Do interest rate controls work? Evidence from Kenya

This paper reviews the impact of interest rate controls in Kenya, introduced in September 2016. The intent of the controls was to reduce the cost of borrowing, expand access to credit, and increase the return on savings. However, we find that the law on interest rate controls has had the opposite effect of what was intended. Specifically, it has led to a collapse of credit to micro‐, small‐, and medium‐sized enterprises; shrinking of the loan book of the small banks; and reduced financial intermediation. Because of their adverse effects on bank lending, we estimate that the interest rate controls have reduced economic growth by ¼–¾ percentage points on an annual basis. We also show that interest rate caps reduced the signaling effects of monetary policy. These suggest that (1) the adverse effects could largely be avoided if the ceiling was high enough to facilitate lending to higher‐risk borrowers and (2) alternative policies could be preferable to address concerns about the high cost of credit.     

BUSINESS CYCLES AND ADMISSIONS TO SUBSTANCE ABUSE TREATMENT

We study the effect of business cycles on admissions to specialty substance abuse treatment using administrative data between 1992 and 2015. We proxy business cycles with the state unemployment rate and apply a panel fixed‐effects model. While previous economic research has shown that substance abuse is counter‐cyclical, we observe no change in the total number of admissions across the business cycle. However, focusing on average effects misses important heterogeneity. In substance‐specific regressions we find statistically significant evidence that heroin‐related admissions are counter‐cyclical while stimulant‐related admissions are procyclical. Our findings add to the literature on business cycles and health. (JEL I1, J2)     

THE TRANSMISSION OF THE MONETARY POLICY IN THE EURO AREA: THE ROLE OF THE BANKS’ BUSINESS MODEL

This paper sheds some new light on the incidence of the banks’ business model as a component of the bank lending channel in the euro area. Differently from existing literature, the analysis is led on the basis of the two main macroeconomic regions that today characterize the euro area: its north‐east (German‐centric) and south‐west halves. The observation period is 2008–2013, mainly featured by the financial and economic crisis. The empirical findings evidence that in the north‐east half of the euro area the cooperative banks leveraged the effects of the reduction in the interest rates in terms of new lending. In this respect, they differentiated from commercial and savings banks, which showed a more neutral impact on the transmission of the monetary policy decisions. These results highlight the distinctive role of the cooperative banks in terms of credit provision in Germany and in the whole north‐east half of the euro area. Nevertheless, this cooperative banking effect did not emerge for the south‐west half of the continent, particularly hit by the crisis. This may suggest that the bank's business model tend to be neutral to the transmission of the monetary policy in economies characterized by prolonged recessions.     

LABOR MARKET IMPACTS OF SMOKING REGULATIONS ON THE RESTAURANT INDUSTRY

This paper examines the impact of smoking regulations on restaurant employment in West Virginia, a state with a high rate of smoking prevalence. Using a confidential establishment‐level dataset, our results suggest that smoking bans reduced restaurant employment by between 0.7 and 1.5 workers, depending on model specification. We find that smoking restrictions have heterogeneous impacts across establishments, with the largest impacts on mid‐sized establishments, defined as those with 10–29 employees. Our results also suggest that the impact of smoking restrictions was larger in counties with higher rates of smoking prevalence. (JEL L51, D78, H0)     

Mortgage lending,monetary policy,and prudential measures in small euro‐area economies: Evidence from Ireland and the Netherlands

This paper examines whether the increased use of macroprudential policies since the global financial crisis has affected the impact of (euro‐area and foreign) monetary policy on mortgage lending in Ireland and the Netherlands, which are both small open economies in the euro area. Using quarterly bank‐level data on domestic lending in both countries for 2003–2018, we find that restrictive euro‐area monetary policy shocks reduce the growth of mortgage lending. We find evidence that stricter domestic prudential regulation mitigates this effect in Ireland, but not so in the Netherlands. There is some weak evidence for an international bank lending channel that can be mitigated by stricter lender‐based domestic prudential regulation.     

A QUEST FOR UNFETTERED CREDIT: HOW MONETARY POLICY DRIVES CREDIT RISK TRANSFER OF STRUCTURED FINANCE PRODUCTS

This study examines the effects of monetary policy contractions on bank loans to households and firms and instruments in three different credit risk transfer (CRT) capital markets over two separate time periods (1995–2006 and 2007–2015). The findings show that in both periods, banks decrease business lending but increase lending to consumers through a combination of mortgage, auto, credit card, and student loans from more liquidity produced by consumer‐related CRT activity. Additional results reveal relative CRT movements toward securitized mortgages from bank mortgage debt over both periods and toward securitized and insured business loans from bank business debt in the latter period, which suggest vulnerabilities among interconnected credit markets. (JEL E44, E51, G21, G23)     

CAN STATE TAX POLICIES BE USED TO GROW SMALL AND LARGE BUSINESSES?

The existing literature studying the relationship between small business activity and U.S. state tax policy has focused primarily on a few measures of small business. We expand this literature by estimating the effect of state tax policy on small businesses by using broader measures of small business activity using a longitudinal dataset for the U.S. states. We also estimate the relationship between state tax policy and large business activity. Results provide evidence that state tax policy can influence small business firm, establishment, payroll, and employment growth in important ways but provide limited evidence that such policy significantly influences large business growth. (JEL H2, H7, R1)     

How to measure the market power of banks in the lending business accurately: a segment-based adjustment of the Lerner Index

Numerous empirical studies use the price-cost-margin-based Lerner Index (LI) to assess the general market power of banks. A common procedure within those LI applications is to approximate the market price required for the LI measurement as the ratio of a bank’s total revenues to total assets. We discuss the major flaws of this aggregated procedure and propose an adjusted (i.e. business segment-orientated) LI approach, which is then applied to assess the market power of banks in the specific lending business at the country level. Our empirical study is based on an original data set containing all interest-related categories (weighted by the respective loan as well as deposit volumes) in the countries of the European Monetary Union zone (EMU) from 2003 to 2013. Our results reveal that the country-specific market power of banks in the lending business has been substantially underestimated in previous studies based on aggregated outputs. For example, averaged across the five most important economies in the EMU, we detect a calibration factor of four. Our findings corroborate the economic notion that the interest-bearing lending business is a more locally separated, and thus profitable, segment in which competition is attenuated.     

集中连片特困区旅游扶贫效率与经济发展水平的时空耦合关系——以武陵山片区为例

采用SBM模型和熵权TOPSIS分别测算武陵山片区42个国家级贫困县2010—2016年旅游扶贫效率和经济发展水平;运用耦合度模型探析旅游扶贫效率与经济发展水平的时空耦合关系。结果表明:①武陵山片区旅游扶贫效率整体水平较高,在小幅度波动中稳步上升,但各国家级贫困县旅游扶贫效率差异显著。②武陵山片区经济发展水平总体呈上升趋势,但综合指数较低,经济增速缓慢,区域差异显著。③研究期内,旅游扶贫效率与经济发展水平的耦合度较高且呈持续上升态势,二者处于良性协调发展状态;旅游扶贫效率与经济发展水平呈现显著的双向正相关关系,相较于旅游扶贫效率对经济发展水平的影响程度,区域经济水平的增长对提升旅游扶贫效率作用更加明显。     

IS THERE A CURSE OF RELOCATION? ANALYSING THE CAUSAL LINK BETWEEN OFFSHORING AND THE INNOVATION PERFORMANCE OF (SMALL) FIRMS

We analyse the empirical link between offshoring activities and different dimensions of innovation performance at the firm‐level. In order to identify causal effects running from offshoring to innovation, we use a quasi‐experimental comparison group approach by means of (conditional) difference‐in‐difference estimations applied to German establishment‐level data for firms that conducted offshoring activities in the period 2007–13. We find that the international relocation of business functions has a negative impact on the firms’ propensity to be innovative in terms of product and process innovations as well as product improvements. While for larger firms the reduction in process innovations is most striking, potentially due to a lack of resources, stagnation in expertise and a reduction in intra‐organizational learning‐by‐doing associated with the relocation of some business activities, for small and medium‐sized enterprises we particularly observe a reduction in product innovations after the offshoring activity has taken place. When interpreting this ‘pessimistic’ picture on the link between offshoring and the innovation performance of firms, the reader should note that our findings for German establishments have to be assessed through the lens of a global economy in economic recession after 2008, which may have intensified the negative impact of offshoring on the firms’ innovation performance.     

From housing bust to credit crunch: Evidence from small business loans

This paper provides evidence that the 2007–2009 housing bust in the United States precipitated a “credit crunch” for small businesses. To remove demand‐driven correlations, we rely on within‐city comparisons. We ask whether banks whose mortgage portfolios were more heavily weighted in harder‐hit cities cut back lending to a greater extent in all cities where they make small business loans, relative to other banks in those cities. The evidence is consistent with a credit crunch. Large banks reacted with heavier cuts, but consistent evidence is also found among smaller banks. Quantitatively, the detected contribution to the overall decline in lending from the crunch appears modest.     

THE SIZE OF FISCAL MULTIPLIERS AND THE STANCE OF MONETARY POLICY IN DEVELOPING ECONOMIES

Implementing fiscal programs during monetary policy expansions seems to improve significantly their economic stimulus. We find this result by estimating the effect of government consumption shocks on gross domestic product (GDP) using a panel of 23 developing economies. Our goal is to better understand the reasons for the low fiscal multipliers found in the literature by performing estimations for alternative exchange rate regimes, business‐cycle phases, and monetary policy stances. In addition, we perform counterfactual simulations to analyze the possible gains from fiscal‐monetary policy coordination. Our results also show lower multipliers in developing economies with flexible regimes, especially during economic slowdowns. (JEL E62, E63, F32)     

FIRING COSTS AND BUSINESS CYCLE FLUCTUATIONS*

This article considers a real business cycle model with establishment level dynamics and uses it to analyze the effects of firing taxes. It finds that firing taxes can have significant consequences on business cycle fluctuations, that the largest effects are on aggregate employment, and that even relatively small firing taxes have substantial effects. A significant contribution of the article is computational: It describes how to use standard linear‐quadratic methods to solve for a stochastic equilibrium of an (S,s) economy with tax distortions.     

OPTIMAL FOREIGN BORROWING REVISITED

Foreign capital has become increasingly important in financing investment and growth in developing countries. Foreign capital flows, however, can be volatile as is evident from the recent financial crises. It has also recently been noted by researchers that there is little systematic empirical evidence that foreign capital contributes to the economic growth of developing countries. In this context, this paper attempts to theoretically reevaluate the borrowing behaviour of a developing economy that relies on foreign borrowing for its capital formation. In particular, this paper investigates the implications of different lending policies of international financial institutions. It is found that no matter whether the borrowing interest rate increases with the level of foreign debt per capita or with the foreign‐capital/total‐capital ratio, the economy always moves toward the stationary state. The result holds even when the representative agent regards the interest rate given as constant. This implies that foreign borrowing does help economic growth, irrespective of lending policies of international financial institutions.     

Are microfinance institutions resilient to economic slowdown? Evidence from their capital ratio adjustment over the business cycle

Prior studies using pre-crisis data concluded that microfinance institutions are resilient to economic crises. However, some recent studies indicate that the microfinance sector is becoming part of the global financial system and microfinance lending activities are now vulnerable to economic and financial crises. Capital being a key resource to support lending, this paper analyzes the cyclical behaviour of capital ratio using an international sample of microfinance institutions from 2001 to 2014. We uncover a negative relationship between their capital-to-assets ratios and business cycle indicators. This relationship mainly concerns regulated institutions, comprised mostly of profit-oriented MFIs, and is driven by both asset-side and capital level adjustments. We identify the lending channel (loan-to-assets ratio) as the main mechanism to explain these cyclical variations. Our findings are consistent with the “procyclicality” of capital regulation documented extensively in the banking literature. Hence, macro-prudential regulation for MFIs should target regulated and profit-oriented MFIs.     

Is Crowdfunding Different? Evidence on the Relation between Gender and Funding Success from a German Peer‐to‐Peer Lending Platform

According to the literature on traditional banking, lenders often discriminate against female borrowers. However, studies of Peer‐to‐Peer lending in the United States find that female borrowers have better chances of obtaining funds than do males. We provide evidence on the success of female borrowers at a large German peer‐to‐peer lending platform. Our results show that there is no effect of gender on the individual borrower's chance to receive funds on this platform, ceteris paribus. Several robustness checks confirm this finding. Hence, female discrimination seems to be eased by the ‘wisdom of the lending crowd’.     

Do Business Cycles Alter the Composition of Research and Development Expenditures?

Do business cycles cause firms to alter the composition of research and development (R&D) expenditures? This article uses aggregate data on U.S. firm‐financed R&D expenditures during the 1956–96 period to address this issue. The mix of R&D expenditures changes over the business cycles with firms increasing the amount of basic R&D and reducing the amount of development R&D during recessions. Though the effects are small, the results raise the possibility that business cycles influence the rate of long‐run growth. (JEL E33, O30)     

Le Pont de Londres: Interactions between monetary and prudential policies in cross‐border lending

Using two unique confidential datasets summarizing the cross‐border lending of banks in France and the UK, we examine whether recipient‐country prudential policies can help to reduce the spillover effects of euro‐area (EA) monetary policy. We address this question from a novel angle, focused on the role of international financial centres, by considering differences in bank size and location (lending from French headquarters vs. from French affiliates located in the UK). For small French banks that lack a presence in international financial centres, the response of direct cross‐border lending from France to EA monetary policy is partially offset by recipient‐country prudential policy. For larger banks, however, the offsetting effect applies only to lending that passes through foreign affiliates located in London. This suggests the existence of a “London Bridge”: banks adapt their flows to the UK conditional on EA monetary policy and global prudential policies; and from their UK affiliates to third‐party countries in a manner that depends on local prudential settings.     

LOCAL AND STATEWIDE SMOKE‐FREE LAWS IN NEBRASKA: THE EFFECTS ON KENO ESTABLISHMENTS

This study examines how smoke‐free laws influence cross‐border keno shopping in Nebraska. We exploit smoke‐free law variation in timing and location to identify keno revenue gains and losses between neighboring smoke‐free and smoke‐friendly areas. We find the Lincoln municipal smoke‐free law reduced keno revenue by 23.5% in Lincoln and increased keno revenue by 30.0% in smoke‐friendly Surrounding Lincoln counties. The Omaha municipal smoke‐free law reduced keno revenue by 14.8% in Omaha and increased keno revenue by 7.1% in smoke‐friendly Surrounding Omaha counties. Following the Nebraska statewide law, no Nebraska areas had a smoke‐friendly advantage and keno revenue fell by an insignificant 1.0% and 5.2% in the surrounding Lincoln and Omaha counties, respectively. Our results may be of interest to local policy makers interested in understanding the amount of business activity and tax revenue that may be migrating out of a community or even the state. (JEL l18, K32)