Uncertainty, financial development and economic growth: an empirical analysis

This paper examines whether financial sector development may partly undo growth-reducing effects of policy uncertainty. By performing a cross-country growth regression for the 1970-1995 period I find evidence that countries with a more developed financial sector are better able to nullify the negative effects of policy uncertainty on per capita economic growth. For countries with a very well developed financial sector, it may even be the case that an increase in policy uncertainty positively affects per capita economic growth. This clearly indicates the relevance of financial sector development.

Financial development and the transmission of monetary shocks

We investigate whether the financial system dampens or exacerbates monetary shocks of inflation uncertainty to the economy. Our GMM-estimates for 88 countries over a period of 25 years show that inflation uncertainty has a positive and significant impact on the volatility of economic growth. More importantly, we find that financial development dampens the negative effects of inflation uncertainty on the volatility of economic growth. This confirms the importance of a well-developed financial sector.

Joint liability lending: a note

This note argues that the joint liability contracting equilibria worked out in Ghatak(2000) have a serious drawback in that, even though incentive compatible ex ante, they violate ex post rationality. For such contracts to be feasible, banks should be able to extract more under failure than under success. However, when we alllow for this, it may help explain some important empirical observations on joint liability lending.

Financial reform and information problems in capital markets: an empirical analysis of the Chilean experience, 1983-1992

This paper introduces a general, formal treatment of dynamic constraints, i.e., constraints on the state changes that are allowed in a given state space. Such dynamic constraints can be seen as representations of "real world" constraints in a managerial context. The notions of transition, reversible and irreversible transition, and transition relation will be introduced. The link with Kripke models (for modal logics) is also made explicit. Several (subtle) examples of dynamic constraints will be given. Some important classes of dynamic constraints in a database context will be identified, e.g. various forms of cumulativity, non-decreasing values, constraints on initial and final values, life cycles, changing life cycles, and transition and constant dependencies. Several properties of these dependencies will be treated. For instance, it turns out that functional dependencies can be considered as "degenerated" transition dependencies. Also, the distinction between primary keys and alternate keys is reexamined, from a dynamic point of view.

Corporate ownership as a means to solve adverse selection problems in a model of asymmetric information and credit rationing

This paper analyzes an asymmetric information model where the financing needs of entrepreneurs are obtained from two sources. We show that adverse selection is only important if the credit constraint of banks is not too tight. Next, we show that banks can induce a pattern of corporate ownership, whereby safe firms end up owning shares in risky firms. This particular type of an incentive compatible debt contract can solve the adverse selection problem caused by credit rationing under asymmetric information. Our theory gives a theoretical backing for the existence of business groups containing firms that operate in diversified markets.

Uncertainty and investment of Dutch firms: an empirical analysis using stock market data

This paper examines the investment-uncertainty relationship for a panel of Dutch firms. The uncertainty proxy is derived from daily stock market prices of individual firms. We show that some macro indicators, in combination with firm fixed effects, are able to give a reasonable explanation of the uncertainty a firm is faced with, and hence can be used to extract the exogenous component of uncertainty. The investment-uncertainty relationship appears to be non-linear: for low levels of uncertainty there is a positive effect on investment, whereas for high levels of uncertainty the effect becomes negative.

Does Financial Liberalization Influence Saving, Investment and Economic Growth? Evidence from 25 Emerging Market Economies, 1973-96

financial liberalization, saving, investment, economic growth

Fiscal Policy and Private Investment in Less Developed Countries

Private investment, Public investment, Fiscal policy, LDCs

Asymmetric information, option to wait to invest and the optimal level of investment

This paper analyzes equilibrium rationing on credit markets in the case of gains from waiting to acquire information about the future profitability of investment. We compare the competitive outcome with the socially optimal level of investment. We show that the opportunity to postpone investment changes the nature of the inefficiencies of the competitive outcome fundamentally. Without the option to wait, high risk firms tend to invest and the outcome is characterized by a situation of underinvestment. If firms can wait high risk firms benefit the most from waiting. In this case low risk firms tend to invest immediately and a situation of overinvestment will result, since from the banks' point of view firms do not delay enough.

Risk behaviour and group formation in microcredit groups in Eritrea

We conducted a survey in 2001 among members and group leaders of borrowers who accessed loans from two microcredit programs in Eritrea. Using the results from this survey, this paper aims to provide new insights into the empirical relevance of the homogeneous matching hypothesis for microcredit groups in Eritrea. Since the methodology to test for homogeneous matching needs estimating risk behaviour, the paper also provides new evidence on risk behaviour of members of microcredit groups in Eritrea. Our main results strongly indicate that groups are formed heterogeneously. Most importantly, we do not find support for the matching frictions hypothesis, in the sense that even if we control for matching frictions, credit groups in Eritrea do not seem to consist of borrowers of the similar risk type.