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on Financial Development and Growth |
| By: | Chakraborty, Pavel; Mitra, Nirvana |
| Abstract: | New liberalization policies are rapidly globalizing financial services in developing countries, but there is little or no microeconomic evidence on the impact of banking reforms on the real economy. We examine the impact of a banking sector reform characterized by the introduction of new domestic private and/or foreign banks on Indian manufacturing firms' access to credit, performance and the resulting misallocation in the Indian economy using a unique firm-bank matched data. We find that the introduction of new banks led to (i) increase in access to credit by 18–-23% for big firms (top 25 percentile of size distribution); (ii) reduction in access to loans for small firms (bottom 25th percentile) by around 45%; and (iii) increase in profit, total sales for big firms. Next, we follow Hsieh and Klenow (2009) and estimate the distortions arising out of the capital and output market and show that the banking reforms significantly relaxed the credit constraints only for the big and more productive firms, resulting in reduced capital market misallocation. Finally, our counterfactual experiment shows that the reallocation of credit led to an overall gain in manufacturing output by 0.15--1.1%. |
| Keywords: | Banking Reforms, Private and/or Foreign Banks, Big Firms, Cream Skimming, Misallocation |
| JEL: | G1 G21 L25 O47 |
| Date: | 2021–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:111221&r= |
| By: | Ibrahim A. Adekunle (Ilishan-Remo, Ogun State, Nigeria); Olumuyiwa G. Yinusa (Olabisi Onabanjo University, Ago-Iwoye, Nigeria); Tolulope O. Williams (Olabisi Onabanjo University, Ogun State, Nigeria); Rahmon A. Folami (Olabisi Onabanjo University, Ogun State, Nigeria) |
| Abstract: | While it is clear that financial depth and economic diversity are prerequisites for the realisation of growth and development objectives, heterogeneous factors that determines financial development remains imperfectly understood. This ambiguity in the structural relations between varied causative factors is more pronounced in Africa where conditions for growth and development remains inadequately met. Underexplored aspects such as geographic, political, economic and macroeconomic policy determinant of financial development in Africa could have culminated into the misalignment of the continent financialisation strategies. This paper takes the lead, diverse and holistic approach to assign numerical weights to these unobserved factors to reach conclusions that can redefine policy and research on Africa's financialisation objectives. We compared result along with the mean group (MG), common correlated effect mean group (CCEMG) and Augmented Mean Group (AMG) estimators but relied on the AMG results because of its high precision, relevance and superiority in addressing core issues of cross-sectional dependence and slope homogeneity of regressors.Based on the AMG results, we found geographic, economic and macroeconomic policy factors to lead to financial development in Africa. However, our political/institutional composite index inversely relate to financial development in Africa. This counter-intuitive outcome could be due to Africa, age-long weak institutional capacities. Policy implications were discussed. |
| Keywords: | Financial Development; Geography; Institutions; Macroeconomic Policy; Africa |
| JEL: | D02 G20 P34 Q56 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:abh:wpaper:21/054&r= |
| By: | Hlongwane, Nyiko Worship; Mmutle, Tumelo Donald; Daw, Olebogeng David |
| Abstract: | This study investigates the relationship between foreign direct investment and economic growth in SADC region from 2000 to 2019. The study utilises panel data spanning from 2000 to 2019 sourced from the World Bank. The study employs a panel ARDL and panel Error Correction Model to analyse the relationship between foreign direct investment and economic growth in SADC region. The statistical results revealed a positive statistically significant short run relationship and negative statistically significant long run relationship between foreign direct investment and economic growth. |
| Keywords: | Foreign Direct Investment (FDI), Economic Growth, Error Correction Model, SADC, Panel ARDL model |
| JEL: | C01 C22 E41 F15 F43 R11 |
| Date: | 2021–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:111008&r= |
| By: | Simplice A. Asongu (Yaounde, Cameroon); Christelle Meniago (Sol Plaatje University, South Africa); Raufhon Salahodjaev (Tashkent, Uzbekistan) |
| Abstract: | This study investigates: (i) the effect of foreign direct investment (FDI) on total factor productivity (TFP) and economic growth dynamics, and (ii) the relevance of value added from three economic sectors in modulating the established effect of FDI on TFP and economic growth dynamics. The geographical and temporal scopes are respectively 25 Sub-Saharan African countries and the period 1980–2014. The empirical evidence is based on non-interactive and interactive Generalised Method of Moments. The following main findings are established. First, FDI has a positive effect on GDP growth, GDP per capita and welfare real TFP. Second, the effect of FDI is negative on real GDP and TFP, while the impact is insignificant on real TFP growth and welfare TFP. Third, values added to the three economic sectors largely modulate FDI to produce negative net effects on TFP and growth dynamics. Policy implications are discussed with particular emphasis on the need to complement added value across various economic sectors in order to leverage on the benefits of FDI in TFP and economic growth. To the best of knowledge, this is the first study to assess how value added from various economic sectors affect the relevance of FDI on macroeconomic outcomes. |
| Keywords: | Economic output, total factor productivity, foreign investment, agricultural sector, manufacturing sector, service sector, sub-Saharan Africa |
| JEL: | E23 F21 F30 F43 O55 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:exs:wpaper:21/088&r= |
| By: | Yahyaoui, Ismahen |
| Abstract: | Unlike previous studies in the Foreign Direct Investment-economic growth literature, this study uses the panel vector autoregressive (PVAR) model to examine the role of corruption in inhibiting the effect of Foreign Direct Investment on the African economic growth. Furthermore, we use the impulse response function tool to better understand the reaction of economic growth, after shock on Foreign Direct Investment and the interaction between Foreign Direct Investment and Corruption. Using data over the period 1996–2016, this research results show that the Foreign Direct Investment promotes the African economic growth. While corruption mitigates this effect. Therefore, the implications of this paper are that public policies should aim to minimize the level of corruption in order to ameliorate the attractiveness of FDI and ensure its efficient utilization in order to give strength to the level of economic growth. |
| Keywords: | corruption, FDI, economic growth |
| JEL: | A1 |
| Date: | 2021–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:111190&r= |
| By: | Manuel David Cruz; Ashish Kumar Sedai |
| Abstract: | This study looks at the relationship between corruption and foreign direct investment (FDI) in natural resources using a panel of 20 Latin American countries from 1995-2019. We find that lower levels of corruption have a positive and significant impact on resource FDI supporting the grabbing hand hypothesis. A one-point increase in the Corruption Perception Index (CPI) is associated with an increase between 52-57 million dollars across models with varying controls. Results also show a nonlinear relationship between CPI and resource FDI, suggesting that when a country becomes less corrupt and improves its economic, social and political performance, it usually attracts more resource FDI. The analysis is robust to alternate measures of corruption (CPI, ICRG, and WGI) and different specifications of the dynamic panel model. Finally, the study highlights significant precautions and pre-conditions required to increase economic development when attracting natural resource-based FDI. |
| Keywords: | Foreign direct investment, corruption, natural resources, grabbing hand, Latin America |
| JEL: | F23 F21 E02 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2021-98&r= |
| By: | Yildiz, Savas |
| Abstract: | Chapter 1 provides an introduction and preliminary comparisons of economic and human development indicators to present current differences in levels of development between different countries grouped by their income level. Since World War II foreign aid has proved to be one of the main instruments for the developed countries to promote and increase economic development in less developed parts of the world. Chapter 2 will give a brief chronological overview of economic theories about economic growth and development and highlight recent approaches in development research. It will be shown that the focus of development policies has changed several times since its emergence. Given positive and negative growth experiences in developing countries, the development research literature is still inconclusive concerning the effects of development assistance and foreign aid on economic development. The gap in economic performance between developing and developed countries remains considerable, even in the face of constant flows of foreign aid and continuously changing policy prescriptions addressing pressing issues and obstacles of development. Chapter 3 uses sub-nationally disaggregated data to assess the importance of recipient countries' governance on the allocation of aid projects within recipient countries. The results show that incumbent presidents' birth regions do not signiffcantly attract more project aid than other regions in a country. Accounting for levels of governance in recipient countries does not change the results. On the other hand, capital city regions appear to attract more project aid. Higher levels of governance seem to have a negative effect on the allocation of aid projects in capital city regions, which might be driven by clientelistic and corrupt motives of political decision makers. Considering the results from the research literature and from Chapter 3 one may wonder how different sub-national distributional patterns of aid projects and foreign aid influence regional and spatial inequalities within recipient countries. If the sub-national allocation of foreign aid follows certain ethnic, political or economic considerations, instead of addressing poverty or alleviating human misery, then foreign aid might further deepen regional inequalities in recipient countries. Thus, Chapter 4 first elaborates on different theories and highlights existing empirical evidence about regional inequality. The chapter additionally presents trends and levels of different measures of regional inequality in sub-Saharan Africa. Chapter 5 assesses the relationship between foreign aid and regional inequality. First, different measures of regional inequality and necessary considerations for proper interpretation are discussed. Secondly, using sub-nationally disaggregated GDP data these measures of regional inequality in sub-Saharan Africa are calculated to further discuss their patterns and levels over the years 1998 to 2015. The data shows that regional inequalities vary largely within and between countries and that the pattern is on average highly persistent in the entire sample. The empirical analysis to understand the effects of foreign aid on regional inequality first provides estimation results using a static panel estimation approach. However, due to serious endogeneity concerns, especially between foreign aid and regional inequality, these results need to be taken cautiously. The empirical analysis further uses dynamic panel estimation methods such as system GMM to account for endogeneity issues and for the high persistence of regional inequalities. The results indicate that foreign aid does not increase regional inequalities, but instead even reduces regional inequalities in some specifications. Interestingly, higher trade ratios significantly reduce regional inequalities in all specifications. Furthermore, the estimation using the decomposition of regional inequalities by within and between capital and non capital city regions could not detect any significant effects in almost all specifications. This results from the limited instrument set due to fewer countries in the sample and the higher persistence of within and between regional inequalities. As a results, the analysis provides no support for the assumption that foreign aid increases regional inequalities. The uneven distribution of aid projects sub-nationally does not appear to affect overall regional inequalities. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:dar:wpaper:129988&r= |
| By: | Tang, Keyi |
| Abstract: | When development finance becomes available to weak states, which parts of the state will receive the windfall gains? Development finance does not always reach the people who need it the most, both within and across countries. In this research, Keyi Tang examines how donors' preferences and recipient countries' regime types affect the subnational distribution of development finance. By combining a large-N analysis of Chinese and World Bank's loans and grants to 48 African countries between 2000-2012 and small-N case studies of a hybrid regime, Zambia, and an autocratic regime, Ethiopia, Keyi finds that domestic politics play a bigger role than donors' conditionality in development finance allocation. The more democratic a regime is, the more likely co-ethnic regions of the incumbent leader are to receive finance from both China and the World Bank. Democracy may not always help prevent clientelism but may actually facilitate it under weak institutions. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cariwp:202145&r= |
| By: | Amendolagine, Vito |
| Abstract: | As the world becomes more and more integrated, participating in global production fragmentation by connecting to global value chains (GVCs) can provide a "golden" opportunity for developing countries to access international markets and boost economies. Vito Amendolagine analyses the extent to which international development lending can support African countries in trading intermediate goods with foreign partners with the goal of further specializing in high value-added activities within cross-national production networks. Based on his research, it appears that Chinese lending increases the involvement of borrowing countries in the international trade of intermediate goods, while World Bank loans contribute to move African countries toward higher valued added activities along international production chains. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cariwp:202148&r= |
| By: | Munemo, Jonathan |
| Abstract: | As Chinese loans to Africa have been on an upward trajectory for more than a decade, there are questions about the economic consequences that large scale borrowing from China has on African economies. Jonathan Munemo investigates the impact these rising loans have on entrepreneurship and finds that African countries with a higher percentage of economic infrastructure loans have greater entrepreneurship in the form of new business startups. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cariwp:202146&r= |
| By: | Otaviano Canuto |
| Abstract: | Macroeconomic dynamics in the U.S. economy has increasingly become associated with asset price fluctuations in the past few decades. Financial conditions have increasingly become an influential factor shaping the cyclical pace of the macroeconomy. There has been a mismatch between rising financial wealth and the pace of creation and incorporation of new assets. Several secular stagnation hypotheses offer explanations for the insufficient creation of new assets. Public debt—and its partial monetization by central banks—has played a stabilizing role by boosting the net supply of assets available to accommodate the demand for financial assets. The U.S. big balance sheet economy has been on a growth path highly dependent on the continuity of low real interest rates, as well as stretched price-earnings ratios of stocks and high corporate debt. Periodic episodes of downward adjustment of asset prices have been countervailed with lax monetary policies. |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:ocp:ppaper:pb21-29&r= |
| By: | Dhruv Rawat; Sujay Patni; Ram Mehta |
| Abstract: | The objective of this paper is to find the existence of a relationship between stock market prices and the fundamental macroeconomic indicators. We build a Vector Auto Regression (VAR) model comprising of nine major macroeconomic indicators (interest rate, inflation, exchange rate, money supply, gdp, fdi, trade-gdp ratio, oil prices, gold prices) and then try to forecast them for next 5 years. Finally we calculate cross-correlation of these forecasted values with the BSE Sensex closing price for each of those years. We find very high correlation of the closing price with exchange rate and money supply in the Indian economy. |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2112.08071&r= |
| By: | Yusuf, Ismaila Akanni; Salaudeen, Mohammed Bashir; Agbonrofo, Hope |
| Abstract: | The study examines the effect of the social and economic indicators on the stock market performance in Nigeria between 1981 and 2019. The study employs secondary data from the World Bank and Central Bank of Nigeria using the ordinary least squares as the technique of estimation. Findings show that regarding the economic drivers, interest rate, exchange rate, and inflation rate negatively impact the stock market while only income exerts a positive impact. However, both income and interest rate are significant economic drivers of stock performance. Regarding social drivers, life expectancy, poverty, and population exert a positive impact on stock performance. Similarly, both life expectancy and population are significant social drivers of stock market performance in Nigeria. The study recommends that monetary authorities should be cautious in avoiding discretionary policies that might hike the exchange rate; otherwise, the flow of funds to the stock market will be derailed. Also, the fiscal authority should invest massively in safety nets programmes to enhance the capacity of the growing population and reduce poverty. |
| Keywords: | Economic Drivers, Social Drivers, Stock Market, Nigeria. |
| JEL: | C1 E5 G1 G12 |
| Date: | 2021–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:111086&r= |
| By: | Benjamin Gardner; Chiara Scotti; Clara Vega |
| Abstract: | While the literature has already widely documented the effects of macroeconomic news announcements on asset prices, as well as their asymmetric impact during good and bad times, we focus on the reaction to news based on the description of the state of the economy as painted by the Federal Open Market Committee (FOMC) statements. We develop a novel FOMC sentiment index using textual analysis techniques, and find that news has a bigger (smaller) effect on equity prices during bad (good) times as described by the FOMC sentiment index. Our analysis suggests that the FOMC sentiment index offers a reading on current and future macroeconomic conditions that will affect the probability of a change in interest rates, and the reaction of equity prices to news depends on the FOMC sentiment index which is one of the best predictors of this probability. |
| Keywords: | Monetary policy; Public information; Probability of a recession; Price discovery |
| JEL: | C53 D83 E27 E37 E44 E47 E50 G10 |
| Date: | 2021–11–18 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2021-74&r= |
| By: | Deni Irawan (Institute for Economic and Social Research, Faculty of Economics and Business, Universitas Indonesia (LPEM FEB UI); Crawford School of Public Policy, Australian National University, Australia; Centre for Applied Macroeconomic Analysis (CAMA), Australian National University, Australia); Tatsuyoshi Okimoto (Crawford School of Public Policy, Australian National University, Australia; Research Institute of Economy, Trade and Industry (RIETI), Japan; Centre for Applied Macroeconomic Analysis (CAMA), Australian National University, Australia) |
| Abstract: | Capital structure is one of the most critical decisions for firms in business. This study examines the role of macro (economic and non-economic) uncertainties in affecting firms’ capital structure management. Three prominent capital structure theories are tested for global resource firms: (1) static trade-off, (2) pecking order, and (3) market timing theory. The results suggest that no single theory prevails, although both pecking order and market timing theories have certain explanatory power to explain sample firms’ financing behaviour. The pecking order theory is strongly supported by the results of the leverage target adjustment model. However, the downward cyclical patterns of pecking order coefficients suggest that the resource firms tend to choose debt financing less and less over time, particularly after 2008. The market timing theory holds strong, as indicated by the significance of macro condition (uncertainties) variables in determining sample firms’ capital structure, especially after 2008 and for non-renewable firms. However, the main proxies of the cost of debt are not statistically significant. In conclusion, this study finds that resource firms have a particular pecking order preference when they need financing, and the influence of macro uncertainties are vital in determining their capital structure. |
| Keywords: | capital structure — trade-off theory — pecking order theory — market timing theory — macro uncertainties |
| JEL: | E32 G32 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:lpe:wpaper:202168&r= |
| By: | Sanghamitra W. Mukherjee; Lauren F. Bergquist; Marshall Burke; Edward Miguel |
| Abstract: | Access to microcredit has been shown to generate only modest average benefits for recipient households. We study whether other financial market frictions—in particular, lack of access to a safe place to save—might limit credit's benefits. Working with Kenyan farmers, we cross-randomize access to a simple savings product with a harvest-time loan. Among farmers offered a loan, the additional offer of a savings lockbox increased farm investment by 11% and household consumption by 7%. Results suggest that financial market frictions can interact in important ways and that multifaceted financial access programs might unlock dynamic household gains. |
| JEL: | G50 O13 O16 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29542&r= |
| By: | Falk Bräuning; José Fillat; Gustavo Joaquim |
| Abstract: | Credit availability from different sources varies greatly across firms and has firm-level effects on investment decisions and aggregate effects on output. We develop a theoretical framework in which firms decide endogenously at the extensive and intensive margins of different funding sources to study the role of firm choices on the transmission of credit supply shocks to the real economy. As in the data, firms can borrow from different banks, issue bonds, or raise equity through retained earnings to fund productive investment. Our model is calibrated to detailed firm- and loan-level data and reproduces stylized empirical facts: Larger, more productive firms rely on more banks and more sources of funding; smaller firms mostly rely on a small number of banks and internal funding. Our quantitative analysis shows that bank credit supply shocks lead to a sizable reduction in aggregate output, with substantial heterogeneity across firms, due to the lack of substitutability among alternative credit sources. Finally, we show that our insights have important implications for the validity of standard empirical methods used to identify credit supply effects (Khwaja and Mian 2008). |
| Keywords: | shock transmission; bank-firm matching; firm financing; credit supply shocks |
| JEL: | E32 E43 E50 G21 G32 |
| Date: | 2021–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:93553&r= |
| By: | Falk Bräuning; Viacheslav Sheremirov |
| Abstract: | We study the transmission channels through which shocks affect the global economy and the cross-country comovement of real economic activity. For this purpose, we collect detailed data on international trade and financial linkages as well as domestic macro and financial variables for a large set of countries. We document significant international output comovement following U.S. monetary shocks, and find that openness to international trade matters more than financial openness in explaining cross-country spillovers. In particular, output in countries with a high share of exports and imports responds to U.S. monetary shocks significantly more than output in countries with a low share, whereas we do not find material heterogeneity depending on international investment positions or financial flows in the balance of payments. We further document strong network amplification associated with the patterns of bilateral trade flows, as indirect spillovers account for nearly half of the total effect. Studies that do not account for direct bilateral linkages between national economies — and the indirect linkages through the network they form – may thus present an incomplete view of international business cycles. |
| Keywords: | financial linkages; international spillovers; monetary shocks; trade networks |
| JEL: | E52 F42 F44 G15 |
| Date: | 2021–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:93549&r= |
| By: | Galip Kemal Ozhan |
| Abstract: | How does news about future economic fundamentals affect within-country and cross-country credit allocation? How effective is unconventional policy when financial crises are driven by unfulfilled favorable news? I study these questions by employing a two-sector, two-country macroeconomic model with a financial sector in which financial crises are associated with occasionally binding leverage constraints. In response to positive news on the valuation of non-traded sector capital that turns out to be incorrect at a later date, the model captures the patterns of financial flows and current account dynamics in Spain between 2000-2010, including the changes in the sectoral allocation of bank credit and movements in cross-country borrowing during the boom and the bust. When there are unconventional policies by a common authority in response to unfulfilled favorable news, liquidity injections perform better in ameliorating the downturn than direct assets purchases from the non-traded sector. |
| Keywords: | Central bank research; Digital currencies and fintech |
| JEL: | E44 F32 F41 G15 G21 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:21-66&r= |
| By: | Bao-We-Wal Bambe (CERDI - Centre d'Études et de Recherches sur le Développement International - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne) |
| Abstract: | This paper analyses the effect of inflation targeting on private domestic investment in developing countries. Using the propensity scores matching method, which allows addressing the self-selection bias in the policy adoption, I find that inflation targeting has increased private domestic investment from 2.05 to 2.53 percentage points in targeting countries compared to nontargeting countries. The estimated coefficients are economically meaningful and robust to a battery of econometric tests and alternative specifications. Finally, I highlight several heterogeneities in the effect of inflation targeting, depending on various factors. |
| Keywords: | E51,E52,E58,590,E62,E220,Inflation targeting,Private domestic investment,Developing countries,Propensity score matching |
| Date: | 2021–12–14 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03479679&r= |
| By: | Ogawa, Toshiaki |
| Abstract: | This study examines how micro- and macro-prudential policies work and interact with each other over the credit cycles using a dynamic general equilibrium model of financial intermediaries. Micro-prudential policies restrict the excess risk-taking of individual institutions, while taking real interest rates (prices) as given. By contrast, macro prudential policies control the aggregate credit supplied (equilibrium outcome) by internalizing prices or the general equilibrium effect. The proposed model indicates that: (i) micro-prudential policy alone cannot completely remove inefficient credit cycles; (ii) when macro-prudential policy is conducted jointly with the micro-prudential one, policymakers can improve banks' credit quality and remove inefficient credit cycles completely without sacrificing the total credit supply; and (iii) the contributions of micro and macro-prudential policies to the improvement in social welfare are roughly comparable. |
| Keywords: | Micro-prudential policy; Macro-prudential policy; Moral hazard problem; General equilibrium; Inefficient credit cycles |
| JEL: | E0 E44 G01 G21 G28 |
| Date: | 2022–01–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:111378&r= |
| By: | Leonello, Agnese; Mendicino, Caterina; Panetti, Ettore; Porcellacchia, Davide |
| Abstract: | Does the level of deposits matter for bank fragility and efficiency? In a banking model with endogenous bank runs and a consumption-saving decision, we show that the level of deposits has opposite effects on bank fragility depending on the nature of bank runs. In an economy with panic-driven runs, higher deposits make banks less fragile, while the opposite is true when runs are only driven by fundamentals. The effect of deposits is not internalized by depositors. A saving externality arises, leading to excessive fragility and insufficient liquidity provision. The economy features under-saving when runs are panic driven, and over-saving when fundamental driven. JEL Classification: G01, G21, G28 |
| Keywords: | endogenous bank runs, fundamental runs, liquidity provision, panic runs, saving externality |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20222636&r= |
| By: | Wang, Ruting; Althof, Michael; Härdle, Wolfgang |
| Abstract: | This paper develops a new risk meter specifically for China - FRM@China - to detect systemic financial risk as well as tail-event (TE) dependencies among major financial institutions (FIs). Compared with the CBOE FIX VIX, which is currently the most popular financial risk measure, FRM@China has less noise. It also emitted a risk signature much earlier than the CBOE FIX VIX index in the 2020 COVID pandemic. In addition, FRM@China uses a single quantile-lasso regression model to allow both the assessment of risk transfer between different sectors in which FIs operate and the prediction of systemic risk. Because the risk indicator in FRM@China is based on penalization terms, its relationship with macro variables are unknown and non-linear. This paper further expands the existing FRM approach by using Shapley values to identify the dynamic contribution of different macro features in this type of "black box" situation. The results show that short-term interest rates and forward guidance are significant risk drivers. This paper considers the interaction among FIs from mainland China, Hong Kong and Taiwan to provide an enhanced regional tool set for regulators to evaluate financial policy responses. All quantlets are available on quantlet.com. |
| Keywords: | FRM (Financial Risk Meter),Lasso Quantile Regression,Financial Network,China,Shapley value |
| JEL: | C30 C58 G11 G15 G21 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:irtgdp:2021022&r= |
| By: | Jorge E. Galán (Banco de España) |
| Abstract: | This document proposes an aggregate early-warning indicator of systemic risk in the banking sector. The indicator is derived from a logistic model based on the variables in the CAMELS rating system, originally developed for the US, and complemented with macroeconomic aggregate variables. The model is applied to the Spanish banking sector using bank-level data for a complete financial cycle, from 1999 to 2021. The performance of the model is assessed not only during the last global financial crisis and the subsequent sovereign crisis, but also during the recent Covid-19 shock. The proposed indicator has a macroprudential orientation, which differs from most of previous studies predicting individual bank defaults. The indicator is found to provide accurate early-warning signals of systemic risk in the banking sector within a two-year horizon. In this context, the indicator provides mid-term signals of systemic risk that complement those derived from macrofinancial indicators and from measures of the materialization of risk. |
| Keywords: | banks, defaults, early-warning performance, macroprudential policy, systemic risk |
| JEL: | C25 E32 E58 G01 G21 |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:2132&r= |