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21. COVID-19 and Regional Solutions for Mitigating the Risk of Small and Medium-sized Enterprise Finance in ASEAN Member States

Author:
Farhad Taghizadeh-Hesary, Han Phoumin, and Ehsan Rasoulinezhad
Publication Date:
08-2021
Content Type:
Research Paper
Institution:
Economic Research Institute for ASEAN and East Asia (ERIA)
Abstract:
One of the significant challenges small and medium-sized enterprises (SMEs) face is their difficulty in accessing finance. One way to reduce the risk of lending to SMEs is through the credit guarantee scheme (CGS). In this paper, we assess the determining factors of the optimal credit guarantee ratio for the banking industry in four Association of Southeast Asian Nations (ASEAN) countries, namely Indonesia, Singapore, the Philippines, and Malaysia, by employing statistical techniques and econometric models. The empirical findings prove that the loan default ratio (nonperforming loan/loan, or NPL/L) is the optimal credit guarantee ratio’s main determining factor. Our empirical findings confirm that in the ASEAN region, to help SMEs survive in the emergency stage of COVID-19, the credit guarantee ratio needs to be increased. Gradually, when moving to the new normal stage, the ratio needs to be lessened. Our results show that the credit guarantee ratio should vary for different countries based on the macroeconomic climate and also for each bank or, in other words, for banks with similar financial soundness. Governments should give a higher guarantee ratio to sound banks, whilst less healthy banks should receive a lower guarantee ratio. The study also provides policy recommendations for establishing a regional credit guarantee scheme in ASEAN to promote regional economic cooperation at the SME level for greater economic integration.
Topic:
Finance, Public Health, Pandemic, COVID-19, and Credit
Political Geography:
Asia and Southeast Asia

22. Perspectives on Balance Sheet and Credit Policies: A Tribute to Marvin Goodfriend

Author:
Esther L. George
Publication Date:
10-2020
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Iappreciate this opportunity to pay tribute to Marvin Goodfriend and his many contributions to the theory and practice of monetary policy. At the Kansas City Fed, we knew Marvin as a scholar and a good Federal Reserve colleague. Marvin also was a participant in a number of our Jackson Hole Economic Symposiums. As a Research Officer at the Richmond Fed, he attended the first symposium that we held in Jackson Hole, Wyoming, in 1982, where his work on “Discount Window Borrowing, Monetary Control, and the Post‐​October 6, 1979 Federal Reserve Operating Procedure” was widely cited.1 Thirty‐​four years later in 2016, as a professor at Carnegie Mellon, he presented a paper making the case for deeply negative interest rates as a policy tool that could breach the zero lower bound on nominal rates. He argued that “the zero interest bound encumbrance on monetary policy should be removed so that movements in the intertemporal terms of trade can be reflected fully in interest rate policy to sustain price stability and full employment with a minimum of inefficient and costly alternative policies” (Goodfriend 2016; 128; emphasis added).
Topic:
Monetary Policy, Finance, Interest Rates, and Credit
Political Geography:
Global Focus and United States of America

23. Child Skill Production: Accounting for Parental and Market-Based Time and Goods Investments

Author:
Elizabeth Caucutt, Lance Lochner, Joseph Mullins, and Youngmin Park
Publication Date:
08-2020
Content Type:
Working Paper
Institution:
Centre for Human Capital and Productivity (CHCP), Western University
Abstract:
This paper studies the multidimensional nature of investments in children within a dynamic framework. In particular, we examine the roles of parental time investments, purchased home goods/services inputs, and market-based child care services. We first document strong increases in total investment expenditures by maternal education; yet expenditure shares, which skew heavily towards parental time, vary little with parental schooling. Second, we develop an intergenerational lifecycle model with multiple child investment inputs to study these patterns and the impacts of policies that alter the prices of different inputs. We analytically characterize investment behavior, focusing on the substitutability of different investment inputs and the way parental skills affect the productivity of family-based inputs. Third, we develop an estimation strategy that exploits intratemporal optimality conditions based on relative demand to estimate substitutability between inputs, the relative productivity of different inputs, and the role played by parental education. This approach requires no assumptions about the dynamics of skill investment, preferences, or credit markets. We also account for mismeasured inputs and wages, as well as unobserved heterogeneity in parenting skills. We further show how noisy measures of child achievement (measured several years apart) can also be incorporated in a generalized method of moments approach to additionally identify the dynamics of skill accumulation. Fourth, we use data from the Child Development Supplement of the Panel Study of Income Dynamics to estimate the skill production technology for children ages 12 and younger. Our estimates suggest complementarity between parental time and home goods/services inputs as well as between these family-based inputs and market-based child care, with elasticities of substitution ranging from 0.2 to 0.5. We find no systematic effects of parental education on the relative productivity of parental time and other home inputs. Finally, we use counterfactual simulations to explore the extent and sources of variation in investments across families, as well as investment responses to changes in input prices. We find that variation in prices explains 48% of the overall variance in investment expenditures, and differences in wages explain more than half of the investment expenditure gap between college-educated and non-college-educated parents. We further show that accounting for the degree of input complementarity implied by our estimates has important implications for the responses of individual inputs to any price change and for the responses in total investments and skill accumulation to large (but not small) price changes.
Topic:
Economics, Labor Issues, Children, Human Capital, Economic Mobility, Credit, Productivity, Skilled Labor, and Price
Political Geography:
Global Focus

24. Private Credit under Political Influence: Evidence from France

Author:
Anne-Laure Delatte, Adrien Matray, and Noémie Pinardon-Touati
Publication Date:
04-2020
Content Type:
Working Paper
Institution:
Centre d'Etudes Prospectives et d'Informations Internationales (CEPII)
Abstract:
Formally independent private banks change their supply of credit to the corporate sector for the constituencies of contested political incumbents in order to improve their reelection prospects. In return, politicians grant such banks access to the profitable market for loans to local public entities among their constituencies. We examine French credit registry data for 2007--2017 and find that credit granted to the private sector increases by 9%--14% in the year during which a powerful incumbent faces a contested election. In line with politicians returning the favor, banks that grant more credit to private firms in election years gain market share in the local public entity debt market after the election is held. Thus we establish that, if politicians can control the allocation of rents, then formal independence does not ensure the private sector's effective independence from politically motivated distortions.
Topic:
Economics, International Political Economy, Private Sector, Credit, and Banking
Political Geography:
France

25. Do Private Sector Short-term External Debt Have Impact on Credit Default Swap Premiums In Turkey? An Analysis with Asymmetric Threshold Cointegration Approach

Author:
Esra N. Kilci and Burcu Kiran
Publication Date:
04-2020
Content Type:
Journal Article
Journal:
Journal of Academic Inquiries
Institution:
Sakarya University (SAU)
Abstract:
A country’s capacity to pay short-term external debt, which reflects the fiscal strenght of an economy against adverse shocks, is significantly taken into consideration by international investors in their decision making process. It has been seen that Turkey has experienced a gradually increasing private sector short-term external debt especially in the last twenty-year period. The objective of this study is to investigate the long-run relationship between private sector short-term external debt and CDS (credit default swap) premiums in Turkey for the period of 2000:Q4-2017:Q4 by using asymmetric threshold autoregressive (TAR) and momentum threshold autoregressive (M-TAR) procedures of Enders and Siklos (2001). The results indicate that CDS premiums and private sector short-term external debt in Turkey are cointegrated. After finding cointegration, the null hypothesis of symmetric adjustment is tested against the alternative of asymmetric adjustment and the evidence of symmetric adjustment is found, suggesting that the relationship between the private sector short-term external debt and CDS premiums has the same effect in expansion and contraction periods.
Topic:
Debt, Private Sector, and Credit
Political Geography:
Turkey and Middle East

26. Payment vs. Funding: The Law of Reflux for Today

Author:
Perry Mehrling
Publication Date:
01-2020
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The analytical tension in post-Keynesian thought between the theory of endogenous (credit) money and the theory of liquidity preference, brought to our attention by Dow and Dow (1989), can be viewed through the lens of the money view (Mehrling 2013) as a particular case of the balance between the elasticity of payment and the discipline of funding. Further, updating Fullarton’s 1844 “law of reflux” for the modern condition of financial globalization and market- based credit, the same money view lens offers a critical entry point into Tobin’s fateful 1963 intervention “Commercial Banks as Creators of ‘Money’” which established post-war orthodoxy, and also to the challenge offered by so-called Modern Money Theory.
Topic:
Economics, Globalization, Monetary Policy, Economic Theory, Macroeconomics, Keynes, and Credit
Political Geography:
United States

27. Effects of interest rate caps on microcredit: evidence from a natural experiment in Bolivia

Author:
María José Roa, Alejandra Villegas, and Ignacio Garrón
Publication Date:
09-2020
Content Type:
Working Paper
Institution:
Institute for Advanced Development Studies (INESAD)
Abstract:
This paper evaluates the imposition of caps on microcredit lending rates through directed credit policies for productive sectors. This financial inclusion intervention provides a unique quasi-experiment, allowing to estimate its causal effect following a difference-in-differences analysis. Our results suggest that the imposition of interest rate ceilings negatively affected the portfolio balance of new microcredits and loans to SMEs granted by MFIs. Particularly, we find robust results indicating that the balance of the microcredit and SME loans portfolio granted by MFIs, relative to the company portfolio granted by banks, decreased by 26.1% for an average MFI for the period 2011-2018.
Topic:
International Political Economy, Microcredit, Credit, and Lending
Political Geography:
Latin America and Bolivia

28. Obtaining Credit in Cameroon: Problems and Prospects

Author:
Dr. Louis-Marie Kakdeu, Ulrich D’POLA KAMDEM, and Egoh Aziz
Publication Date:
10-2020
Content Type:
Special Report
Institution:
The Nkafu Policy Institute
Abstract:
In keeping with its mission, and in this report, entitled, “Obtaining Credit in Cameroon: Problems and Prospects” the Institute undertakes the third in a series of its six thematic reports dedicated to the Doing Business Index Project (DBIP). The report examines the business environment in Cameroon, specifically about how prospective investors could obtain credit from financial institutions in the country. It proposes useful suggestions to the Government of Cameroon (GOC) for improving its monetary and fiscal policies, especially, those which revolve around the micro- and macro-economic issues, and which are articulated in the financial sector of the national economy. The central purpose of this report is to offer informed knowledge in public policy-making, to public policy-maker in Cameroon, as the mandatory catalysts for improving or easing the Doing Business Concept in Cameroon’s business, economic, social and political landscapes.
Topic:
Economics, Finance, Business, Macroeconomics, Microeconomics, and Credit
Political Geography:
Cameroon

29. Born Out of Necessity: A Debt Standstill for COVID-19

Author:
Patrick Bolton, Lee Buchheit, Pierre-Olivier Gourinchas, Mitu Gulati, Chang-Tai Hsieh, Ugo Panizza, and Beatrice Weder di Mauro
Publication Date:
04-2020
Content Type:
Policy Brief
Institution:
Economics for Inclusive Prosperity (EfIP)
Abstract:
Rich and poor countries alike are facing an unprecedented economic crisis as they attempt to contain the impact of the COVID-19 pandemic. A downturn of this magnitude can cause tremendous long-term damage, with critical economic linkages between employees, businesses, and banks at risk of disappearing forever. Scores of firms will close permanently unless urgent action is taken. The threat is even more significant for emerging economies, where the economic costs of social distancing are likely to be higher, and where vulnerable small and medium sized enterprises with low cash reserves account for a much larger share of the economy than in rich countries, which can rely on extensive social and economic safety nets. Poor countries, moreover, have far more precarious health-care systems. The funds required to support vulnerable workers and businesses, and to care for COVID-19 patients, could be as high as 10% of their GDP. As a comparison, in the US the rescue measures passed in the last month alone account for at least 10% of GDP, and are likely to increase even more. A number of European countries have commited loans, equity injections and guarantees up to 35% of GDP. The COVID-19 crisis has led to a sudden collapse in capital flows to emerging and developing countries. According to estimates by the Institute of International Finance, non-resident portfolio outflows from emerging market countries amounted to nearly $100 billion over a period of 45 days starting in late February 2020. For comparison, in the three months that followed the explosion of the 2008 global financial crisis, outflows were less than $20 billion.
Topic:
Debt, Economics, International Political Economy, GDP, Business, Macroeconomics, Pandemic, COVID-19, and Credit
Political Geography:
Global Focus

30. Dangerous, Yet Not So Unique. Characteristics of the Chinese Social Credit System

Author:
Jan Pabisiak
Publication Date:
01-2020
Content Type:
Journal Article
Journal:
Polish Political Science Yearbook
Institution:
Polish Political Science Association (PPSA)
Abstract:
Since 2015, the Social Credit System - an initiative of the government of the People’s Republic of China which aims to strengthen trustworthiness of the business entities and citizens, promote obedience to law and customs, and develop the Communist Party of China’s control over social trends and potential threats to the political stability - has been attracting worldwide attention. International media portrays the System as a mechanism which leads China to totalitarianism and destroys hope for development of the Chinese democratic movement. Therefore, interests of both sides, the West and China, are seen as contradictory. Harmful beliefs like the one that Chinese still export products of poor quality and on the Chinese side that the Western ideals lead to demoralization are common thanks to some sort of Occidental and Oriental propaganda. That is why it is necessary to compile and analyze the known facts regarding the Social Credit System, which in contrast to the media narration turns out to be a tool with interesting capabilities, not necessarily contradictory to the other major civilizations’ values.
Topic:
Governance, Business, Surveillance, and Credit
Political Geography:
China and Asia