Financial Integration, Economic Growth and Financial Stability
Financial integration is a strong and growing force shaping the international economic landscape. This research group analyses the role of financial integration for economic growth and financial stability.
Neoclassical economics suggest that an integrated global financial market can boost economic growth through reduced capital costs and increased risk-sharing. However, countries with a liberalised capital account in fact do not necessarily perform better than economies with capital controls, and the last global financial crisis caused a reversal to the process of financial globalisation. Therefore, reevaluating the role of financial integration for economic growth and financial stability is of great importance for policy discussion as well as academic research.
This research group aims at finding answers to the following questions: First, the group investigates how the productivity of firms is affected by the access to international capital and whether capital-intensive sectors benefit more from capital account liberalisation than other sectors. In addition, this group explores the structural transformational consequences of financial integration. Second, international capital is fueled into the economy through financial institutions. The group analyses whether the cross-border capital flow alternates banks’ behaviour and specifically, how the financing maturity, structure and systemic risk are affected. Third, international organisations like the IMF suggested a gradual path to liberalise the capital account, the main idea of which is to liberalise the inward flow before the flow out, and the FDI flow before the flow of debt and equity. However, empirical evidence is rare. This group studies whether and how the sequencing of capital account liberalisation matters for financial stability.
Research ClusterProductivity and Institutions
Surges and Instability: The Maturity Shortening Channel
in: Journal of International Economics, forthcoming
Capital inflow surges destabilize the economy through a maturity shortening mechanism. The underlying reason is that firms have incentives to redeem their debt on demand to accommodate the potential liquidity needs of global investors, which makes international borrowing endogenously fragile. Based on a theoretical model and empirical evidence at both the firm and macro levels, our main findings are twofold. First, a significant association exists between surges and shortened corporate debt maturity, especially for firms with foreign bank relationships and higher redeployability. Second, the probability of a crisis following surges with a flattened yield curve is significantly higher than that following surges without one. Our study suggests that debt maturity is the key to understand the financial instability consequences of capital inflow bonanzas.
Total Factor Productivity Growth at the Firm-level: The Effects of Capital Account Liberalization
in: Journal of International Economics, forthcoming
This study provides firm-level evidence on the effect of capital account liberalization on total factor productivity (TFP) growth. We find that a one standard deviation increase in the capital account openness indicator constructed by Fernández et al. (2016) is significantly associated with a 0.18 standard deviation increase in firms’ TFP growth rates. The productivity-enhancing effects are stronger for sectors with higher external finance dependence and capital-skill complementarity, and are persistent five years after liberalization. Moreover, we show that potential transmission mechanisms include improved financing conditions, greater skilled labor utilization, and technology upgrades. Finally, we document heterogeneous effects across firm size and tradability, and threshold effects with respect to the country's institutional quality.
Financial Technologies and the Effectiveness of Monetary Policy Transmission
in: European Economic Review, January 2024
This study investigates whether and how financial technologies (FinTech) influence the effectiveness of monetary policy transmission. We use an interacted panel vector autoregression model to explore how the effects of monetary policy shocks change with regional-level FinTech adoption. Results indicate that FinTech adoption generally mitigates the transmission of monetary policy to real GDP, consumer prices, bank loans, and housing prices, with the most significant impact observed in the weakened transmission to bank loan growth. The relaxed financial constraints, regulatory arbitrage, and intensified competition are the possible mechanisms underlying the mitigated transmission.
Household Indebtedness, Financial Frictions and the Transmission of Monetary Policy to Consumption: Evidence from China
in: Emerging Markets Review, June 2023
This paper studies the impact of household indebtedness on the transmission of monetary policy to consumption using the Chinese household-level survey data. We employ a panel smooth transition regression model to investigate the non-linear role of indebtedness. We find that housing-related indebtedness weakens the monetary policy transmission, and this effect is non-linear as there is a much larger counteraction of consumption in response to monetary policy shocks when household indebtedness increases from a low level rather than from a high level. Moreover, the weakened monetary policy transmission from indebtedness is stronger in urban households than in rural households. This can be explained by the investment good characteristic of real estate in China.
Does Capital Account Liberalization Affect Income Inequality?
in: Oxford Bulletin of Economics and Statistics, No. 2, 2021
By adopting an identification strategy of difference‐in‐difference estimation combined with propensity score matching between liberalized and closed countries, this paper provides robust evidence that opening the capital account is associated with an increase in income inequality in developing countries. Specifically, capital account liberalization, in the long run, is associated with a reduction in the income share of the poorest half by 2.66–3.79% points and an increase in that of the richest 10% by 5.19–8.76% points. Moreover, directions and categories of capital account liberalization matter. The relationship is more pronounced when liberalizing inward and equity capital flows.
Global Political Ties and the Global Financial Cycle
in: IWH Discussion Papers, No. 23, 2023
We study the implications of forging stronger political ties with the US on the sensitivities of stock returns around the world to a global common factor – the global financial cycle. Using voting patterns at the United Nations as a measure of political ties with the US along with various measures of the global financial cycle, we document evidence indicating that stronger political ties with the US amplify the sensitivities of stock returns in developing countries to the global financial cycle. We explore several channels and find that a deepening of financial linkages along with a reduction in information asymmetries and an amplification of sentiment are potentially important factors behind this result.
BigTech Credit and Monetary Policy Transmission: Micro-level Evidence from China
in: IWH Discussion Papers, No. 18, 2022
This paper studies monetary policy transmission through BigTech and traditional banks. By comparing business loans made by a BigTech bank with those made by traditional banks, it finds that BigTech credit amplifies monetary policy transmission mainly through the extensive margin. Specifically, the BigTech bank is more likely to grant credit to new borrowers compared with conventional banks in response to expansionary monetary policy. The BigTech bank‘s advantages in information, monitoring, and risk management are the potential mechanisms. In addition, monetary policy has a stronger impact on the real economy through BigTech lending.
Globalization, Productivity Growth, and Labor Compensation
in: IWH Discussion Papers, No. 7, 2022
We analyze how changes in international trade integration affect productivity and the functional income distribution. To account for endogeneity, we construct a leaveout measure for international trade integration for country-industry pairs using international input-output tables. Our findings corroborate on the country-industry level that international trade integration increases productivity. Moreover, we show that both trade in intermediate inputs and trade in value added is associated with lower labor shares in emerging markets. For advanced countries, we document a positive effect of trade in value added on the labor share of income. Further, we show that the effects on productivity and labor share are heterogeneous across different sectors. Finally, we discuss the implications of our results for a possible throwback in international trade integration due to experiences from recent crises.
The Role of State-owned Banks in Crises: Evidence from German Banks During COVID-19
in: IWH Discussion Papers, No. 6, 2022
By adopting a difference-in-differences specification combined with propensity score matching, I provide evidence using the microdata of German banks that stateowned savings banks have lent less than credit cooperatives during the COVID-19 crisis. In particular, the weaker lending effects of state-owned banks are pronounced for long-term and nonrevolving loans but insignificant for short-term and revolving loans. Moreover, the negative impact of government ownership is larger for borrowers who are more exposed to the COVID-19 shock and in regions where the ruling parties are longer in office and more positioned on the right side of the political spectrum.
How Does Economic Policy Uncertainty Affect Corporate Debt Maturity?
in: IWH Discussion Papers, No. 5, 2022
This paper investigates whether and how economic policy uncertainty affects corporate debt maturity. Using a large firm-level dataset for four European countries, we find that an increase in economic policy uncertainty is significantly associated with a shortened debt maturity. Moreover, the impacts are stronger for innovation-intensive firms. We use firms’ flexibility in changing debt maturity and the deviation to leverage target to gauge the causal relationship, and identify the reduced investment and steepened term structure as the transmission mechanisms.