Financial Intermediation and Growth: Long Run Consequences of Capital Market Imperfections

The model describes an economy in which banks develop in order to meet the entrepreneurs' demand of capital. Domestic savers can lend in the informal credit market where they have to bear some risk; they can also save in a safe bank account. Banks cannot perfectly check the choices of borrowers, hence they ask for a collateral. Therefore, small firms borrow in the informal market where costly information can be obtained. The long run steady state is determined by the initial distribution of wealth and aggregate wealth. The economy may eventually stop growing, and the banking system will fail to develop. Alternatively, banks may progressively dominate the financial system and the economy will reach a stable positive rate of growth.

A Family Divided-Labor Market Duality in Korea

The paper describes the main featues of the labor market and the social safety net in Korea, analyzes the causes and macroeconomic consequences of the dual labor market, and discusses the government's reform proposals.

What is the Most Effective Monetary Policy for Aid-Receiving Countries?

This paper analyses how monetary policy can enhance the effectiveness of volatile aid fl ows. We find that monetary policy is effective in reducing trade balance volatility. We propose the following taxonomy, excluding the case of emergency assistance. Monetary policy should slow down consumption growth and build up international reserves when aid is abundant and deplete them to finance imports and support consumption when aid is scarce. If foreign aid also affects productivity growth, monetary policy should take this productivity effect into account in responding to aid flows.Aid effectiveness, monetary policy, real exchange rate, Dutch disease

Boosting productivity via innovation and adoption of new technologies : any role for labor market institutions?

The authors present empirical evidence on the determinants of industry-level multifactor productivity growth. They focus on"traditional factors,"including the process of technological catch up, human capital, and research and development (R&D), as well as institutional factors affecting labor adjustment costs. Their analysis is based on harmonized data for 17 manufacturing industries in 18 industrial economies over the past two decades. The disaggregated analysis reveals that the process of technological convergence takes place mainly in low-tech industries, while in high-tech industries, country leaders tend to pull ahead of the others. The link between R&D activity and productivity also depends on technological characteristics of the industries: while there is no evidence of R&D boosting productivity in low-tech industries, the effect is strong in high-tech industries, but the technology leaders tend to enjoy higher returns on R&D expenditure compared with followers. There is also evidence in the data that high labor adjustment costs (proxied by the strictness of employment protection legislation) can have a strong negative impact on productivity. In particular, when institutional settings do not allow wages or internal training to offset high hiring and firing costs, the latter reduce incentives for innovation and adoption of new technologies, and lead to lower productivity performance. Albeit drawn from the experience of industrial countries, this result may have relevant implications for many developing economies characterized by low relative wage flexibility and high labor adjustment costs.Environmental Economics&Policies,Economic Theory&Research,Banks&Banking Reform,Labor Policies,Public Health Promotion,Environmental Economics&Policies,Economic Theory&Research,Banks&Banking Reform,Health Monitoring&Evaluation,Economic Growth

Banking on the principles : compliance with Basel Core Principles and bank soundness

This paper studies whether compliance with the Basel Core Principles for Effective Banking Supervision (BCP) improves bank soundness. BCP compliance assessments provide a unique source of information about the quality of bank supervision and regulation around the world. The authors find a significant and positive relationship between bank soundness (measured with Moody's financial strength ratings) and compliance with principles related to information provision. Specifically, countries that require banks to report regularly and accurately their financial data to regulators and market participants have sounder banks. This relationship is robust to controlling for broad indexes of institutional quality, macroeconomic variables, sovereign ratings, as well as reverse causality. Measuring soundness through z-scores yields similar results. The findings emphasize the importance of transparency in making supervisory processes effective and strengthening market discipline. Countries aiming to upgrade banking regulation and supervision should consider giving priority to information provision over other elements of the Core Principles.Banks&Banking Reform,Financial Intermediation,Corporate Law,Financial Crisis Management&Restructuring,Insurance&Risk Mitigation

Competition and Corporate Governance: Substitutes or Compliments? Evidence from the Warsaw Stock Exchange

In this paper we analyze the impact of product market competition and ownership structure on corporate performance. We focus on the firms listed on the Warsaw Stock Exchange, which are either privatised or newly created firms. First, we study the separate effects of competition and ownership concentration on firm level productivity growth. Next, we investigate their interaction: are they substitutes or complements? We take care of the crucial problem of potential endogeneity of explanatory variables by using GMM estimators proposed by Arellano and Bond (1991). We also control for several types of selection bias that could affect the productivity levels. Moreover, we control for industry fixed effects affecting the rate of growth of productivity. Our results show that product market competition has a positive and significant impact on performance. Concerning the effect of ownership concentration, we find a U-shaped relationship with performance. Firms with relatively dispersed ownership (no shareholder with more than 20 per cent of voting shares) and firms, in which one shareholder has more than 50 per cent of voting shares, have higher productivity growth than firms with an intermediate level of ownership concentration. This correlation between concentration of ownership and productivity growth is not explained by the type of the controlling shareholder. Finally, product market competition and good governance te and to reinforce each other rather than to be substitutes. Competition has no significant effect on performance for the firms with 'poor' governance; on the contrary, it has significant positive effect in the case of firms with 'good' corporate governance.

The impact of contractual savings institutions on securities markets

The authors assess empirically the impact of contractual savings institutions portfolios (pension funds and life insurance companies) on securities markets, for example, depth and liquidity in the domestic stock market, and depth in the domestic bond market. They discuss how the institutionalization of savings can modify financial markets through the lengthening of securities'maturities. The results are the following: 1) An increase in assets of contractual savings institutions relative to domestic financial assets has a positive impact on the depth of stock and bond markets on average. 2) The impact on stock market depth and liquidity is nonlinear: it is stronger in countries where corporate information is more transparent. 3) There is evidence of a significant heterogeneity among countries: contractual savings have a stronger impact on securities markets in countries where the financial system is market based, pension fund contributions are mandatory, and international transactions in securities are lower. 4) The authors do not find that the impact of contractual savings institutions on securities markets is explained by the overall level of development, education, demographic structure or the legal environment.Economic Theory&Research,Insurance&Risk Mitigation,Banks&Banking Reform,Payment Systems&Infrastructure,Insurance Law,Insurance&Risk Mitigation,Banks&Banking Reform,Financial Intermediation,Economic Theory&Research,Insurance Law

Contractual savings institutions and banks'stability and efficiency

The authors analyze the relationship between the development of contractual savings institutions and banks'efficiency, credit, and liquidity risks. They discuss the potential mechanisms through which the development of contractual savings institutions may affect the banking sector. They show that the development of contractual savings institutions has a significant impact on bank spreads and loan maturity. After controlling for banks'characteristics, macroeconomic factors, and more standard indicators of financial development, they show that the development of contractual savings institutions is associated with increased efficiency of the banking system and greater resilience to credit and liquidity risks.Payment Systems&Infrastructure,Banks&Banking Reform,Economic Theory&Research,Financial Intermediation,Insurance&Risk Mitigation,Contractual Savings,Banks&Banking Reform,Financial Intermediation,Economic Theory&Research,Insurance&Risk Mitigation

Contractual savings, capital markets, and firms'financing choices

The authors analyze the relationship between the development and asset allocation of contractual savings and firms'capital structures. The authors develop a simple model of firms'leverage and debt maturity decisions. They illustrate the mechanisms through which contractual savings development may affect corporate financing patterns. In the empirical section, the authors show that the development and asset allocation of contractual savings have an independent impact on firms'financing choices. Different channels are identified. In market-based economies, an increase in the proportion of shares in the portfolio of contractual savings leads to a decline in firms'leverage. In bank-based economies, instead, an increase in the size of contractual savings is associated with an increase in leverage and debt maturity in the corporate sectorBanks&Banking Reform,Payment Systems&Infrastructure,International Terrorism&Counterterrorism,Economic Theory&Research,Financial Intermediation,Banks&Banking Reform,Economic Theory&Research,Financial Intermediation,Environmental Economics&Policies,International Terrorism&Counterterrorism

Does Financial Globalization Discipline Politically Connected Firms?

This paper studies the effect of financial globalization on the allocation of capital within countries. We show that, in countries with weak governance, politically connected firms benefit relatively more of financial integration than other firms. They experience a positive differential effect on investment financed by external debt, even though they report a slower growth of profits. These results suggest that, under certain circumstances, financial integration does not improve the allocation of capital. We provide a theoretical explanation for these results emphasizing regulatory forbearance of domestic banks lending to politically connected firms, and the “uninformed ” characteristic of foreign capital