Issues in Applied Macroeconomics and Growth
Paper Session
Sunday, Jan. 5, 2025 8:00 AM - 10:00 AM (PST)
- Chair: Usha Nair-Reichert, Georgia Institute of Technology
Does Open Banking Expand Credit?
Abstract
We use the launch of zero-cost digital payment infrastructure in India, namely Unified PaymentInterface (UPI), in 2016 as a natural experiment to investigate the impact of open banking on
credit access. UPI enabled real-time zero-cost creation of a verifiable digital financial history for
all. We obtain several unique and proprietary data sets, including rich credit bureau data on the
universe of consumer loans, UPI transactions at the pin-code level, and loan-level information
from one of the largest fintech lenders. Exploiting time variation in the adoption of UPI by
banks with the highest local deposit share as a source of exogenous variation in UPI usage in
a difference-in-differences empirical design, we document a significant increase in consumer
credit by banks, shadow banks, and fintechs. Consistent with financial inclusion, the credit
increases to subprime and new-to-credit customers. Notably, the credit increase for new-to credit
customers is led by fintech lenders, especially in ex-ante financially excluded regions. An
alternate empirical design using the launch of a major mobile phone operator that considerably
reduced internet data costs confirms these findings. Overall, these findings underscore that
digital payments complement savings bank account-oriented financial inclusion programs in
expanding credit access and inform the policy discussion on open banking’s impact.
Structural Risk Modelling- Indian Mergers & Acquisitions
Abstract
Primary survey data of Indian M&A transactions were used to test the hypotheses on latent risk factors. A structural equation model (SEM) model was estimated to assess the composite risk factors considering financial, non-financial, and sustainability risks. The results reveal that reforms in management and human resources can control up to 23 percent of overall risk. Ensuring appropriate technology will take away another 22 percent risk. Macroeconomic stability can reduce risks of the firms by 12 percent. Then sustainability factors reduce risk by 11 percent and another 11 percent of risk can be controlled by a sound financial sector. Thus overall novelty of this research is to critically evaluate the existing framework and propose a holistic M&A risk assessment model that captures contemporary technical, management and HR, economic issues underlying challenges of business enterprises in India. The research gap in assessing sustainability M&A risks is an extended version of the existing M&A synergy gain theory.Basel Regulations and Indian Banks’ Strategies Towards Capital and Risk
Abstract
The Basel regulatory standards aim to make banks more resilient, restore confidence in banking systems, and address systemic vulnerabilities. This paper examines the key trade-offs banks make when faced with the implementation of these more stringent standards, and their impacts on the Indian banking system. These standards are especially important in developing countries like India where many banks are undercapitalized and have very large non-performing assets. We find that banks’ changes in capital adequacy and risk vary by ownership structure. Changes in capital adequacy are more pronounced in foreign banks while public and private domestic banks see greater changes in risk as they venture into riskier activities such as trading and brokerage to compete with their foreign competitors. In aggregate, Basel 1 witnessed changes in capital adequacy for banks that are diversified or with lower asset quality. Changes in capital adequacy ratios and risk were not witnessed the Basel 2 period in Indian banks as they remained stable with adequate capital so as to not come under scrutiny of regulators as the global financial sector collapsed. At the heels of the global financial crisis, Indian public sector banks faced a large volume of non-performing assets as Basel 3 regulations came into effect resulting in changes in capital adequacy and risk in Indian banks.Government Size and Risk Premium
Abstract
Given the rise in the government debt level in recent times, this paper aims tounderstand the effect of an increase in government size on risk premium and its
transmission in the economy. We jointly identify the term spread shock (originating
at the short-end and the long-end) and the government size shock, using max share
identification. Term spread shock originating at the long-end is driven by higher
risk premium unlike the shock originating at the short-end, and increases inflation
and reduces growth. Results suggest that the increase in the share of government
expenditure in GDP (size) increases long-term rates by increasing the risk (term
premium) and hence obstructs the transmission of monetary policy. As expected,
the effect of government size on risk premium is more pronounced during recessions
compared to expansions. By including a news shock about future economic activity,
we rule out that the effect of government size shock on term premium is not driven
by a news shock. We estimate the parameters of a new Keynesian model with term
premium by matching the responses in data with responses from the model.
The model can generate a similar rise in risk premium due to the increase in
government size, and the estimated parameters suggest that the coefficient of risk
aversion during recession is more than twice that of during expansions.
Trilemma or Trinity? The Nexus of Economic Growth, Circular Economy and Net Zero
Abstract
How can economies achieve economic growth without causing negative environmentalexternalities? There are two aspects to the long-standing debate on .sustainable growth..
A first-best solution is for economies to replace fossil fuels with renewable energy sources,
mitigating carbon emissions. A second-best solution is for economies to also adopt e¢ -
cient waste management, recycling residual waste and pollutants (including hard-to-abate
carbon) from production (circular economy). We establish a simple growth model that
integrates three fundamental pillars of economics: (i) the net-zero carbon target in envi-
ronmental economics (ii) the circular economy, dealing with waste management in resource
economics, and (iii) sustainable growth, in growth economics. We argue that growth, cir-
cularity and net zero emissions present a trinity of solutions to the sustainable growth
problem, showing that the circular economy is a necessary condition for achieving net zero.
We show that an economy with .active environmental policy achieves net-zero faster than
one with .passive. policy, and also eliminates carbon.
JEL Classifications
- O5 - Economywide Country Studies
- F2 - International Factor Movements and International Business