Trade openness,financial openness,and macroeconomic volatility

This paper develops a new model of an open economy for a study of macroeconomic dynamics under different degrees of trade and financial openness. The model is estimated using quarterly data on the Chinese economy over the period 2005Q3-2020Q4 and then applied to analyze how macroeconomic volatility varies with trade and financial openness in several representative settings. We find that the impacts on macroeconomic volatility of trade openness and financial openness depend on the nature of the underlying shocks and a moderate degree of trade openness, together with a high degree of financial openness, yield the optimal welfare results in most cases. These results highlight that the effects of trade and financial openness on macroeconomic volatility differ in various situations and that their interactions can lead to different welfare results.     

Bank competition,financial development and macroeconomic stability: Empirical evidence from emerging economies

In this study, we investigate the potential contribution of bank competition to macroeconomic stability, and the interactive role of financial development. We classify macroeconomic stability into economic and financial stability. Economic stability is represented by the volatility of actual and unexpected output growth, whereas financial stability is assessed by the aggregate Z-score and volatility of the private credit-to-gross domestic product ratio. We employ two structural and two non-structural measures of bank competition in our analysis. Applying a two-step dynamic panel system (GMM) to macroeconomic data from 48 developing nations from 1999 to 2018, we find a bell-shaped relationship between bank competition and macroeconomic stability. The findings imply that a higher level of bank competition promotes macroeconomic stability by reducing output growth volatility, fluctuations in private credit, and the probability of bank default. There is an optimal level of bank competition beyond which it may foster economic and financial instability. Moreover, financial development enhances bank competition’s positive impact on macroeconomic stability.     

An evolutionary game theory model for the inter-relationships between financial regulation and financial innovation

Financial regulation and financial innovation tend to show a dynamic game process of ‘regulation-innovation-re-regulation-re-innovation’. This paper constructs an evolutionary game model to simulate the above phenomena for analyzing the stable equilibrium strategies between financial institutions and regulation institutions. Previous studies mainly stay in a theoretical perspective; instead, this study uses the financial and macroeconomic data of the U.S. during 1947–2007 to numerically demonstrate the dynamic evolution paths of financial regulation and financial innovation. This study finds that the financial regulation and financial innovation of the U.S. presents a dynamic adjustment process by promoting the development of each other. Both regulatory and innovative strategies should be coordinated in the evolutionary progress in a timely and coordinated reason. This study has great referential value for policy makers to balance regulation and innovation in the financial industry and for avoiding financial crises.     

开放条件下中国货币与经济关联度变动原因实证研究

本文运用动态条件相关(DCC)方法估计中国各层次货币与实体经济的关联度。研究发现,1994年前,关联度始终在低位波动,之后大幅提高,总体呈上升趋势。通过在模型中引入金融深化度和经济开放度,本文从不同的侧面解释了货币与经济关联度变动的原因。虽然金融深化度和经济开放度对关联度的影响程度随货币层次的提高而增强,但作用方向却不完全相同;金融深化度越高,经济开放度越低,关联度越强,这表明金融深化理论与中国国情相适应。这对于改革开放具有较强的现实意义。政府通过优先发展金融,深化金融体制改革,能够提高货币对经济增长的效能,促进经济结构的转型和经济持续增长。     

The financial investment decision of non-financial firms in China

This paper constructs a portfolio model to analyze the determinants of the financial investment decision of non-financial firms in China. Unlike the literature assuming that financial investments are riskless, our model allows risks in both fixed and financial investments. We show that this extension provides an analytically similar but economically different model from the literature. In particular, it is relative risk and risk-adjusted return gap, not pure risk and simple return gap that enter into firms’ financial investment decision model. Using firm-level panel data of 1902 firms listed in Chinese stock market over the period from 2006 to 2016 with semi-annual frequency, we find that the ratio of fixed investment risk over total risk dominates financial investment decisions of non-financial firms. However, rates of risk-adjusted return gap between financial and fixed investments play no role in Chinese firms’ financial investment decisions, which is in stark contrast to the results using a model assuming riskless financial investments. The baseline findings are robust to alternative measures of financialization and investment risk and different firm sizes, ownership structures and time periods.     

Financial globalization and technological innovation: International evidence

Country’s technology progress and innovation development not only depends on internal knowledge stock and human capital, but also external financial resources. This paper explores the effect of financial globalization on technological innovation through empirical investigations by using the system generalized method of moment method and panel data from 110 countries over the period of 1985–2015. Our empirical results suggest that financial globalization exerts a significant enhancing effect on technological innovation and this effect becomes stronger for countries with better institution quality. A one unit change of financial globalization can bring about a 0.6 % increase in patent applications. The comprehensive evidence shows that financial development, not trade integration, is the main channel through which financial globalization promotes national innovation. Subsample analysis shows that financial globalization only promotes innovation development of Non- Organization for Economic Co-operation and Development (OECD) countries. Our findings offer new insights into the influence of financial openness on technology progress.     

The role of financial intermediaries in monetary policy transmission

The recent financial crisis has stimulated theoretical and empirical research on the propagation mechanisms underlying business cycles, in particular on the role of financial frictions. Many issues concerning the interactions between banking and monetary policy forced policy makers to redefine economic policies, and motivated macroeconomists to focus on the implications of financial intermediation constraints for asset price fluctuations, the behavior of non-financial firms, households, governments and in turn for real macroeconomic performance. This paper surveys research on the role of financial intermediaries and financial frictions in the transmission of monetary policy and discusses how to design both the new banking regulatory and supervisory structures and monetary policy in order to stabilize the economy. It also serves as an introduction to this special issue.     

The effect of investors’ confidence on monetary policy transmission mechanism: A Multivariate GARCH approach

This paper investigates the financial stability’s effect on the monetary policy transmission mechanisms. The correlations between investors’ confidence in the markets, money growth and economic growth are analyzed along with the correlations within their volatilities. Specifically, the heteroskedasticity of the errors is exploited in a Multivariate GARCH framework to obtain endogenously estimated measures of uncertainty. By a two-step estimator, the indirect interplay of money growth and financial markets is highlighted at different time horizons. The results contrast previous literature supportive of the “Great Moderation” as causing the recent financial crisis. Effectively, by accounting for the breaks in volatility series due to structural shifts in monetary policy, a low period of macroeconomic volatility is found not to drive directly low financial stability.     

Foreign banks and short-term macroeconomic fluctuations: Do financial development and regions matter?

In this paper, we investigate the association between bank integration, measured with the share of foreign banks in the banking industry, and macroeconomic volatility in emerging economies. We find a negative and significant relationship between bank integration and short-run fluctuations in output, consumption and investment, controlling for financial development, bank concentration and the real effective exchange rate. However, this relationship is found to be positive at high levels of financial development. We also explore the association at the regional level and show that the presence of foreign banks in Latin America is negatively and significantly correlated with macroeconomic volatility both in normal times and times of crisis. Despite widespread concerns in emerging Europe, which experienced greater financial vulnerability during the global financial crisis, we find no significant association between growth volatilities and bank integration.     

Exploring the sources of financial performance in Chinese banks: A comparative analysis of different types of banks

Since significantly organizational difference in Chinese banks, this study makes an attempt to investigate whether there exist some differences of the financial performance and its decomposed components for Chinese banks. We employ the decomposition of profit change model introduced by Grifell-Tatje and Lovell (2015, P215) and normalized price definition of Balk (2018) to develop a normalized profit change decomposition model which can well deal with the firms’ scale difference. This model also decomposes the normalized profit into the technical efficiency effect, technical effect, size effect, price and quantity margin effect, and price recovery effect. For the empirical evidence, we find that although there is an increase of profit gains, the profit growth rate decline by year. Furthermore, the productivity is not the main factor to expand profits, quantity margin effect also makes peer contributions. Finally, the productivity effect and its decomposed components present different functions in different kinds of Chinese banks.     

The recurrence of financial distress: A survival analysis

Companies often suffer periods of financial distress before filing for bankruptcy. Unlike one-off bankruptcies, financial distress can occur repeatedly within the same individual firm. This paper is focused on the recurrence of financial distress and studies the Chinese stock market, where Special Treatment – an official indicator of financial distress – can be repeatedly applied to a listed company. We employ a stratified hazard model to predict the probability of subsequent distress with variables, including duration dependency, event-based factors, institutional variables, financial ratios, market-based variables and macroeconomic conditions. Our empirical results show that accounting and market-based variables have limited power in predicting the recurrence of distress, whereas the duration of recovery, restructuring events and their interaction terms with the accounting and macroeconomic factors affect the recurrent risk significantly. Tested on out-of-time samples, our proposed hazard models show a robust performance in the prediction of recurrent risk over time.     

Financial openness and Chinese regional growth imbalance: New insight from spatial spillovers

This paper uses spatial panel methods and Chinese provincial data from 2003 to 2017 to study the spatial spillovers of financial openness on economic growth. The results show, first, a positive direct effect and an overall negative spatial spillover of financial openness on provincial growth. Second, there are two spatial spillover channels: a positive growth externality and a harmful resource competition among provinces. Third, we estimate the state dependence and dynamics of spatial spillover, and find that the negative spatial spillover is smaller in provinces with high levels of financial openness and in the long term; thus, the negative spatial spillover declined over time. These results are robust to the choice of SDM and GNS spatial econometrics methods and under different spatial weight matrices.     

Factors influencing bank risk in Europe: Evidence from the financial crisis

We use a dynamic panel data model to analyze bank-specific and macroeconomic determinants of bank risk for a large sample of commercial banks operating in the euro area. The selected time span, from 2001 to 2012, considers the impact of the on-going financial and economic crisis on the Eurozone banking system. Our results indicate that capitalization, profitability, efficiency and liquidity are inversely and significantly related to bank risk. However, the recourse to wholesale funding by banks seems to increase their risk. We also find that less-concentrated markets, lower interest rates, higher inflation rates and a context of economic crisis (with a falling GDP) increase bank risk.     

Financial development and governance: A panel data analysis incorporating cross-sectional dependence

This study investigates bidirectional causality between governance and financial development using panel data of 101 countries from 1984 to 2013. The financial development–governance nexus is explored using econometric methods robust to cross-sectional dependence, and the relationship between different levels of development and openness is analyzed. Long-run equation estimates show clear evidence that financial development positively affects governance, and this positive impact is found to be robust to three different measures of governance. Further analysis shows that improving governance quality has a positive effect on financial development, while Granger causality tests demonstrate bidirectional causality between financial development and the governance measures. Finally, the impact of financial development on governance is dependent on a country’s level of development and openness. These findings underscore the crucial role of financial development in bringing about good governance reforms and economic growth that, in turn, can further develop the financial sector. As such, a symbiotic and synergistic relationship can persist between good governance, growth, and financial development. The findings provide significant motivation for policymakers to encourage openness and financial sector development to lift the standard of living, especially in emerging economies.     

Modelling contagion of financial crises

Inspired by the empirical findings, we include international traders to capture linkage between markets and propose a two-market heterogeneous agents model to simulate financial crisis with contagion effect. This paper manages to calibrate sudden crash behavior of US and UK stock markets during “Black Monday” of 1987 besides smooth crisis and disturbing crisis categorized in literature. It is implied that financial crisis and its contagion could be endogenous, which supports a scenario of over-valuation causing a financial crisis. In addition, the model shows that financial system could be fragile in which small shock(s) hitting individual market’s fundamental could cause financial crisis spreading to the other market. This also supports a scenario of external shock triggering a financial crisis. Lastly, to demonstrate the relevance of our model to financial markets, we manage to match typical stylized facts, especially cross-correlation which is exclusive to a multiple-market case.     

Did covenants distort risk signals from bank subordinated debt yields before the financial crisis?

Restrictive covenants on bank debt require a bank to take or refrain from specific actions that affect the riskiness of that debt. Although covenants all but disappeared in the 1990s, they re-emerged after 2004 with an increase in bank risk leading up to the financial crisis. Subordinated debt yields potentially enable better risk monitoring by supervisors, but covenants can shift risk from bondholders to stockholders without reducing overall bank risk. This can distort the risk signal used by market participants to discipline excessive risk taking. Because covenants are endogenous and increase during periods of bank stress, the yield signal is dampened the most precisely when regulators most need accurate risk monitoring.     

Economic integration and government revenue from financial repression

We study a relationship between economic openness via financial and trade integration and government revenue from financial repression. An implicit budgetary saving, the financial repression revenue, as measured by the stock of government domestic debt multiplied by the difference between effective foreign and domestic interest rate, has declined significantly from the 1980s into the 2000s across the upper-income, the middle-income, and the low-income developing countries. While we find that both the financial and trade openness have a negative association with the financial repression revenue in the panel of countries, the effect of financial openness is stronger and the empirical correlations depend on the quality of governmental and budgetary management.     

Financial sector strategies and financial sector outcomes: Do the strategies perform?

Financial sector strategies enable financial policymakers and stakeholders to take a holistic view at the financial development needs in their country and to formulate balanced financial policies. They help policymakers consider the systemic risk that different development policies involve and choose an informed way forward. We construct a new dataset of historical financial sector strategies covering 150 countries over the period 1985–2014, and assess the strategies using the rating criteria proposed by Maimbo and Melecky (2014). We then investigate how the quality of the strategies can affect financial sector outcomes such as financial depth, inclusion, efficiency and stability. We find that the use of financial sector strategies helped increase financial sector deepening, inclusion and stability, and that this impact could be greater for higher quality strategies. One way how financial sector strategies can improve financial sector outcomes is by improving the regulatory framework for finance. A significant relationship between the use of strategies and the efficiency of banks is not confirmed.     

Nonlinearity in the effects of financial development and financial structure on unemployment

The positive role of the financial sector in promoting economic growth has been well established among academics and practitioners since the early 1990s. However, more recently, there has been increasing evidence pointing to a vanishing, and even negative, effect of financial sectors at high levels of financial depth, particularly since the global financial crisis of 2007?2009. Too much finance could hurt growth. The paper shifts the focus towards labor market outcomes by examining whether too much finance also hurts unemployment. Using a dynamic simultaneous model via system GMM estimation and a panel of 97 OECD and non-OECD countries for the period 1991–2015, we find that the answer depends on the type of finance and the extent of a country’s labor market flexibility. Specifically, (i) too much financial development hurts unemployment for countries with more rigid labor markets; (ii) too bank-centered or too little market-oriented financial systems worsen unemployment, particularly for countries with more flexible labor markets; and (iii) too much credit to private enterprises deteriorates unemployment in countries with more rigid labor markets, whereas too little credit to households worsens unemployment in countries with more flexible labor markets. Evidence also shows that these unemployment consequences possibly run through investment and entrepreneurship channels.     

Does financial regulation affect the profit efficiency and risk of banks? Evidence from China's commercial banks

The goal of financial regulation is to enable banks to improve liquidity and solvency. Stricter regulation may be good for bank stability, but not for bank efficiency. This research aims to examine whether banks have met the CBRC's standard of financial regulations and explores how the previously implemented financial regulations have affected bank efficiency and risk in the past. In addition, we also explored the trade-off relationship between efficiency and risk. Unlike other studies, this study used bank assets as a classification standard from the financial risk and differential regulatory perspective.The empirical results indicate that the CBRC regulates the provision coverage ratio and cost-to-income ratio, which seems relevant to large banks and the loan-to-deposit ratio, capital adequacy ratio, and leverage ratio, which seems relevant to small banks. The CBRC regulates the current ratio to reduce the risks of banks. Based on our empirical results, the current ratio did not affect the risks and led to different efficiency results between large and small banks. In an environment with asymmetric information, a bank decision-making is unobservable. The characteristics of financial regulation provide market clues if a bank is operating at the most efficiency and risk condition.