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Finance, Risk, and Economic Development

Paper Session

Sunday, Jan. 9, 2022 12:15 PM - 2:15 PM (EST)

Hosted By: Association of Indian Economic and Financial Studies
  • Chair: Sushanta Mallick, Queen Mary University of London

Financial Crises and Social Spending

Vitor Castro
,
Loughborough University
Thanh Cong Nguyen
,
Phenikaa University
Justine Wood
,
Loughborough University

Abstract

Financial crises have an immediate impact on the economic activity but also a deep
effect on people’s lives at several dimensions. The social impact of financial crises has not
received as much attention as the economic ones, but while the economy tends to recover
relatively quickly, the social consequences may remain for a long time. Government policies
may help to mitigate these consequences or can inflate them. The competing objectives of
reducing the deficit and protecting citizens from the negative effects of a crisis are a big
challenge for policymakers. If their priority during and in the aftermath of a crisis is to reduce
spending, especially social spending, and restructure budgets to return to financial solvency,
this might be a recipe for disaster in what regards to the welfare of a society. How harmful
this can be is an important question for which we do not have a clear answer. However,
before being able to answer this question we need to understand how social spending reacts
to financial crises.
This paper investigates the impact of financial crises on public social spending in 140
countries over the period 1981-2019 using a system GMM estimator. Unlike most of the
previous empirical works that focused essentially on social spending in the aftermath of
banking crises – especially in what regards the Great Recession of 2007/08 – we depart from
them in terms of types of financial crises considered. In this study, we account for not only
banking crises but also currency, debt, and twin and triple crises as different crises may have
different impacts on social spending. Understanding these reactions will open the way for a
proper assessment of how harmful government conservatisms in the aftermath of crises can
be for social welfare.

Bank Credit Risk and Macro-Prudential Policies: Role of Liquidity in Uncertain Times

Nadia Benbouzid
,
University of Greenwich
Abhishek Kumar
,
Indira Gandhi Institute of Development Research
Sushanta Mallick
,
Queen Mary University of London
Ricardo Sousa
,
University of Minho
Aleksandar Stojanovic
,
University of Greenwich

Abstract

This paper investigates the impact of macro-prudential policy on bank credit risk using a unique data set consisting of bank-level and country-level data for 429 credit default swap (CDS) spreads related to 149 banks from 36 countries over the period 2010-2019. We find that bank CDS spread increases during uncertain times, and prudential regulation measures (counter-cyclical capital buffers) prevent any increase in bank CDS spreads. We further show that bank-level factors, such as (i) an improvement in liquidity, (ii) a rise in capital ratios, (iii) an increase in profitability and, to some extent, (iv) better asset quality and (v) a fall in leverage are associated with lower bank CDS spreads. In identifying the transmission mechanism, we find that banks with higher liquidity are better positioned to comply with macro-prudential regulation, while mitigating the rise in credit risk during uncertain times. Therefore, central bank actions in providing liquidity during the COVID-19 pandemic are justified for containing financial market risks.

Are Capital Inflow Bonanzas a Common Precursor to Banking Crises?  A Categorical Data Analysis 

David M. Kemme
,
University of Memphis
Saktinil Roy
,
Athabasca University

Abstract

The empirical literature that relates capital inflow bonanzas to the risk of a banking crisis has, so far, examined the probability of a crisis conditional on a bonanza episode. We argue that estimating the probability of a prior capital inflow bonanza given the occurrence of a banking crisis is at least equally important from a policy perspective to limit the exposure to sudden, big surges in capital inflows and reduce the risk of a systemic banking crisis. We consider two global samples, one consisting of sixty-four countries for 1970-2008 and the other one-hundred-and-eleven countries for 1980-2008. In both samples, we show that the latter conditional probability is strikingly large, much higher than the former, and even higher if we consider only "systemic" banking crises in developing countries. We also construct 2x2 contingency tables, utilize the odds ratio, and conduct statistical tests to show that the association between bonanzas and crises is significant and robust across the two samples. The association is much stronger than commonly understood, most notably for systemic crises in developing countries. The findings provide support for stronger policies to limit or dampen unusual surges in international capital flows.

Does productivity growth boost domestic savings? Causal evidence using event studies and model-based instruments

Abhishek Kumar
,
Indira Gandhi Institute of Development Research
Sushanta Mallick
,
Queen Mary University of London
Kunal Sen
,
United Nations University-WIDER

Abstract

Domestic resource mobilisation, as a key policy challenge for many developing economies, raises questions on what determines cross-country differences in savings behaviour and whether saving precedes growth or growth leads to higher savings. Using a panel of countries with at least 40 years of continuous time series data, we causally identify the effect of total factor productivity (TFP) growth on savings using three different approaches. First, from our event-study estimates, we find that large and sustained increases in TFP growth lead to persistent increase in savings, whereas such increases in savings do not translate into higher TFP growth. Second, productivity shocks from a Neoclassical model are used as exogenous instruments for productivity growth; one percent increase in TFP growth increases savings rate by 0.14 percent on average across different models. Finally, comparing two countries in which one experienced a sudden decline in TFP growth and using a counter-factual simulation, we reconfirm that large declines in productivity shocks were associated with large decline in savings. Therefore, countries should focus on promoting policies to boost productivity growth and thereby achieve higher savings instead of focusing on savings-induced policies alone.

Finance, Gender, and Entrepreneurship: India’s Informal Sector Firms

Ira N. Gang
,
Rutgers University
Rajesh Raj Natarajan
,
Sikkim University
Kunal Sen
,
United Nations University-WIDER

Abstract

How does informal economic activity respond to increased financial inclusion? Does it
become more entrepreneurial? Does access to new financing options change the gender
configuration of informal economic activity and, if so, in what ways and what directions? We take
advantage of nationwide data collected in 2010/11 and 2015/16 by India’s National Sample Survey
Office on unorganized (informal) enterprises. This period was one of rapid expansion of banking
availability aimed particularly at the unbanked, under-banked, and women. We find strong
empirical evidence supporting the crucial role of financial access in promoting entrepreneurship
among informal sector firms in India. Our results are robust to alternative specifications and
alternative measures of financial constraints using an approach combining propensity score
matching and difference-in-differences. However, we do not find conclusive evidence that
increased financial inclusion leads to a higher likelihood of women becoming entrepreneurs than
men in the informal sector.

Discussant(s)
Sushanta Mallick
,
Queen Mary University of London
Justine Wood
,
Loughborough University
Abhishek Kumar
,
Indira Gandhi Institute of Development Research
Valerie Cerra
,
International Monetary Fund
Keshab Bhattarai
,
University of Hull
JEL Classifications
  • G2 - Financial Institutions and Services
  • O1 - Economic Development