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on Financial Development and Growth |
| By: | Kodongo, Odongo |
| Abstract: | This paper sought to establish the linkages between bank performance and real sector productivity. We use data for five East African countries (Ethiopia, Kenya, Rwanda, Tanzania, and Uganda) for the period 2014-2022. We initially deploy the traditional panel fixed effects regression and subsequently the instrument variable fixed effects estimation for robustness checks. Our results show a robust negative nexus between banking sector performance and real sector productivity. Second, we find that noninterest charges is the major channel of transmission of adverse effects from the banking sector to real sectors such as manufacturing, while the interest channel tends to transmit positive effects especially to the services sector. Based on these findings, we make several policy recommendations. |
| Keywords: | Real sector productivity, sectoral value-added, bank profitability, cost efficiency, East Africa |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:kbawps:297986&r= |
| By: | De Carvalho Reis Neves, Mateus; Bressan, Valéria; Shinkoda, Marcelo; Romero, João; Souza, Gustavo Henrique |
| Keywords: | Community/Rural/Urban Development, International Development |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ags:aaea22:343658&r= |
| By: | Victor Aguirregabiria; Robert Clark; Hui Wang |
| Abstract: | Geographic dispersion of depositors, borrowers, and banks may prevent funding from flowing to high loan demand areas, limiting credit access. Using bank-county-year level data, we provide evidence of the geographic imbalance of deposits and loans and develop a methodology for investigating the contribution to this imbalance of branch networks, market power, and scope economies. Results are based on a novel measure of imbalance and estimation of a structural model of bank competition that admits interconnections across locations and between deposit and loan markets. Counterfactual experiments show branch networks and competition contribute importantly to credit flow but benefit more affluent markets. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.03517&r= |
| By: | Söhnke M. Bartram; Gregory W. Brown; René M. Stulz |
| Abstract: | Average idiosyncratic volatility and firm idiosyncratic volatility increase with the number of listed firms. Average industry idiosyncratic volatility increases with the number of listed firms in the industry. We ex-plain the relation between idiosyncratic volatility and the number of listed firms through Schumpeterian creative destruction. We show that Schumpeterian creative destruction increases as the number of listed firms increases. However, there is no consistent evidence of an incremental effect of the number of non-listed firms on idiosyncratic volatility either in the aggregate or at the industry level, suggesting that listed firms play a unique role in the dynamism of the economy. |
| JEL: | G10 G11 G12 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32568&r= |
| By: | de Padua, David (Asian Development Bank); Lanzafame, Matteo (Asian Development Bank); Qureshi , Irfan (Asian Development Bank); Taniguchi, Kiyoshi (Asian Development Bank) |
| Abstract: | Remittances are an important source of external financing in Pakistan, amounting to around 10% of gross domestic product in 2021. As such, an appropriate understanding of the key macroeconomic drivers of remittances has important policy implications. Combining a database of bilateral remittances between Pakistan and its main remittance-sending countries with monthly macroeconomic data over 2003–2021, we use a Bayesian vector autoregression model to understand the drivers of remittances to Pakistan. Specifically, we do so by estimating the impact of various structural shocks on remittance growth in Pakistan. We find that macroeconomic variables, including economic activity, inflation, equity markets, and interest rates—both in Pakistan and migrants’ host countries—play a significant role, and their contributions vary over time. |
| Keywords: | remittances; macroeconomics; Pakistan |
| JEL: | E70 F22 F24 |
| Date: | 2024–07–10 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbewp:0733&r= |
| By: | Bangyu He; Phil Johnston; Agustin Velasquez |
| Abstract: | This paper explores the catalytic impact of IMF lending to Low-Income Countries on Official Development Assistance (ODA) during 1990-2019. It disentangles the effect on the amounts of ODA on countries’ participation in IMF programs (“extensive margin”) and the size of the IMF-supported program (“intensive margin”). To address selection biases, we rely on the interaction of past IMF program participation and IMF liquidity as an instrument for program participation and employ the review of access limits as an instrument for the size of disbursements. We document that a one percentage point (pp) of GDP increase in IMF disbursements catalyzes additional ODA of 2.7 pp of GDP. In addition, we find that IMF disbursements catalyze ODA mostly from multilateral donors (1.3 pp of GDP) and to lesser extent from traditional bilateral donors (0.6 pp of GDP). Among multilateral donors, the strongest effect is on World Bank disbursements, followed by the EU. Finally, we document that catalytic effects on ODA have decreasing returns to large IMF disbursement amounts. |
| Keywords: | International Monetary Fund (IMF); catalysis; official development assistance (ODA) |
| Date: | 2024–06–28 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/134&r= |
| By: | F. Aresu; E. Marrocu; R. Paci |
| Abstract: | This paper investigates the economic impact of European Structural and Investment Funds (ESIF) for 262 EU NUTS2 regions over the period 2000-2019. Differently from previous contributions, we focus on the impact of ESIF on regional Total Factor Productivity (TFP) growth, which allowed us to account for other sources of regional investments. A relevant contribution of this study is the thorough examination of the effect of the four main funds included in ESIF on the productivity of a comprehensive set of EU regions. Results show the prevailing effectiveness of the European Regional Development Fund (ERDF), featuring a great deal of heterogeneity over time and across EU geographic areas. Moreover, by analyzing the role played by the European Agricultural Fund (EAFRD) on the TFP of the agricultural sector, we found that its growth impact crucially depends on the initial level of regional sectoral TFP. Our results contribute to a deeper understanding of ESIF economic impact and suggest policy implications for enhancing their contribution to regional economic development. |
| Keywords: | European Structural and Investment Funds;regional development;Spatial Error Model;European Union |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:cns:cnscwp:202412&r= |
| By: | Dawid, H.; Harting, P.; Neugart, M. |
| Abstract: | In the aftermath of the financial crisis, with periphery countries in the European Union falling even more behind the core countries economically, there have been quests for various kinds of fiscal policies in order to revert divergence. How these policies would unfold and perform comparatively is largely unknown. We analyze four such stylized policies in an agent-based macroeconomic model and study the economic mechanisms behind their relative success. Our main findings are that the core country sharing the debt burden of the periphery country has almost no effect on the growth dynamics of that region, fiscal transfers have a positive short- and long-run impact on per-capita consumption in the target region, and that technology-oriented firm subsidies have the strongest positive long-run impact on competitiveness of the periphery country at which they are targeted. The positive effect of the technology-oriented policy is reinforced if combined with household transfers. |
| Date: | 2024–06–25 |
| URL: | https://d.repec.org/n?u=RePEc:dar:wpaper:146302&r= |
| By: | Costas Milas (University of Liverpool, UK; Rimini Centre for Economic Analysis); Theodore Panagiotidis (University of Macedonia, Greece); Georgios Papapanagiotou (University of Macedonia, Greece) |
| Abstract: | This paper uses time-varying Bayesian models to assess the impact of the shifting, and progressively more volatile (especially since the EU Referendum vote in 2016) macroeconomic landscape on Foreign Direct Investment (FDI) inflows to the UK. FDI inflows are depressed in response to higher UK-specific economic and geopolitical uncertainty. A stronger real exchange rate and a higher interest rate also have a negative effect. It benefits from lower UK corporate tax rates and higher US uncertainty, the latter creating investment opportunities in the UK. Rising economic policy uncertainty since the EU Referendum, has led to FDI losses of up to 0.5% of GDP. |
| Keywords: | Foreign Direct Investment, economic policy uncertainty, Brexit |
| JEL: | C11 C32 F21 F23 F30 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:rim:rimwps:24-09&r= |
| By: | Mr. Kevin Fletcher; Veronika Grimm; Thilo Kroeger; Thilo Kroeger; Ms. Aiko Mineshima; Christian Ochsner; Mr. Andrea F Presbitero; Paul Schmidt-Engelbertz; Jing Zhou |
| Abstract: | Global geopolitical tensions have risen in recent years, and European energy prices have been volatile following Russia’s invasion of Ukraine. Some analysts have suggested that these shifting conditions may significantly affect FDI both to and from Germany. To shed light on this issue and other factors affecting German FDI, we leverage two detailed and complementary FDI datasets to explore recent trends in German FDI and how it is affected by geopolitical tensions and energy prices. In doing so, we also develop a new measure of geopolitical alignment. Our main findings include the following: (i) the post-pandemic recovery in Germany’s inward and outward FDI has been weaker than in the US or the rest of the European Union (EU27) as a whole; (ii) Germany’s outward FDI linkages with geopolitically distant countries have been weakening since the Global Financial Crisis; (iii) the relationship between Germany’s outward FDI and geopolitical distance has become more pronounced over the last six years; (iv) Germany’s outward FDI to China-Russia bloc countries is more sensitive to recent geopolitical developments compared with that to US-bloc countries; and (v) Germany’s outward FDI in energy-intensive sectors decreases as destination countries’ energy costs increase, but energy costs do not appear to have a statistically significant effect on outward FDI in non-energy intensive sectors. |
| Keywords: | Germany; foreign direct investment; geopolitical fragmentation |
| Date: | 2024–06–28 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/130&r= |
| By: | Mr. Serhan Cevik |
| Abstract: | The emergence of financial technologies—fintech—has become an engine of change, promising to expand access to financial services and give a boost to financial inclusion. The ownership of accounts in formal financial institutions increased from 51 percent of the world’s adult population in 2011 to 76 percent in 2021, but there is still significant variation across countries. So has the rapid growth of fintech delivered the promise of broadening financial services to the under-served populations? In this paper, I use a comprehensive dataset to investigate the relationship between fintech and financial inclusion in a panel of 84 countries over the period 2012–2020 and obtain interesting empirical insights. First, the magnitude and statistical significance of fintech on financial inclusion varies according to the type of instrument. While digital lending has a significant negative effect on financial inclusion, digital capital raising is statistically insignificant. Second, the overall impact of fintech is also statistically insignificant for the full sample, but becomes positive and statistically highly significant in developing countries. Policymakers need to develop an adequate regulatory framework that balances fostering innovation and ensuring equitable treatment of individuals and groups. This requires better financial education, strong regulatory institutions, and well-calibrated prudential regulations for a level playing field and effective supervision. |
| Keywords: | Fintech; financial innovation; financial inclusion |
| Date: | 2024–06–28 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/131&r= |
| By: | Han, Seoni (KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP)) |
| Abstract: | Digital technology is gaining attention as a game changer to reshape the landscape of Africa’s financial industry. This widespread adoption of mobile money has significantly broadened financial accessibility and reduced the proportion of the financially excluded population. The transformation of the financial industry was further accelerated by the COVID-19 pandemic with a surge in online payments and increased fintech activities. Digital finance has arisen as a solution to address the economic and non-economic constraints in the financial market, such as transaction costs, information asymmetry between financial institutions and customers, and uncertainty in outcomes of financial services. Digital finance strengthens economic resilience of individuals and households by offering a broader spectrum of strategies for risk mitigation and risk sharing. In Kenya, mobile money penetration has facilitated financial management for low-income groups, increased women’s labor market participation, and reduced poverty rates. The access to finance of small and medium-sized enterprises is especially crucial in developing countries. Limited access to financial services poses significant challenges for SMEs, obstructing their ability to operate seamlessly, increase sales, and boost exports. In Sub-Saharan Africa, only about one-fifth of SMEs can gain access to loans through traditional financial institutions. Han et al. (2023) conducts on an empirical analysis of Kenyan firms and finds that the firms’ use of mobile money is positively correlated with their financial accessibility, and their investment activities in both tangible assets (fixed assets) and intangible assets (R&D expenditure). Korea has the potential to strengthen its cooperation with Africa in digital finance and the financial sector by actively participating in international initiatives for financial inclusion, promoting more private investments into the financial sector or fintech industry in Africa, enhancing Africa's digital competitiveness in digital infrastructure and skilled workforce, and finally supporting digital transformation in the context of regional integration. |
| Keywords: | Africa; Digital technology; Digital Finance; Financial Inclusion |
| Date: | 2024–05–31 |
| URL: | https://d.repec.org/n?u=RePEc:ris:kiepwe:2024_015&r= |
| By: | Lahcen Bounader; Mr. Selim A Elekdag |
| Abstract: | We develop a model with diagnostic expectations (DE) and a financial accelerator (FA) that generates mutually reinforcing shock amplification, especially in the case of demand shocks. However, supply shocks can be dampened via a debt deflation channel, which is strengthened amid DE. Importantly, the model results in a worsening of the inflation-output volatility trade-off confronting policymakers. In contrast to most of the literature—which argues against targeting the level of asset prices—our financial accelerator model with DE suggests that targeting house price growth may result in welfare gains. |
| Keywords: | Financial Accelerator; Diagnostic Expectations; Optimal monetary policy; Instrument rules |
| Date: | 2024–06–28 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/132&r= |
| By: | Koivisto, Tero |
| Abstract: | This study aims to explore the extent to which changes in wealth contributes to inflation utilizing a highly flexible non-Gaussian SVAR framework which minimizes the risk of distributional misspecification. We employ narrative sign restrictions to label the asset price shock and leverage the property of the Bayesian approach to compute the posterior probability of each shock satisfying these proposed restrictions. The structural shock associated with wealth has a positive impact on private consumption and GDP. The asset price shock is also positively related on consumer prices. Therefore, variations in wealth appear to stimulate the real economy. |
| Keywords: | Asset price shocks, wealth effect, inflation, structural vector autoregression, non-Gaussianity |
| JEL: | E31 E44 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofecr:300078&r= |
| By: | Fueki, Takuji; Hürtgen, Patrick; Walker, Todd B. |
| Abstract: | Financial institutions, especially in Europe, hold a disproportionate amount of domestic sovereign debt. We examine the extent to which this home bias leads to capital misallocation in a real business cycle model with imperfect information and fiscal stress. We assume banks can hold sovereign debt according to a zero-risk weight policy and contrast this scenario to one in which banks weight the sovereign debt according to default probabilities. Banks are assumed to miscalculate the probability of a disaster state due to moral hazard and imperfect monitoring. This distortion pushes the economy away from the first-best allocation. We show that the zero risk weight policy exacerbates these distortions while a non-zero risk-weight improves allocations. The welfare costs associated with zero-risk weight policies are large. Households are willing to give up 3.2 percent of their consumption to move to the first-best allocation, whereas in the economy with non-zero risk-weights households are willing to give up only 1.2 percent of their consumption to move to the first-best allocation. |
| Keywords: | Zero-Risk Weight, Fiscal Limit, Macroprudential Regulation, Sovereign-Bank Nexus, Fiscal Stress |
| JEL: | E61 E62 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:299238&r= |
| By: | Bertomeu, Jeremy; Mahieux, Lucas (Tilburg University, School of Economics and Management); Sapra, Haresh |
| Date: | 2023 |
| URL: | https://d.repec.org/n?u=RePEc:tiu:tiutis:df2ee887-1525-4184-8567-05cdfdd61f43&r= |
| By: | R\"udiger Frey; Theresa Traxler |
| Abstract: | We study the impact of regulatory capital constraints on fire sales and financial stability in a large banking system using a mean field game model. In our model banks adjust their holdings of a risky asset via trading strategies with finite trading rate in order to maximize expected profits. Moreover, a bank is liquidated if it violates a stylized regulatory capital constraint. We assume that the drift of the asset value is affected by the average change in the position of the banks in the system. This creates strategic interaction between the trading behavior of banks and thus leads to a game. The equilibria of this game are characterized by a system of coupled PDEs. We solve this system explicitly for a test case without regulatory constraints and numerically for the regulated case. We find that capital constraints can lead to a systemic crisis where a substantial proportion of the banking system defaults simultaneously. Moreover, we discuss proposals from the literature on macroprudential regulation. In particular, we show that in our setup a systemic crisis does not arise if the banking system is sufficiently well capitalized or if improved mechanisms for the resolution of banks violating the risk capital constraints are in place. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.17528&r= |
| By: | Kimundi, Gillian |
| Abstract: | Capital is central to efficient intermediation and is a core indication of the financial health of a bank. Recent shifts in monetary policy, economic shocks and contextspecific events in interbank liquidity flow in Kenya call for a revisit of banks' response through the lens of their capitalization. Using data from 27 banks between 2001 and 2021, this study first reveals that there is heterogeneity in how banks respond to policy, economic and market shifts, and that capital plays a key role in maintaining (and in some cases amplifying) balance sheet activity and cushioning operating profitability. Small, lesser-capitalized banks are more sensitive to monetary policy and shifts in interbank market liquidity, whereas large, higher-capitalized banks are more sensitive to GDP shocks. Collectively, the role of capital depends on the nature of the shock, the size of the bank and the sub-period studied. The study concludes with relevant policy and bank-level implications from these findings. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:kbawps:297990&r= |
| By: | Paul Castillo; Mr. Ruy Lama; Juan Pablo Medina |
| Abstract: | Financial dollarization is considered a source of macroeconomic instability in many emerging economies. Dollarization constrains the ability of central banks to stimulate output during economic downturns. In contrast to the conventional monetary transmission mechanism, a monetary policy loosening in a dollarized economy leads to a currency depreciation, adverse balance sheet effects, and a contraction in investment and output growth. In this paper we evaluate the role of foreign exchange reserves in facilitating macroeconomic stabilization in a financially dollarized economy. We first show empirically that foreign exchange intervention in response to capital outflows can largely reduce the volatility of output and the real exchange rate in dollarized economies. We then develop a small open economy model with foreign currency debt and balance sheets effects. Our quantitative model shows that an active foreign exchange intervention policy is sufficient for offsetting the output volatility associated with financial dollarization. These results can explain the prevalence of low macroeconomic volatility in some dollarized economies (Christiano et al., 2021) and they highlight the role of foreign exchange reserves in reducing the welfare costs of dollarization. |
| Keywords: | Foreign Exchange Intervention; Global Financial Cycle; Financial Dollarization; Balance Sheet Effects; Emerging Economies. |
| Date: | 2024–06–21 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/127&r= |
| By: | Han, Wontae (KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP)); Kim, Hyo-Sang (KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP)); Song, Saerang (KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP)); Kim, Junhyong (Korea Development Institute (KDI)) |
| Abstract: | This study analyzed the effects of uncertainty and interest rate hike shocks on capital flows, as well as the effectiveness of economic stabilization policies. When comparing the impacts of global economic policy uncertainty shocks and individual country economic policy uncertainty shocks, empirical analysis showed that global economic policy uncertainty shocks had a significant effect on capital flows. This suggests that global factors are more closely associated with capital flows than country-specific factors, relating to discussions on the global financial cycle. Although classified as an advanced economy, Korea has a shallow foreign exchange market and its financial markets are sensitive to external shocks, so the spillover effects of uncertainty shocks need to be analyzed through various channels like trade, capital transactions, industrial structure, and monetary policy. As financial globalization progresses with Fintech and digital finance, the spillover effects of external shocks through capital transactions are expected to increase, especially requiring close monitoring of shocks from countries with similar industrial structures to Korea. An integrated policy framework analysis found that for emerging economies without anchored inflation expectations and shallow foreign exchange markets, a combination of monetary policy and foreign exchange intervention was effective for economic stabilization. Recently, major international organizations like the IMF, BIS, and OECD have shifted towards allowing some foreign exchange intervention and capital flow management measures to reduce exchange rate and capital flow volatility and achieve financial stability. Since there is a general consensus that Korea does not have a deep foreign exchange market, an appropriate combination of monetary policy, foreign exchange intervention, and capital flow management measures can help reduce exchange rate volatility. As Korea's foreign exchange market advances and if Korea succeeds to join major global bond indices, its sensitivity to external factors may increase, so measures to assess the depth and maturity of Korea's foreign exchange and financial markets are needed to determine the optimal policy mix. |
| Keywords: | external shocks; capital flow response; policy effectiveness |
| Date: | 2024–06–14 |
| URL: | https://d.repec.org/n?u=RePEc:ris:kiepwe:2024_017&r= |
| By: | Annie Soyean Lee; Charles Engel |
| Abstract: | Empirical work finds that flows of investments from the U.S. and other high income countries to emerging markets increase during times of quantitative easing by the U.S. Federal Reserve, and the reverse movement occurs under quantitative tightening. We offer new evidence to confirm these findings, and then propose a theory based on the liquidity of U.S. government liabilities held by the public. We hypothesize that QE, by increasing liquidity, offers greater flexibility for investors that might be concerned their funds will be tied up when shocks to income or investment opportunities arise. With the assurance that some of their portfolio can be readily sold in liquid markets, rich country investors are more willing to increase investments in illiquid loans to emerging markets. The effect of increasing the liquidity of U.S. government liabilities on investments in EMs may even be stronger during times of greater uncertainty. |
| JEL: | E5 F30 F40 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32572&r= |
| By: | Clemens M. Graf von Luckner; Mr. Robin Koepke; Ms. Silvia Sgherri |
| Abstract: | This paper shows how cryptocurrency markets can fuel cross-border capital flight by serving as marketplaces that match counterparts with and without (illicit) access to FX. In countries where international transactions are restricted, crypto exchanges effectively allow domestic agents to pay a premium to buy foreign currency. The counterparts to these transactions are agents with access to FX, who sell crypto holdings purchased abroad. A stylized model illustrates that restricted foreign currency amid economic imbalances incentivizes these transactions via persistent crypto premia in local relative to global markets. We analyze relative crypto pricing data in several country case studies, providing empirical support that crypto markets serve as marketplaces for capital flight that already took place, rather than a novel channel for capital flight. We make available a novel dataset on crypto market premia, which we propose as indicators of excess demand for foreign currency and capital control intensity. The dataset will be posted along with this paper and updated periodically. |
| Keywords: | Capital flows; digital money; capital controls |
| Date: | 2024–06–28 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/133&r= |
| By: | Malcolm Fisher; Alan Walsh |
| Abstract: | We share insights from Canadian data from 2002 to 2022 that the Bank of Canada collected. The Bank submits these data each year to the Financial Stability Board for inclusion in its Global Monitoring Report on Non-Bank Financial Intermediation. |
| Keywords: | Financial institutions; Sectoral balance sheet |
| JEL: | G2 G21 G22 G23 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:24-15&r= |