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on Financial Development and Growth |
| By: | Carlos Madeira |
| Abstract: | This paper analyses the causal impact of macroprudential policies on growth, using industry-level data for 89 countries for the period 1990 to 2021. The small industry size creates an exogenous identification and avoids reverse-causality. I find that macroprudential tightening measures have a negative impact on manufacturing growth, but only for industries with high external finance dependence. This effect is stronger during banking crises, periods of higher output growth and for advanced economies. The effect is weaker during period of high private credit growth. Growth effects on externally dependent industries are economically sizeable and can persist over three years. |
| Keywords: | macroprudential policy, financial development, growth, external finance dependence, credit frictions |
| JEL: | E44 G28 O10 O16 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1191&r= |
| By: | Alnaa, Samuel Erasmus; Matey, Juabin |
| Abstract: | Financial deepening plays a pivotal role in fostering economic growth, alleviating poverty, and mitigating social inequalities. Employing the Vector Autoregressive Model (VAR), this study examines the implications of per capita gross domestic product (GDP), interest rates, and inflation rates for financial deepening (FD) in Ghana. GDP per capita and interest rates exhibit statistically significant impacts on FD in Ghana, whereas inflation exerts an insignificant inverse effect. The statistically significant influence of GDP per capita and interest rates underscores their significance as robust favourable determinants of financial sector development in Ghana. Hence, policymakers are entreated to closely monitor the behaviour of these macroeconomic variables that positively influence financial deepening, as they play crucial roles in fostering economic growth. |
| Keywords: | Financial Deepening, GDP per capita, Economic Growth, Interest Rate, Inflation, VAR |
| JEL: | E31 E37 E43 E44 E62 |
| Date: | 2024–02–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120974&r= |
| By: | Carlos Alberto Durigan Junior; Andr\'e Taue Saito; Daniel Reed Bergmann; Nuno Manoel Martins Dias Fouto |
| Abstract: | The main objective of this paper is to Identify which macroe conomic factors and industrial indexes influenced the total Brazilian banking spread between March 2011 and March 2015. This paper considers subclassification of industrial activities in Brazil. Monthly time series data were used in multivariate linear regression models using Eviews (7.0). Eighteen variables were considered as candidates to be determinants. Variables which positively influenced bank spread are; Default, IPIs (Industrial Production Indexes) for capital goods, intermediate goods, du rable consumer goods, semi-durable and non-durable goods, the Selic, GDP, unemployment rate and EMBI +. Variables which influence negatively are; Consumer and general consumer goods IPIs, IPCA, the balance of the loan portfolio and the retail sales index. A p-value of 05% was considered. The main conclusion of this work is that the progress of industry, job creation and consumption can reduce bank spread. Keywords: Credit. Bank spread. Macroeconomics. Industrial Production Indexes. Finance. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.10655&r= |
| By: | Francesco Ferlaino |
| Abstract: | This study examines the redistribution effects of a conventional monetary policy shock among households in the presence of production-side financial frictions. A Heterogeneous Agents New Keynesian model featuring a financial accelerator is built after empirical evidence for consumption inequality. The results show that the presence of financial frictions significantly increases the magnitude of the Gini coefficient of wealth and other wealth inequality measures after contractionary monetary policy, compared to a scenario in which such frictions are inactive, proving that firms’ financial characteristics affect household wealth inequality. Consumption dynamics are also affected: financial frictions have a significant impact on how households consume and save after a monetary contraction, because they rely differently on labor income to smooth consumption. The relative increase in consumption inequality confirms the empirical results obtained in this study. |
| Keywords: | heterogeneous agents, financial frictions, monetary policy, New Keynesian models, inequalities, proxy-SVAR. |
| JEL: | C32 E12 E21 E44 E52 G51 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:mib:wpaper:538&r= |
| By: | Oliver Pfäuti; Fabian Seyrich; Jonathan Zinman |
| Abstract: | Business cycle models often abstract from persistent household heterogeneity, despite its potentially significant implications for macroeconomic fluctuations and policy. We show empirically that the likelihood of being persistently financially constrained decreases with cognitive skills and increases with overconfidence thereon. Guided by this and other micro evidence, we add persistent heterogeneity in cognitive skills and overconfidence to an otherwise standard HANK model. Overconfidence proves to be the key innovation, driving households to spend instead of precautionary save and producing empirically realistic wealth distributions and hand-to-mouth shares and MPCs across the income distribution. We highlight implications for various fiscal policies. |
| Keywords: | Household heterogeneity, cognitive skills, overconfidence, financial constraints, fiscal policy, HANK |
| JEL: | D91 E21 E62 E71 G51 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp2080&r= |
| By: | Lukas Menkhoff; Jannis Westermann |
| Abstract: | The low degree of stock market participation (SMP) is one of the big puzzles in finance. Numerous determinants have been proposed. We put these determinants into a structure that is derived from a standard static portfolio model. Then we discuss arguments put forward regarding specific SMP determinants and the empirical evidence that has been provided. The focus of our survey is on the identification of a causal impact of determinants on SMP via shocks. We summarize the evidence by suggesting established and likely SMP determinants and providing an outlook for future research and policy. |
| Keywords: | Stock market participation, transaction costs, information, return volatility, risk tolerance |
| JEL: | G11 G51 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp2078&r= |
| By: | Pierre Gosselin (IF); A\"ileen Lotz |
| Abstract: | In a series of precedent papers, we have presented a comprehensive methodology, termed Field Economics, for translating a standard economic model into a statistical field-formalism framework. This formalism requires a large number of heterogeneous agents, possibly of different types. It reveals the emergence of collective states among these agents or type of agents while preserving the interactions and microeconomic features of the system at the individual level. In two prior papers, we applied this formalism to analyze the dynamics of capital allocation and accumulation in a simple microeconomic framework of investors and firms.Building upon our prior work, the present paper refines the initial model by expanding its scope. Instead of considering financial firms investing solely in real sectors, we now suppose that financial agents may also invest in other financial firms. We also introduce banks in the system that act as investors with a credit multiplier. Two types of interaction are now considered within the financial sector: financial agents can lend capital to, or choose to buy shares of, other financial firms. Capital now flows between financial agents and is only partly invested in real sectors, depending on their relative returns. We translate this framework into our formalism and study the diffusion of capital and possible defaults in the system, both at the macro and micro level.At the macro level, we find that several collective states may emerge, each characterized by a distinct level of average capital and investors per sector. These collective states depend on external parameters such as level of connections between investors or firms' productivity.The multiplicity of possible collective states is the consequence of the nature of the system composed of interconnected heterogeneous agents. Several equivalent patterns of returns and portfolio allocation may emerge. The multiple collective states induce the unstable nature of financial markets, and some of them include defaults may emerge. At the micro level, we study the propagation of returns and defaults within a given collective state. Our findings highlight the significant role of banks, which can either stabilize the system through lending activities or propagate instability through loans to investors. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.10338&r= |
| By: | Tomohiro HIRANO; Alexis Akira Toda |
| Abstract: | We analyze equilibrium housing prices in an overlapping generations model with perfect housing and rental markets. The economy exhibits a two-stage phase transition: as the income of home buyers rises, the equilibrium regime changes from fundamental to bubble possibility, where fundamental and bubbly equilibria can coexist. With even higher incomes, fundamental equilibria disappear and housing bubbles become a necessity. Even with low current incomes, housing bubbles may emerge if home buyers have access to credit or have high future income expectations. Contrary to widely-held beliefs, fundamental equilibria in the possibility regime are inefficient despite housing being a productive non-reproducible asset. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:cnn:wpaper:24-009e&r= |
| By: | Xiaodan Ding; Mr. Dimitrios Laliotis; Ms. Priscilla Toffano |
| Abstract: | We developed a novel Systemwide Liquidity (SWL) framework to identify liquidity stress in the system that goes beyond banks and to assess the role played by non-bank financial institutions (NBFIs) in episodes of liquidity stress. The framework, which complements standard liquidity and interconnectedness analyses, traces the flow of liquidity among various agents in the economy and explores possible transmission channels and amplification mechanisms of correlated liquidity shocks. The framework uses unique balance sheet and asset encumbrance data to demonstrate the importance of assessing liquidity at the system level by allowing for (i) analyses of each agent’s contribution to liquidity stress, (ii) analyses of the impact of different behavioral assumptions (e.g., pecking order of collateral utilization, negative externalities of fire-sales and margin positions), and (iii) policy simulations. Since this framework covers a comprehensive set of financial instruments and transactions, it paves the way for harmonization of systemwide liquidity analysis across countries. We applied this general framework to Mexico in the context of the FSAP. Results for Mexico show that commercial banks safeguard the resiliency of the financial system by backstopping the liquidity needs of other agents. Moreover, certain sectors appear more vulnerable when binding regulatory liquidity constraints trigger risk-averse behavioral responses. |
| Keywords: | Systemwide liquidity analysis; liquidity at risk; nonbank financial institution; liquidity stress testing; haircut; asset encumberance; margin calls; repurchase agreement; fire-sales; derivative positions |
| Date: | 2024–05–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/104&r= |
| By: | Burak Deniz; Ýbrahim Yarba |
| Abstract: | This study analyzes bank loan maturity and corporate investment linkage by using novel firm-level data covering the universe of all incorporated firms in Türkiye over the last decade. The results of the panel regression model with multi-dimensional fixed effects reveal that loan maturity has a significant positive association with investment, indicating that longer debt maturity fosters corporate investment. The results reveal that the positive linkage between longer debt maturity and investment is more pronounced for small and medium-sized enterprises (SMEs). This is also the case for young firms and firms with high growth opportunities. Considering the evidence provided in the literature that bank lending conditions, including maturity structure, are highly cyclical and vulnerable to financial conditions and economic policy uncertainties, our findings highlight the importance of reducing the policy uncertainties as well as the importance of policies that make equity financing more attractive and deepen the capital markets. |
| Keywords: | Bank loans, Corporate investment, Debt maturity structure |
| JEL: | C23 D22 E22 G31 G32 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:2405&r= |
| By: | Ivan T. Ivanov; Luke Pettit; Toni Whited |
| Abstract: | We use variation in state corporate income tax rates to re-examine the relation between taxes and corporate leverage. Contrary to prior research, we find that corporate leverage rises after tax cuts for small private firms. An estimated dynamic equilibrium model shows that tax cuts make capital more productive and spur borrowing. Tax cuts also produce more distant default thresholds and lower credit spreads. These effects outweigh the lower interest tax deduction and lead to higher optimal leverage choices, especially for firms with flexible investment policies. The presence of the interest tax deduction raises consumer welfare in equilibrium. |
| JEL: | G31 G32 H25 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32398&r= |
| By: | Ryuichiro Izumi (Department of Economics, Wesleyan University); Antonis Kotidis (Federal Reserve Board); Paul E. Soto (Federal Reserve Board) |
| Abstract: | One in five banks in the United States share a similar name. This can increase the likelihood of confusion among customers in the event of an idiosyncratic shock to a similarly named bank. We find that banks that share their name with a failed bank experience a half percent drop in transaction deposits relative to banks with similar characteristics but different name. This effect doubles for failures that are covered in media. We rationalize our findings via a model of financial contagion without fundamental linkages. Our model explains that when distinguishing banks is more costly due to similar trademarks, depositors are more likely to confuse their banks’ condition resulting in financial contagion. |
| Keywords: | Trademarks, Banking, Bank Runs, Bank Failures |
| JEL: | G21 G14 G30 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:wes:weswpa:2024-004&r= |
| By: | Damane, Moeti; Ho, Sin-Yu |
| Abstract: | We examine the impact of financial inclusion of Sub-Saharan Africa (SSA) small and medium-sized enterprises (SMEs) on financial stability. Results show that financial inclusion of SMEs negatively affects stability in SSA countries, and the negative link is even stronger as levels of financial stability increase across countries. Our findings are consistent with the theory of excessive credit expansion or extreme financial inclusion theory, suggesting that to safely promote SME financial inclusion and foster financial sector stability, efforts should be directed toward improving banking sector risk mitigation efforts, financial sector supervision and strengthening coordination among regional financial sector regulators. |
| Keywords: | Sub-Saharan Africa; Financial Inclusion; Financial Stability; Small and Medium sized Enterprises, Fixed Effect Model; Quantile Regression |
| JEL: | G00 G2 G21 G28 |
| Date: | 2024–05–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:121093&r= |
| By: | Martin Kliem; Alexander Kriwoluzky; Gernot J. Müller; Alexander Scheer |
| Abstract: | Financial repression lowers the return on government debt and contributes, all else equal, towards its liquidation. However, its full effect on the debt-to-GDP ratio hinges on how repression impacts the economy at large because it alters investment and saving decisions. We develop and estimate a New Keynesian model with financial repression. Based on U.S. data for the period 1948–1974, we find, consistent with earlier work, that repression was pervasive but gradually phased out. A model-based counterfactual shows that GDP would have been 5 percent lower, and the debt-to-GDP ratio 20 percentage points higher, had repression not been phased out. |
| Keywords: | Financial repression, Government debt, Interest rates, Banks, Regulation, Bayesian estimation |
| JEL: | H63 E43 G28 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp2075&r= |
| By: | Coqueret, Guillaume; Filippin, Maria Elena; Laguerre, Martial; Weber, Christoph |
| Abstract: | Barro et al. (2022) investigate the quantity of safe assets held in the cross-section of developed countries and find that the average safe-asset ratio (ratio of safe assets to total assets) was 37% in 2015 and has remained relatively stable over time. They also document a crowding-out coefficient for private bonds relative to public bonds of around −0.5. In the second part of the analysis, they simulate a heterogeneous agent model with rare disasters and risk aversion to match the empirical findings. This report seeks to reproduce and confirm their results. Overall, we were largely able to replicate their findings and propose a few robustness checks. Apart from two regression outputs for which the signs and significance do not change, our results are very close to those of the original paper. Alternative models and estimators do not change the signs or significance levels. A more systematic approach to the parameter values in the simulations also points towards solid conclusions. |
| Keywords: | Replication, reproducibility, robustness |
| JEL: | E44 E51 G11 G12 G51 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:i4rdps:122&r= |
| By: | Jiménez Sotelo, Renzo |
| Abstract: | The objective of the study was to determine if a policy of preference for the domestic public debt market influences the development of the respective national financial system. This research finds that such influence does exist. Using panel data techniques, the causal relationship between the internal marketing of public debt and eight indicators of financial development was tested. The results confirm that the traditional theories of financial development were incomplete. Although the research shows that the preference for the internal public debt market influences financial development, and therefore economic development, it does not explain why in some less developed countries it is not given greater importance, an answer that would also involve the fields of study in which politics and ethics move. |
| Keywords: | sovereign curve; panel data; sovereign debt; economic development; securities market; financial policy; monetary policy; financial system. |
| JEL: | A13 C23 D70 E61 G18 H63 N20 O16 P16 Q01 |
| Date: | 2023–02–23 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121021&r= |
| By: | Kaan Celebi; Werner Roeger; Paul J. J. Welfens |
| Abstract: | This paper re-evaluates the US external deficit which has considerably widened over the 1990s. US safe asset provision to the rest of the world is the dominant explanation for the persistent nature of the US external deficit. We suggest that apart from the safe asset hypothesis, there is an important role for technology shocks originating in US multinational companies that have a strong foreign direct investment presence. It is shown that technology shocks that increase the market value of FDI assets are loosening the sustainability constraint on the trade balance and therefore generate persistent trade balance deficits. Our analysis suggests that this channel can explain why the US tech-boom in the 1990s has contributed significantly to the increase of the US current account deficit and its duration. Technology shocks have been neglected as a reason for longer lasting current account deficits since for these shocks, standard open economy DSGE models can only generate temporary external deficits. We show that our enhanced DSGE-model – covering both trade and FDI – not only matches well the dynamics of the US external balance but can also account for the observed evolution of FDI related components of the external balance. In particular, US technology shocks can match the increase in net FDI income and a rising FDI capital balance. Our analysis suggests that FDI flows and their determinants should play a more important role in monitoring external imbalances by international organizations. |
| Keywords: | Foreign direct investment, current account imbalance, USA, DSGE, technology shocks |
| JEL: | D5 F21 F23 F32 O3 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp2074&r= |
| By: | Mikhail Chernov; Valentin Haddad; Oleg Itskhoki |
| Abstract: | Financial markets play two roles with implications for the exchange rate: they accommodate risk sharing and act as a source of shocks. In prevailing theories, these roles are seen as mutually exclusive and individually face challenges in explaining exchange rate dynamics. However, we demonstrate that this is not necessarily the case. We develop an analytical framework that characterizes the link between exchange rates and finance across all conceivable market structures. Our findings indicate that full market segmentation is not necessary for financial shocks to explain exchange rates. Moreover, financial markets can accommodate a significant extent of international risk sharing without leading to the classic exchange rate puzzles. We identify plausible market structures where both roles coexist, addressing challenges faced when examined separately. |
| JEL: | E44 F31 G15 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32436&r= |
| By: | Jaccard, Ivan |
| Abstract: | The evidence suggests that monetary policy transmission is asymmetric over the business cycle. Interacting financing frictions with a preference for liquidity provides an explanation for this fact. Our mechanism generates monetary asymmetries in a model that jointly reproduces a set of asset market and business cycle facts. Accounting for the joint dynamics of asset prices and business cycle fluctuations is key; in a variant of the model that is unable to produce realistic macro-finance implications, monetary asymmetries disappear. Our results suggest that asymmetries in the transmission mechanism critically depend on the macro-finance implications of monetary policy models, and that resorting to nonlinear techniques is not sufficient to detect monetary asymmetries. |
| Keywords: | Money Demand; Nonlinear Solution Methods; Asset Pricing in DSGE Models; Term Premium; Stochastic Discount Factor |
| JEL: | E31 E44 E58 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpm:dynare:081&r= |
| By: | Ida, Daisuke; Okano, Mitsuhiro; Hoshino, Satoshi |
| Abstract: | This note examines the role of stock price stabilization in a small open new Keynesian model. We show that stabilizing stock prices is desirable to attain a unique rational expectations equilibrium and that the open economy effect has a significant impact on the determinacy condition. |
| Keywords: | Stock prices; Monetary policy rules; Terms of trade; Indeterminacy; Taylor principle; |
| JEL: | E52 E58 F41 |
| Date: | 2024–05–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:121050&r= |
| By: | Agboton, Damien Joseph |
| Abstract: | In this article, we use recently developed oanel causality and cointegration techniques to examine the long-run relationship between inflation and economic growth of the 8 WAEMU countries. A panel of 256 observations was therefore constituted from the IMF (WDI) and BCEAO database. Our results highlight a unidirectional causality between inflation and economic growth and support the view that public spending controls can reduce inflation. Economic growth is the main channel through which economic policy can influence inflation. Furthermore, improving the quality of the workforce can further strengthen economic growth. |
| Keywords: | Inflation Economic growth Panel causality Panel cointegration WAEMU |
| JEL: | E3 E31 E6 |
| Date: | 2024–05–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:121080&r= |
| By: | Afia Malik (Pakistan Institute of Development Economics); Ghulam Mustafa (Pakistan Institute of Development Economics) |
| Abstract: | The electricity sector’s financial stability is crucial for the smooth functioning of power systems. However, in Pakistan, circular debt is holding the sector and the entire economy hostage. To quantify the impact of this problem, a study is conducted using standard econometric techniques to investigate circular debt effects on the industrial sector at both the firm and macro levels. The study also measured the impact of circular debt on different sectors, sub-sectors, and factor inputs in the economy using a Computed General Equilibrium model through cost of production path. The study revealed that circular debt hurts real GDP and all sectors, increasing fiscal deficit and trade imbalance. The study also estimated a total public welfare loss of US$13 billion due to a 10 percent growth in circular debt. At the firm level, circular debt via an increase in tariffs is causing a reduction in profitability due to a significant increase in production costs. At the macro level, this is causing a decrease in industrial output and export competitiveness. |
| Keywords: | Circular Debt, Electricity Tariff, Pakistans Economy |
| JEL: | C68 D22 Q43 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pid:wpaper:2024:2&r= |
| By: | Kruse, Tobias; Mohnen, Myra; Sato, Misato |
| Abstract: | This study investigates whether financial markets respond to firms’ climate actions. We exploit the signing of the Paris Agreement, which required governments to commit to ambitious climate action, as a quasi-natural experiment. Using a proprietary green revenue database, we find that firms deriving a significant fraction of their revenues from green goods and services experience on average a 10% increase in cumulative abnormal returns following the agreement. The empirical evidence indicates that financial markets are responding to opportunities associated with new green markets, and strengthening climate policies can reallocate capital to support green private sector investment. |
| Keywords: | green revenues; Paris Agreement; event study; corporate financial performance; green finance; H2020-MSCA-RISE project GEMCLIME-2020 (GA number 681228; Future Research Leaders (ES/N016971/1); Centre for Climate Change Economics and Policy (CCCEP) (ES/R009708/1); and PRINZ (ES/W010356/1 |
| JEL: | D20 G14 G18 Q50 Q58 |
| Date: | 2024–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:121969&r= |