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Bank/Fund Joint Seminar Paper

"Credit Chains and Sectoral Comovement: Does the Use of Trade Credit Amplify Sectoral Shocks?"
Claudio Raddatz (World Bank)

Thursday, January 17, 12:30-2:00, room IMF HQ1 6-312

This paper provides evidence of the presence and relevance of the credit-chain amplication mechanism described by Kiyotaki and Moore (1997) by looking at its implications for the correlation of industries. In particular, the author tests the hypothesis that an increase in the use of trade-credit along the input-output chain linking two industries results in an increase in their correlation using detailed data on the correlations and input-output relations of 378 manufacturing industry-pairs across 44 countries with different degrees of use of trade credit. The author's results provide strong support for this hypothesis and indicate that the mechanism is quantitatively relevant.

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"Life Expectancy and Income Convergence in the World"
Kenichi Ueda (IMF)

Thursday, Feb. 21, 12:30-2:00, room MC3-101

There is an evidence for the world-wide convergence in life expectancy, although there is little evidence for convergence in GDP. As such, the living standards in the world should have already converged substantially, if we value longer life much more than material happiness. This paper introduces a concept of the dynastic general equilibrium value of life to measure welfare gains from an increase in life expectancy. A calibration study confirms sizable welfare gains from the increase in life expectancy. However, these gains hardly mitigate the large inequality among countries. Indeed, a conventional GDP-based measure turns out to be a good approximation for (non)convergence in world living standards adjusted for changes in life expectancy.

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"Who Gets the Credit? And Does It Matter? Household vs. Firm Lending across Countries"
Thorsten Beck (World Bank)

Thursday, March 20, 12:30-2:00, room IMF HQ1 10-713

This paper is jointly written with Berrak Buyukkarabacak, Felix Rioja & Neven Valev (Univ. of Copenhagen).
While the theoretical and empirical finance literature has focused almost exclusively on enterprise credit, about half of credit extended by banks to the private sector in a sample of 45 developing and developed countries is to households. The share of household credit in total credit increases as countries grow richer and financial systems develop. Cross-country regressions, however, suggest a positive and significant impact on GDP per capita growth only of enterprise but not household credit. These two findings together explain why previous studies have found a small or insignificant effect of finance on growth in high-income countries. The authors also find that countries with a lower share of manufacturing, a higher degree of urbanization, more market-oriented financial systems, better developed institutions, but less effective contract enforcement have a higher share of household credit. Banking market structure and regulatory policies are not robustly related to credit composition.

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"Business Cycles and Fiscal Policies: The Role of Institutions and Financial Markets"
Klaus Schmidt-Hebbel (Central Bank of Chile) and César Calderon (World Bank)

Thursday, April 17, 12:30-2:00, room IMF HQ1 10-713

Macroeconomic policies are designed to stabilize business cycle fluctuations. Usually, fiscal and monetary policies in industrial countries have been expansionary in response to weak domestic conditions. However, the cyclical properties of fiscal policies are a much more disputed issue among emerging market economies. Several researchers have attributed these differences in cyclical behavior to: (a) factors associated to a weak institutional framework that play a key role in explaining sub-optimal policy decisions, and (b) factors associated to weak integration (or access) to either domestic or international financial markets. The goal of the present paper is to empirically evaluate whether the ability of countries to conduct counter-cyclical fiscal policy is affected by the quality of their institutions and/or by the availability of financial resources either in domestic or international capital markets. The authors' empirical evaluation yields a more nuanced interpretation to the existing evidence: (1) countries are unable to conduct counter-cyclical fiscal policies if they have poor institutions or lack wide access to credit markets at home and abroad, and (2) institutional factors have a larger weight than financial variables in explaining the differences in cyclical behavior of fiscal policy between industrial and developing countries.

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 "Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market"
Giovanni Dell’Ariccia (IMF) and Luc Laeven (IMF & CEPR)

Thursday, May 1, 12:30-2:00pm, room MC10-100

Jointly written with Deniz Igan (IMF), this paper links the current subprime mortgage crisis to a decline in lending standards associated with the rapid expansion of this market. The authors show that lending standards declined more in areas that experienced larger credit booms and house price increases. They also find that the underlying market structure mattered, with entry of new, large lenders triggering declines in lending standards. Finally, lending standards declined more in areas with higher mortgage securitization rates. The results are consistent with theoretical predictions from recent financial accelerator models based on asymmetric information, and shed light on the relationship between credit booms and financial instability.

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