Does fiscal decentralization foster regional investment in productive infrastructure?

The aim of this paper is to analyze the effect of revenue decentralization on the provision of infrastructure at the sub-national level. We estimate the effects of revenue decentralization and earmarked grant financing on the level of sub-national infrastructure investment in 20 European countries over the period 1990–2009. The results are interpreted in light of the predictions of the theory on fiscal federalism. We find that it is sub-national infrastructure investment that increases after revenue decentralization and not investment in redistribution. However, the effect of revenue decentralization is lower the higher the use of earmarked grants to fund infrastructure investment.     

Sub-national differentiation and the role of the firm in optimal international pricing

We illuminate the relationship between optimal firm pricing and optimal trade policy by exploring a generalized model that accommodates product differentiation at both the national and sub-national (firm) levels. We assume monopolistic competition in the differentiated products at the sub-national level. When the national and sub-national substitution elasticities are similar we find little opportunity for small countries to improve their terms of trade through trade distortions, because firms play an important preemptive role in optimally pricing unique varieties. We contrast this with standard applications of perfect-competition Armington models, which exhibit high optimal tariffs—even for relatively small countries.     

Credit risk assessment in the microfinance industry

This paper discusses credit risk assessment through conventional and specialized credit evaluation metrics. I find that low credit risk is a direct consequence of sound implementation of good governance practices and sustainable financial performance through sound qualitative and quantitative risk management tools. Furthermore, I find that the depth and breadth of outreach and write‐off are by some margin the two most important determinant indicators of a microfinance institutions’ (MFI’s) credit risk control. In addition, I demonstrate that there is no significant statistical difference in terms of risk management among the different types of MFIs. Results also suggest that constructive regulation to promote MFIs has a non‐negligible impact on the risk assessment of MFIs.     

中国地方公共支出的产出效率及其最优水平

通过对Barro Rule单一类型政府支出模型的推广,本文建立了多类型政府支出模型,并且利用中国省级面板数据研究了不同类型公共支出的效率及其最优水平。结果显示,最优总支出水平大致在20%左右,经济建设性支出、行政性支出和社会服务性支出的最优水平大约分别为5.8%、6.6%和7.6%。     

The democratic (dis)advantage: The conditional impact of democracy on credit risk and sovereign default

Many have argued that democracies are able to make credible commitments to repay their debts and consequently enjoy higher sovereign credit ratings. In contrast to this expectation, I argue that the advantage of democracies in credit ratings is conditional on the countries' level of financial vulnerability and adjustment needs. Because democracies have more diffuse decision-making and are more accountable to the public, they encounter greater difficulty than autocracies in passing unpopular economic adjustment measures. Thus, I argue that democracies with high debt levels and low foreign reserve assets experience worse credit outcomes, whereas democracies with low vulnerability experience more positive outcomes. In a sample of up to 96 developing countries, I show that democracies have worse credit ratings and CDS Spreads and are more likely to default than their autocratic counterparts when foreign reserves are low relative to external debt. Notably, I also show that large debt burdens increase credit risk mainly in more democratic countries. I further test the causal pathway of the democratic advantage by constructing democracy scores of “market-friendly” and “adjustment-difficulty” democracy, finding that democracy worsens debt outcomes due to adjustment difficulty. These findings help to revise and clarify the causal logic surrounding the democratic advantage hypothesis.     

The role of banks in the Czech monetary policy transmission mechanism

With this work, I aim to enrich the knowledge about the monetary policy transmission mechanism in the Czech Republic with empirical evidence on the impact of monetary policy on bank lending. Using a panel of quarterly time series for Czech commercial banks for the period 1996–2001, I study the overall effect of monetary policy changes on the growth rate of loans and the characteristics of the supply of loans. The characterization of the credit market's supply side allows us to make inferences on the operativeness of the credit channel (the bank lending channel and the broad credit channel) of the monetary transmission mechanism. I find that changes in monetary policy alter the growth rate of loans, with considerably stronger magnitude in the period 1999–2001 than in the period 1996–1998. From the analysis intended to capture the characteristics of the supply of loans, I conclude that the lending channel was operative in the period 1996–1998: I find cross‐sectional differences in the lending reactions to monetary policy shocks due to the degree of capitalization and to liquidity. For the subsequent period 1999–2001, the results also show distributional effects of monetary policy due to bank size and its bank's proportion of classified loans. In the context of steadily decreasing interest rates, this can bolster the supposition of financial frictions between borrowers and lenders and hence, that of an operative broad credit channel.     

PROMISE KEEPING IN THE GREAT SOCIETY: A MODEL OF CREDIT INFORMATION SHARING

Reputation is possible in a small community, but in the Smith-Lippmann-Hayekian Great Society people are mainly strangers. I model credit reporting as a system of formalized and surgically-precise gossip. In the Great Society credit reporting makes possible reputations, which make possible credit relationships. But forming a credit reporting system is no simple matter. Historically it has been local gossip in the small community that has made possible credit reporting "gossip" in the Great Society.     

Inside Shadow Banking in China: Credit Driven Growth vs. Financial Stability

Shadow banking has been growing rapidly in China since the 2008 global financial crisis. Shadow banking has also played an increasing role in supplying credit. I investigate the development of the shadow banking sector, and assess its impacts on financial stability and economic growth in China. I argue that, due to the loose regulations and institutional characteristics of the shadow banks, these banks tend to adopt business practices that elevate institutional risks. At the systemic level, shadow banks have contributed to credit expansion and credit-driven growth. However, such growth entails significant financial risks and renders the macro-economy financially fragile. I conclude with a discussion of imminent fullblown financial crisis, calling for policy actions.     

Why are credit card rates sticky?

Summary This paper investigates credit card rate stickiness using a screening model of consumer credit markets. In recent years, while the cost of funds has fallen, credit card rates have remained stubbornly high, spurring legislators to consider imposing interest rate ceilings on credit card rates. The model incorporates asymmetric information between consumers and banks, regarding consumers' future incomes. The unique equilibrium is one of two types: separating (in which low-risk consumers select a collateralized loan and high-risk consumers select a credit card loan), or pooling (in which both types of consumers choose credit card loans). I show that a change in the banks' cost of funds can have an ambiguous effect on the credit card rate, so that the credit card rate need not fall when the cost of funds does. Usury ceilings on credit card rates are detrimental to consumer welfare, so would be counter to their legislative intent.I thank George Mailath, Paul Calem, Gerhard Clemenz, Sally Davies, George Kanatas, Leonard Nakamura, Tony Santomero, Tony Saunders, participants in the 1990 Financial Management Association Meetings, and co-editor Michael Woodford for helpful comments.The views expressed here are those of the author and do not necessarily represent the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.     

On the complementarity of money and credit

I propose a model where agents choose to conduct their business using two payment instruments, money and bilateral credit. A friction in the timing of transactions rationalizes the use of both instruments and makes it optimal for agents to use money as a means of settlement for credit. Money and credit complement each other. With anticipated inflation, complementarity implies that the credit to money ratio decreases with inflation.     

Microfinance spillovers: A model of competition in informal credit markets with an application to Indian villages

Despite widespread interest in the development of microfinance, spillover effects on the non-using population and redistributive issues remain largely unexplored. I study a competition game between microfinance institutions (MFIs) offering joint-liability loans and moneylenders offering individual loans in presence of adverse selection. I show that one unintended consequence of the entry of a microfinance sector in local credit markets can be to trigger an increase in the equilibrium informal interest rate, because MFIs tend to attract a disproportionately-safe share of the borrower pool away from incumbent moneylenders. The existence of such composition externality depends crucially on the size of the microfinance sector and the risk composition of the borrower pool. The model predicts a non-linearly increasing relationship between informal interest rates and MFIs' capacity in relatively safe credit markets, and no relationship in risky villages. I show evidence supporting these predictions, using a first-hand panel database that records all credit transactions over 8 years for a sample of about 1000 households living in Indian villages with extensive space and time variation in the size of their microfinance sector.     

War and the political zeitgeist: Evidence from the history of female suffrage

Despite the upheaval associated with warfare, empirical evidence linking conflict with institutional development is limited. This paper examines the hypothesis that international wars accelerated democratization by fostering political inclusion. Employing survival analysis, I find that during the 20th century, nations engaging in external conflict were more than twice as likely to extend the franchise to women in the post-conflict period, even after controlling for other commonly cited determinants of suffrage adoption. I explore several potential mechanisms for this association and find evidence consistent with stories which connect war with increased national unity, ideological fervor, and international posturing. Finally, examining conflict-induced changes in sex ratios and female labor force participation suggests that the underlying determinants of suffrage expansion at the national and sub-national level differ.     

Democracy, size of bureaucracy, and economic growth: evidence from Russian regions

This article considers the impact of sub-national political systems on economic growth by applying the case of Russian regions from 2000 to 2004. It investigates two dimensions of the sub-national systems. First, it studies the influence of democracy on economic performance, providing evidence of a non-linear relationship between democracy and economic growth. Regions with high levels of democracy, as well as strong autocracies, perform better than hybrid regimes. Second, this article considers the influence of the size of the bureaucracy on economic outcomes and confirms the ??grabbing hand?? view on bureaucracy rather than the Weberian idea. Increasing the size of the bureaucracy is associated with a decline in economic performance. In addition, this article analyzes the potential interaction between these two characteristics of sub-national politics as factors of economic growth, but does not establish any robust results.     

Economic and non-economic determinants of FDI inflows in Vietnam: a sub-national analysisPost-Communist Economies

This article focuses on identifying the factors that determine FDI inflows at the sub-national level (i.e. provinces/cities) in Vietnam. Based on a longitudinal dataset for the period 2008–2013 of 63 provinces/cities, we examine the impact on FDI of conventional factors (market size, human resources and infrastructures) as well as emerging factors (institutions and policies, domestic and foreign agglomeration) that are suggested by theories in economics and international business. Statistical results show that market size, infrastructure, labour quality, institutions and policies, and agglomeration are major determinants of FDI inflows at the sub-national level in Vietnam. Implications for policy makers and future research are also discussed.     

Credit channel and flight to quality in emerging markets: evidence from Chile

Empirical evidence of the credit channel of monetary policy often relies on the observance of flight to quality during monetary tightening. The identification assumption is that the typically smaller firms facing financing constraints, are disproportionally affected by the stance of monetary policy. I argue that when credit constrains are widespread, as may be the case in Emerging Markets, flight to quality should not be expected during monetary contractions. Indeed, in my model, among constrained firms, those with tighter financing constraints are less responsive to monetary conditions. I find evidence supporting my model in a sample of firms from the Emerging Market of Chile.     

The Significance of Credit Rationing on Real Investment Activity – A Test for the Significance of Capital-Market Imperfection in Japan

Does bank credit matter to the real investment finance of firms? If so, to what kind of firms does it matter, and why? Despite the progress of research in this field, there is still little empirical consensus on these problems. This paper contributes to the understanding of capital-market imperfection in Japan by answering these questions. I introduce new methods to test the significance of credit rationing and show that bank credit is indeed a very important determinant of real investment activity of small firms. The availability of long-term loans has particularly significant effects on the investment opportunities of small firms, although large firms with capital of more than 1 billion yen are free from credit rationing. JEL Classification Numbers: C51, E44, G21.     

Information technology and the rise of household bankruptcy

Several studies have attributed the rise of household bankruptcy in the past two decades to the decline of social stigma associated with default. Stigma explanations, however, cannot account for the large increase in the use of unsecured credit during this period. I explain the simultaneous increase in bankruptcy rates and unsecured credit as the result of improvements in credit-rating technologies. Using an environment where borrowers face heterogeneous default costs (unobservable by creditors), I show that such improvements will lead to agents with high default costs, i.e., “safe” borrowers, being able to borrow more. A quantitative example illustrates that this increased access to credit can be large enough to raise both equilibrium borrowing and default rates.     

Industrial districts and financial constraints to innovation

Informational frictions between borrowers and lenders are particularly acute for innovative firms undertaking high‐risk projects. As a consequence, banks may end up denying credit to them. However, the literature on relationship finance predicts that a closer relationship between credit suppliers and obligors is deemed to alleviate information asymmetries, hence preventing credit rationing from occurring. The question of whether such situations also apply to innovative firms has so far remained relatively unexplored. Using a cross‐section of Italian manufacturing firms, I find that credit constraints appear to be more severe for firms undertaking innovative activities, although such effects are weaker when measures of R&D intensity are included. The empirical analysis also shows that firms located in an industrial district have easier access to external finance. If I move to consider firms engaged in substantial R&D activities located in a district, results suggest that they can benefit from better financial conditions.     

Credit limits and bankruptcy

Credit cards offer a limit, rather than a specific loan size, at a pre-approved interest rate. This paper studies the determination of these credit limits jointly with default in the presence of one-period debt. I adapt the standard incomplete markets macroeconomic model of one-period unsecured debt with the optimal choice of credit limit. Endogenous limits and positive default coexist. A numerical exercise illustrates the consequences of various factors for indebtedness, credit limits, and bankruptcy.     

农村小额保险与小额信贷结合发展及其模式探讨

小额保险是一种新型保险项目,它以低廉的保费为中低收入人群提供能够保障基本生活的保险产品,具有商业性和社会公益性的双重特征,被认为是一项重要的扶贫措施。农村小额信贷在支持三农发展、帮助农村低收入群体脱贫方面起到不可替代的作用。本文分析了小额信贷机构在经营中面临的信贷风险,在对比国际经验的基础上指出农村小额信贷与小额保险相结合的发展模式,是我国发展农村金融可资借鉴的一种良好模式。文中分析指出了农村小额信贷与农村小额保险相结合的必要性与紧迫性,并提出发展农村小额信贷与农村小额保险的政策建议。