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Finance and Growth

Most of the articles assembled in this issue of the Review of Financial Economy attempt to take a new look at the nature of the link between finance and growth, both concerning the lessons to be drawn from the crisis and the relative instability of this relationship. In particular, they seek to fill the gaps that remain in our understanding of the role of finance and its complex interactions with the real economy. Stakes are significant at a time when the reforms instituted after the crisis are beginning to produce their initial effects, but when voices are being raised to halt their implementation—or even dismantle them—in the name of the growth that they were actually supposed to make more solid and sustainable; significant, too, at a time when debate has begun on the question of the durability of our growth model in the context of climate change, inevitably bringing with it the question of how to finance this transition.

 

The Review also contains an article on financial history devoted to the role played by the Reichsbank prior to World War I and its preparation, as well as two other articles, the first of which looks at the financial behaviour of Europeans during the financial crisis and the second that analyses the role of entry barriers in the behaviour of ECCAS (Economic Community of Central African States) banks.

REF 127 Finance and Growth

publication : December 2017 370 pages

Finance and Growth

Introduction accès libre

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No summary is available for this article.

Laurent Clerc Jézabel Couppey-Soubeyran

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Structural Effects of Financial Development on Growth and Inequalities

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The size of the financial sector has massively expanded across OECD countries over the past fifty years. This process has involved deep structural changes including a debt shift away from business towards household credit and, after 2000, a withering in the flow of equity capital that stock markets provide. A series of econometric studies show that these changes have contributed to slowing down potential growth. At the levels of financial development observed in OECD countries, further increases in credit-GDP ratios translate into slower trend growth, especially when lending goes to households, while additional stockmarket funding boosts growth. Moreover, these trends have contributed to widening inequalities. Against this background, there is a case for policymakers to focus on macroprudential policy tools that optimise growth-stability trade-offs.


Boris COURNÈDE Catherine L. MANN

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What Is the Use of the (Hundreds of Thousands Billions of) Financial Markets Transactions?

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Since the financial crisis, several academic studies have highlighted the excessive growth of the financial sector. In this article, we focus specifically on the sharp upward trend in stock trading since the 1980s. Globally, trading in equity markets have now hit over $100,000 billion, equivalent to nearly 150% of GDP, compared with only 5% in 1975.

What is the “social utility” of all these trades? Stock market liquidity is undoubtedly a key factor in the cost of capital and, as such, a determinant of economic growth. However, the marginal effect is likely decreasing. Moreover, many theoretical and empirical studies suggest that above a certain threshold, trading has a negative effect since: (1) companies benefit from the involvement of long-term investors; (2) investors tend to perform too many trades; and (3) it comes at the expense of transparency and erodes the trust vis-à-vis stock markets. A handful of measures have been taken to limit the growth in stock trading, but these have had only a very limited effect. Only comprehensive reform of the architecture of stock markets could reverse this trend. Ultimately, these issues take us deeper than trading volume to question the very purpose of stock markets.


Gunther Capelle-Blancard

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Are Public Guarantees for Credit to SMEs Efficient? Some International Official Survey

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While small firms are important potential drivers of real economic activity growth, they are considered as lacking access to finance. This situation has motivated policy intervention to facilitate their funding. Policy support for SMEs takes various forms and includes in particular the provision of partial guarantees by publicly supported credit guarantee arrangements for credit extended by banks to SMEs. Policy makers have recognised the need for evaluating the performance of such arrangements, especially as such evaluations can be helpful in changing the design of existing financial guarantee programmes, so as to make them operate more effectively. The results from an OECD/ECsurvey on evaluating publicly supported financial guarantee programmes for SMEs suggest however that there is considerable discrepancy in many countries between actual practises and what might be considered “good practises” in assessing the performance of these arrangements. Many policy makers appear to trust in the net economic benefits generated by such support arrangements for SMEs to such an extent that they do not feel obliged to produce “hard evidence” in support of this view.


Sébastian Schich

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Finance : a Source of Weakness?

Non-Linearities in the Relationship between Finance and Growth

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This paper reviews the empirical literature on the links between finance and growth with a special focus on the empirical literature that has shown that the marginal contribution of financial depth to economic growth becomes negative in countries with large financial sectors (the “too much finance” result). It then assesses the empirical and theoretical validity of recent criticisms to this literature and concludes by discussing avenues for future research aimed at identifying the channels through which a very large financial sector can slow down economic growth.


Ugo PANIZZA

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Credit Deepening: Precursor to Growth or Crisis?

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There are two areas of economic research that are closely related but have until recently developed independently. The first is the literature on the finance growth nexus that has shown how countries with greater financial depth grow more rapidly. The second is the literature on credit and financial crises that has shown that financial crises and recessions are usually preceded by rapid expansion of credit. Thus, credit deepening and credit booms are sometimes beneficial and sometimes not. In the last few years, there have been efforts to reconcile the two literatures. This paper reviews the two literatures and describes recent efforts to reconcile the two relationships. Much more work is required but it is important for policy makers to be able to distinguish good, growth enhancing credit booms from bad, crisis inducing ones.


Paul Wachtel

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Financial Development and Financial Fragility: Two Sides of the Same Coin?

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The paper puts forward three inter-related reasons that explain the recent breakdown of the (bank-based) finance-growth nexus, comprising the use (or abuse) of the relationship by policy-makers, capture by ruling elites and institutional constraints. It concludes that in order to restore the ability of banks to promote growth, the influence of ruling elites on rule of law, financial regulation and supervision needs to be minimized.


Svetlana ANDRIANOVA Panicos O. DEMETRIADES

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Finance, Crisis and Growth

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This article studies the links between the financial sector and macroeconomic performances. The focus of the study is on the distinction between the short-run effects, associated to cycles and crisis, and the long-run effects, associated to economic growth.

After presenting these different effects, the authors show how the concept of hysteresis allows to analyze the interactions between them. In particular, they show that if a higher growth of financial activity comes together with a stronger economic growth during one cycle, it reduces economic growth for future cycles because of the hysteresis phenomenon.


Thomas GRJEBINE Fabien TRIPIER

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Financial Development, Trade Openness and Growth during the First Wave of Globalization

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Did financial development and international trade reinforce each other and drive economic growth more than a century ago? We investigate these linkages among 17 countries during the first wave of economic globalization (1850-1929). Cross-country dynamic panels as well as VARs and VECMs for individual countries indicate that financial development led both trade and growth at this time, while trade largely responded to financial development.


Alexandra D'ONOFRIO Peter L. ROUSSEAU

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Credit Growth, Rational Bubbles and Economic Efficiency

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It has been shown empirically that excessive credit growth and the emergence of bubbles increase the likelihood of a systemic crisis. While no causality between credit growth and systemic crises has been empirically established, it seems reasonable to think that excessive credit growth goes hand in hand with the emergence of bubbles and that it is their bursting that triggers a systemic crisis. This article is devoted to explore the different links between the demand for bubbly assets and the supply of credit and their impact on the emergence of rational bubbles in a dynamic over- lapping generations economy. We argue that this framework should allow to analyze some key trade-offs of macroprudential policy and assess the impact of some of the classical micro and macroprudential instruments.


Xavier FREIXAS

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Finance, Innovations and Productivity

The FinTech Opportunity

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This paper assesses the potential impact of FinTech on the finance industry, focusing on financial stability and access to services. I document first that financial services remain surprisingly expensive, which explains the emergence of new entrants. I then argue that the current regulatory approach is subject to significant political economy and coordination costs, and therefore unlikely to deliver much structural change. FinTech, on the other hand, can bring deep changes but is likely to create significant regulatory challenges.


Thomas PHILIPPON

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Financial Intermediation in the FinTech Era: the Crowdlending Platforms

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This articles studies the role of P2P lending platforms in the financial intermediation.

Online platforms allow matching credit demand with credit supply according to various risk and risk characteristics. Unlike banks, P2P lending platforms do not transform maturity and risk. However, they can organize secondary markets that allow an exchange of credit contracts. Some platforms attempt to provide a fixed revenue stream to lenders.

The regulators have to ensure that platforms act in the interest of lenders to achieve efficient and stable financial intermediation.


Marianne Verdier Olena HAVRYLCHYK

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Global Finance, Financial Cycle and Macroeconomic Stability

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From the 1980s onwards, finance has turned global without much positive impact on long-run growth and economic stability. Contrary the assumption of efficiency and transparency, finance is a network of complex and opaque networks that nurture uncertainty.

Such dynamic systems are endogenously driven by the interaction of indebtedness and asset prices, generating momentum that shows up in the financial cycle. The dynamic feeds in financial vulnerabilities that remain inconspicuous during the euphoric stage of the cycle and burst out at the turning point (Minsky’s moment). It means that the crisis is endogenous to the financial cycle.

The financial cycle impacts the macro economy in activating the financial accelerator.

Both supply side factors and effective demand are hit. Depending on the magnitude of the leveraging/ deleveraging process, multiple macro equilibria are possible, including secular stagnation.


Michel Aglietta

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Climate, Finance and Growth: a Nowhere to Be Found Tango of Economy-Climate Models?

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This paper presents a synthesis of the emerging literature related to the trio climate-finance-growth. It sheds light on the pros and cons of the integrated economy-climate models for the analysis of this trio. We first show how in the integrated assessment models, starting with the seminal Nordhaus’ DICE (2014), growth (improperly) takes precedence over the climate-related damages because investments in a low carbon sector systematically crowd-out the others sectors, with detrimental effects on both short term and long term growth. Moreover, in this perfect financial market framework, this re-allocation of resources drags no disturbing consequences. Finally the rational expectations of a representative agent completely determine the economic long-run equilibrium, leaving no place for any lasting financial or monetary effect. We then progressively relax theses hypotheses to put forward a synthesis of the very recent literature, mainly based on neo-keynesian models. Nonetheless, it appears that the integration finance-climate-growth in the economy-climate models is far from being solved.


Étienne ESPAGNE

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Financial Literacy and Financial Behavior: Bad Education or Black Mark?

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Financial Literacy is a specific component of human capital which allows individual to deal with fundamental financial issues so as to take adequate financial decisions. After presenting the theoretical foundations of this notion, establishing its definition and reviewing the empirical literature, this paper presents recent studies about the link between financial literacy and financial decisions of the population in France using an original survey. The results suggest that financial literacy varies across the population. It is correlated with education but also with gender, age and political affiliation. This last point could reflect differences in opinion regarding the role of welfare state and individual responsibility. Finally, the link between financial literacy and some financial behaviors (the propensity to formulate a specific financial plan in the long run on the one hand and the propensity to own stocks on the other hand) is evaluated: in both cases positive correlations with financial literacy variables are found. We conclude with a reflection on the relative status of financial education to explain the investments of households and judge the effectiveness of training programs in the economic culture.


Luc Arrondel

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Survey

A Survey of the Recent Literature on the Nexus Finance-Growth after the Crisis: Contributions, Limits and Research Agenda

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No summary is available for this article.

Emmanuel CARRÉ Guillaume L'OEILLET

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Financial History Chronicle

The Reichsbank: a Bank for War?

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No summary is available for this article.

Claude Diebolt

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Varia

The Europeans Financial Behavior during the Crisis

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The interpretation of the changes in the households savings rate is too often disconnected from resort to credit and from the different uses of their entire financial resources (savings and new credits). These uses are threefold: loans repayments, financial investments and direct financing of personal contributions in case of durable goods acquisitions.

Admittedly, the necessary reconciliations require still scarce informations such as the amounts of the “real” repayments. During the period 1995-2012, resort to credit has probably been one of the major determining factors of the Europeans savings behavior: credit ebbing from 2007 onwards has very often been associated with a surge in savings rate, but from the use of funds perspective with a financial investments decrease. Likewise international comparisons show that countries with a low savings rate (e.g. Portugal,

Norway, United Kingdom) generally make a greater use of credit and highlight rather important financial investments.


André Babeau

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Do Barriers to Entry Explain the CEMAC Banks Behavior?

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This article identifies the barriers to entry of the CEMAC banking market and analyzes the behavior of banks in a competitive situation. The allotment efficiency scores, for the period 2000 to 2014, reveal the CEMAC banks’ dissuasive strategies. The highest scores indicate more restrictive regulations and therefore higher barriers. The degree of restriction of banking regulation is related to net interest margins. Thus, a 85% increase in the level of restrictions to entry results in an increase of 8,71% of the interest rate loans, with considerable differences between countries. We suggest the implementation of a dynamic approach to provisioning as well as of business intelligence within banks.


Désiré Avom Rodrigue NANA KUINDJA

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Exiting the Very Accommodative Monetary Policy : Stakes and Challenges Facing the ECB

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The ECB has sought to address the various aspects of the crisis that has affected the euro area by building an unprecedented policy combining old instruments and new measures.

This accommodative monetary policy proved to be essential to preserve the economy from deflation, to create the conditions necessary for a return to growth, as well as to save the physical integrity of the euro area. The risks of maintaining unconventional measures today call for their gradual withdrawal. This low, even negative, interest-rate policy, by supporting borrowers, indeed affects the remuneration of savers and lenders, and can therefore encourage excessive risk-taking and speculative behavior that can lead to asset price bubbles. Also affecting the revenues that banks derive from their retail activity, it could likewise sooner or later restrict the ability of banks to keep pace with credit growth during the recovery period. Its normalization, unprecedented and subject to a high degree of uncertainty, for these reasons, has become necessary but is delicate. A rise in interest rates can therefore only be very cautious and gradual, in particular to avoid both the triggering of a bond market crash in the event of a sudden and unexpected rise and, in a context of high level of indebtedness among all economic agents, an excessive increase in their debt-service costs. The exit from this accommodative monetary policy reinforces even more the need to strengthen European macroeconomic stability. In this regard, a better coordination and a truly counter-cyclical nature of economic and fiscal policies as well as the implementation of structural reforms by Member States are important.


Olivier Klein Thibault DUBREUIL

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