpose, we use a Bayesian Structural Vector Autoregression (SVAR) with sign and zero restrictions. We focus on the impact of credit supply shocks on real GDP growth and highlight how the size of this impact changes when we explicitly account for the effects of capital inflows on credit conditions. Hence, our results confirm the importance of external finance for credit supply in Turkey. Our main findings are robust to some alternative data choices, prior selections as well as some alternative identifying restrictions. |
| Keywords: | Credit supply shocks, SVAR, Bayesian VAR, Sign and zero restrictions |
| JEL: | C11 C32 E52 F41 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1906&r=all |
| By: | Simone Lenzu (NYU Stern); Francesco Manaresi (Bank of Italy) |
| Abstract: | Using micro-data on firm-specific borrowing costs and wages, we demonstrate that distortions in firms’ policies can be empirically measured using firm-level gaps between marginal revenue products and user costs (MRP-cost gaps). We estimate MRP-cost gaps for 4.7 million firm-year observations in Italy between 1997 and 2013: their variation is closely related to the extent of credit and labor market frictions. Using the MRP-cost gaps, we assess the scope of input misallocation in Italy, and its impact on aggregate output and total factor productivity (TFP). The Italian corporate sector could produce 6% to 8% more output by reallocating resources toward higher-value users. Output losses from misallocation are larger (i) during episodes of financial instability, (ii) in non-manufacturing industries, (iii) in areas with less developed institutions and (iv) among high-risk firms. We highlight an important gain/risk tradeoff: gains from reallocation might come at the expense of increasing aggregate financial fragility, because maximizing reallocation gains requires a transfer of resource from large, old, and low-risk firms toward small, young, and high-risk firms. |
| Keywords: | total factor productivity, economic development, policy distortions |
| JEL: | O16 O40 E24 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_485_19&r=all |
| By: | Matteo Mogliani |
| Abstract: | We propose a new approach to mixed-frequency regressions in a high-dimensional environment that resorts to Group Lasso penalization and Bayesian techniques for estimation and inference. To improve the sparse recovery ability of the model, we also consider a Group Lasso with a spike-and-slab prior. Penalty hyper-parameters governing the model shrinkage are automatically tuned via an adaptive MCMC algorithm. Simulations show that the proposed models have good selection and forecasting performance, even when the design matrix presents high cross-correlation. When applied to U.S. GDP data, the results suggest that financial variables may have some, although limited, short-term predictive content. |
| Keywords: | MIDAS regressions, penalized regressions, variable selection, forecasting, Bayesian estimation. |
| JEL: | C11 C22 C53 E37 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:713&r=all |
| By: | Stéphane Lhuissier; Fabien Tripier |
| Abstract: | Using a Markov-switching VAR, we show that the effects of uncertainty shocks on output are four times higher in a regime of economic distress than in a tranquil regime. We then provide a structural interpretation of these facts. To do so, we develop a business cycle model, in which agents are aware of the possibility of regime changes when forming expectations. The model is estimated using a Bayesian minimum distance estimator that minimizes, over the set of structural parameters, the distance between the regime-switching VAR-based impulse response functions and those implied by the model. Our results point to changes in the degree of financial frictions. We discuss the implications of this structural interpretation and show that the expectation effect of regime switching in financial conditions is an important component of the financial accelerator mechanism. If agents hold pessimistic expectations about future financial conditions, then shocks are amplified and transmitted more rapidly to the economy. |
| Keywords: | Uncertainty shocks, Regime switching, Financial frictions, Expectation effects. |
| JEL: | C32 E32 E44 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:714&r=all |
| By: | Yener Altunbaş (Bangor University); John Thornton (Office of Technical Assistance, US Department of the Treasury; Bangor University) |
| Abstract: | In a panel of 121 countries, financial development increases income inequality in high- and lower- income countries across inequality quantiles but promotes greater inequality in upper-middle-income countries. Financial development appears to impact financial inclusion for the poor and rich differently as a country’s income level changes. |
| Keywords: | Income inequality; Financial development; Quantile regression |
| JEL: | D31 D63 F02 O11 O15 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:bng:wpaper:19002&r=all |
| By: | Sergio Mayordomo (Banco de España); Omar Rachedi (Banco de España) |
| Abstract: | We study the effect of rising Chinese import competition in the early 2000s on banks’ credit supply policies. Using bank-firm-level data on the universe of Spanish corporate loans, we exploit heterogeneity across banks in the exposure of their loan portfolios towards firms competing with Chinese imports. Exposed banks rebalanced their loan portfolios by cutting the supply of credit to firms affected by Chinese competition, while raising their lending towards non-exposed sectors. This portfolio reallocation depressed further the economic activity of firms competing with Chinese imports |
| Keywords: | trade shock, credit register, banks’ portfolio reallocation, bank loans, real effects |
| JEL: | G21 G32 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1908&r=all |