This research delves into the 'paradox of cash' that persists despite the proliferation of alternative payment methods, which have seemingly displaced paper currency as a medium of exchange. We examine the determinants of cash holdings and consumer payment preferences using novel payment diaries data from 2019 in India, a country known for its strong reliance on cash transactions. Despite recent policies aimed at reducing cash usage, we find that 94% of all transactions were carried out in cash. Cash holdings vary in response to well-established socio-demographic and economic factors, but also by behavioural parameters such as risk aversion, life satisfaction and attitudes toward tax evasion. The use of cash as a payment method varies by attitudes toward cash use and is non-linear in transaction size. These findings are robust to changes in the specification as well as to treating cash holdings as endogenous. We conclude by discussing the implications of our findings for policy, particularly in the context of promoting digital payments in India.
ABSTRACT In India's quest for sustainable development, the interplay among corporate green innovation, financial regulation, and green financing has gained increasing importance. Although existing literature emphasizes the critical role of green finance in promoting environmentally sustainable innovations, there is a notable gap in studies that examine the combined effects of green credit and financial regulation at the firm level. This study aims to bridge this gap by analyzing annual data from publicly traded Indian corporations over the period from 2012 to 2024. To explore these dynamics, we utilize a robust regression model that assesses the impact of green credit (GC) on corporate green innovation (CGI). Our analysis reveals that green finance plays a significant role in stimulating corporate green innovation, with financial regulation serving to further amplify this positive effect. Importantly, the impact of green finance is particularly pronounced among larger firms, underscoring its potential to catalyze sustainable transformation across all sectors of business in India.
We build on empirical evidence showing that international acquisitions exhibit path dependence and often unfold as sequences of deals, and argue that domestic and cross-border mergers are not necessarily isolated events. Specifically, we ask whether blocking a domestic merger that reduces consumer surplus in the short run could inadvertently preclude a subsequent cross-border acquisition (by the same parties) that would raise consumer surplus in both the home and foreign markets. To address this question, we develop a Cournot model with increasing marginal costs and show that moderate, complementary synergies can make hybrid mergers-those combining domestic and cross-border elements-both profitable and beneficial for consumer surplus, even when each merger on its own would not be viable and/or would harm consumers. Our analysis suggests that, in settings where such complementarities are plausible, the interaction and sequencing of domestic and cross-border mergers may be relevant for assessing their long-run welfare implications.
Predicting returns is a timeless and important economic topic. Fundamental analysts see identifying time-varying predictive factors as a key goal in asset pricing. This paper provides strong evidence of time-varying return predictability of the S&P 500 Index from 1929 to 2020, by proposing the construction of altered versions of the classical dividend-price (dp) and earnings-price (ep). Our study's primary objectives are to introduce a cyclical adjustment to the simple dp and ep, which would smooth dividends and earnings, to compare the predictive dynamics of these new ratios with their simple counterparts and to modify all ratios based on long-run equilibrium relationships that arise between the examined variables. We provide solid evidence that the cyclically-adjusted ratios perform better than the simple predictors in all forecasting horizons, both in and out of sample, and the modified variables capture more predictive components in returns. Through certain robustness checks including multivariate regression settings and evidence on excess and real return predictability, we thoroughly present the predictive components identified in our data set.
In this paper, I evaluate the private and the social welfare gains that in the Diamond-Dybvig model of bank runs characterise the switch from a decentralised to a centralised equilibrium that may hold even in an atomistic environment with banking intermediation. Relying on logarithmic preferences, I show that such a social welfare gain is an increasing function of the discount rate of more patient agents. Moreover, I demonstrate that for each level of the discount rate of agents who are willing to postpone consumption, there is an optimal value of the proportion of these agents in the economy that maximises the social welfare gain.
This literature review examines the impact of micro-savings, particularly through Self-Help Groups (SHGs), on economic development, with a specific focus on Asian and developing countries. The review investigates how increased savings, especially in rural areas and among women, contribute to economic growth by facilitating investment and empowering individuals. A variety of studies employing diverse methodologies to explore the relationship between savings, financial inclusion, and economic growth are assessed. The findings suggest that access to savings services and financial inclusion measures significantly and positively influence economic growth, particularly in contexts where informal savings are prevalent. The role of SHGs in promoting savings and microenterprise development is also highlighted.
This article analyzes how the digital divide affects women's financial inclusion in 36 African countries from 2011 to 2022. Employing the quantile regression estimation technique, the main finding shows that the digital divide severely impedes financial inclusion. The negative finding is robust with respect to the use of women's financial inclusion sub-indexes and alternative measures of the digital divide. The negative relationship is robust to OLS, Tobit, censored Poisson and truncated negative binomial estimators. Furthermore, we find that income inequality amplifies the negative effect of the digital divide on women's financial inclusion, whereas human capital mitigates the effect of the digital divide and improves women's financial inclusion. Above certain human capital thresholds, the digital divide no longer has a negative impact on the financial inclusion of women. Based on the quantiles, on average, about 10 years of schooling of the population is required to compensate for the unfavourable effect of the digital divide on the financial inclusion of women. Policy implications are discussed.
Little attention has been paid to the role of inflation and financial inclusion in influencing financial stability. These factors have become all the more important in light of the recent banking crisis in the United States. The lessons learnt from the recent banking crisis have heightened the need for financial regulators and bank supervisors to undertake a continuous search for the nontraditional determinants of financial stability to identify risks early and mitigate risks to financial system stability. In this article, we examine some nontraditional determinants of financial stability using data from 61 countries from 2009 to 2021. The first-difference panel GMM regression method was used to estimate the model, and we find that greater financial stability in the previous period is followed by greater financial stability in the subsequent period in all regions, signalling the persistence of financial stability. The loan-to-deposit ratio improves financial stability in European and Americas countries, while countries that have a high level of financial inclusion, and whose banking sector has a high loan-to-deposit ratio, are more financially stable. Financial inclusion improves financial stability in high inflation environments particularly in African and Americas countries. High levels of financial inclusion impair financial stability during a recession particularly in Asian countries. African banks with a high loan-to-deposit ratio are more financially stable during a recession. Also, Americas and African countries that have a combined high financial inclusion and inflation rates and whose banking sector has a high loan-to-deposit ratio are less financially stable, indicating that high inflation hinders financial inclusion and loan-to-deposit ratio from improving financial stability.
We investigate the quantile effects of climate policy uncertainty (CPU) on real estate investment trusts (REITs) returns in the United States. We use the quantile autoregressive distributed lags (QARDL) method on the monthly economic policy uncertainty (EPU), the market volatility index (VIX) and interest rates (INT) from March 2006 to April 2023. The results show that the impact coefficients of CPU, EPU and interest rates on REIT returns are significant in the short and long term. In addition, CPU demonstrates unidirectional causality with REIT returns across all quantiles, whereas REITs only show unidirectional causality with CPU in lower quantiles. Furthermore, EPU and interest rates show bidirectional causality with REIT returns across most quantiles. Policymakers and REIT investors can utilise the relationships and causality between REITs and CPU to update REIT investments, hedge against CPU and REIT stocks, construct a diversified portfolio and make informed decisions about the price movements of REITs in climate crises.
ABSTRACT Motivated by the regulatory changes introduced by the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, this study investigates its impact on the cost efficiency of US banks. Using a parametric cost frontier methodology previously linked to bank failure risk, the analysis reveals a 13% average decline in cost efficiency under the new regulatory framework. The study also examines the Act's potential heterogeneous effects across banks of different sizes, revealing that while larger banks are typically more efficient, the stricter regulatory oversight imposed on them by the Dodd–Frank Act reduced the efficiency gap with smaller banks.
We propose an enhanced methodology for modelling forward-looking projections of banks' credit risk IRB risk-weighted assets (RWA), a critical component of regulatory capital adequacy ratios. Our approach focuses on granular modelling of the internal risk structure of banks' IRB portfolios, offering more accurate estimations compared to the traditional aggregate-level methods commonly used by many regulatory stress testing frameworks. This improvement seeks to reduce the risk of significant misestimation of RWA, which can distort solvency measures and mislead perceptions of banks' financial health. Our methodology is straightforward to replicate and applicable to various uses, including not only stress testing but also calibrations of macroprudential tools. We demonstrate the advantages of our approach over traditional methods and apply it to estimate the impact of cyclical credit parameters deterioration on RWA and the corresponding calibration of the countercyclical capital buffer (CCyB) for the Czech banking sector.
The study examines the relationship between crime and firm entry in India. Using district-level data for a decade, we find that an increase in crime is related to fewer firms registering in the district. The results are robust to estimation approaches that address the endogeneity related to crime variable. We also explore the pathways through which crime negatively affects firm entry in India. We provide suggestive evidence in favour of a fall in demand caused by the lower income of existing firms in the market as one of the reasons why crime lowers firm entry. Additionally, we show that fear of victimisation is also a possible channel that drives the negative relationship between crime and firm entry. However, we do not find any evidence that crime increases the expenses incurred by existing firms. The findings have important policy implications in terms of the importance of a stable environment for firm entry.
The goal of this article is to examine and compare the various actions that both US and EU legislators have taken-or want to take-to enhance the transparency of single-name credit default swaps (CDSs). Legislators on both sides of the Atlantic are of the view that enhanced transparency is beneficial but their focus is different. That is, the European Union focuses on enhancing pre- and post-trade transparency, whereas US legislators want to mitigate manufactured credit events by requesting disclosure of large positions. Both legislators are of the view that transparency could lead to enhanced market discipline and quality but where European Regulators focus on market participants knowing whether a transaction could take place at a certain price or has happened at certain conditions, US legislators believe that investors should have a more complete picture on creditors' incentives in restructuring and whether there is a concentrated exposure to a limited number of counterparties. This paper discusses the regulatory differences and explains them based on the different market contexts in both continents.
This article analyzes monetary policy under inflation targeting in a developing economy using a hybrid new Keynesian model to determine the optimal policy rule. Firstly, we estimate the model's parameters using a Bayesian approach with data from the Tunisian economy from 2000 Q1 to 2020 Q4. Then, we solve an optimization problem to evaluate different types of monetary policy rules within the framework of two inflation-targeting regimes. The results show that a forward-looking rule with interest rate smoothing minimizes welfare loss most effectively within a strict inflation-targeting framework.
The Fintech sector is traditionally viewed as a convergence of finance and technology. This study examines its characteristics by analysing Fintech stock returns relative to traditional sector portfolios using stepwise regression. Our findings show that Fintech stocks align more closely with the business services sector than with the financial or technology sectors, challenging conventional classification. Additionally, while Fintech indexes initially generated positive alpha, this advantage diminished as the sector matured. These results offer new insights into sector benchmarking and portfolio diversification.
This study explores the size effect in financial markets, focusing on how mergers, acquisitions, and other corporate transactions influence the returns of small versus large stocks. Employing a comprehensive data set of US-listed companies from 1992 to 2021, which includes 51,780 events, this research improves upon previous methodologies by integrating detailed timing information on deal announcements and completions with stock size and return data. Our analysis shows that small stocks are often the targets of transactions that significantly enhance their returns, not limited to takeovers. We find that pre-announcement returns are consistently higher for small stocks, likely due to less analyst coverage, resulting in largely unanticipated deal news. The study deepens our understanding of the size effect, suggesting that deal-related dynamics are essential for analyzing performance variations across different stock sizes and contributing to discussions on market efficiency and the valuation effects of corporate actions.
In recent literature, various social implications arising from the COVID-19 pandemic have been extensively deliberated upon. In this study, we introduce an ordinal random effects model designed to explore the changes in individual perceived happiness during periods of lockdown. We delve into the impact of diverse factors such as social and family relationships, spirituality, religiosity, and trust in institutions, alongside a range of demographic and economic variables. Our data set comprises responses from 1212 individuals in the United States gathered between March and April 2020. The findings reveal an anticipated decline in overall happiness during the COVID-19 crisis, particularly noticeable within specific demographic and behavioural segments: social connections, trust, and religiosity exhibit nuanced variations, contingent upon the level of spirituality and the specific institutions under consideration.
The study re-investigates the existence of the Uncovered interest parity (UIP) hypothesis and substantially adds to the literature by offering the most recent evidence during the period from 2000 to 2022 from developing and emerging economies. The study further augments the literature by extending the standard UIP hypothesis to account for the monetary policy stance and risk premium. The estimates of nonlinear autoregressive distributed lag (NARDL) and component generalised autoregressive conditional heteroscedasticity (C-GARCH) show that the UIP hypothesis does not exist in any of the BRICS economies. Nevertheless, after accounting for the risk premium and monetary policy stance using inflation levels, the interest rate differential significantly and positively influences the expected changes in the spot exchange rates. This indicates three important aspects: first, the necessity of risk premium to make up for the higher risk that comes with holding the foreign bond for the benefit of domestic investors. Second that the UIP puzzle does not hold, such that higher interest differential depreciates the domestic currency. Third, the analysis underscores the substantial and direct impact of US inflation level, particularly for Brazil, Russia and India, in determining the changes in the spot exchange rate. These insights hold crucial implications for policymakers and regulators.
Financial inclusion universally remains one of the critical means to end poverty in the world, especially Africa, where the level of poverty is high. It has however been argued that financial inclusion equally has the tendency to destabilize the financial system, thwarting the poverty reduction efforts, which necessitates the interrogation of the relationship between the variables. This study therefore investigates how financial stability mediates the financial inclusion and poverty reduction relationship in Africa. Using the panel Autoregressive Distributive Lag model, covering a period of 2004-2020, the study found that financial inclusion is positively related to financial stability in both short and long-run, with education, Gross National Income per capita (GNI) and domestic credit to private sector, contributing to financial stability, and trade openness negatively related to financial stability in the long-run. The study further established that financial stability is positively related to household consumption expenditure as such leads to poverty reduction with trade openness, government expenditure, GNI, education, domestic credit to private sector, and institutional quality contributing significantly to poverty reduction. This confirms the mediating role financial stability plays in enhancing the impact of financial inclusion on poverty reduction in Africa and must therefore be given the necessary attention, through proper regulatory mechanisms.
Longstanding evidence in Middle East and North Africa (MENA) countries shows a high prevalence of unemployment and informality among a large fraction of population, and at the same time gender disparities in labour force participation and occupational mobility. Why is there such persistent labour-market segmentation? What is the impact and potential of various formalisation policies? An overview of the informal economy across three middle-income MENA countries (Egypt, Jordan and Tunisia) is provided with respect to taxonomy, coverage and drivers. Transition matrices and multinomial logistic regressions are applied to longitudinal microdata from Labour-Market Panel Surveys, focusing on workers' occupational mobility in relation to their previous status, age cohort, gender and other demographics. Persistent segmentation and low occupational mobility in all countries suggest that informal employment is not driven by choice on the labour supply side but by structural constraints on the demand side. Existing formalisation policies based on distinct stick and carrot strategies, and targeting of existing businesses and workers achieve rather modest impacts. One recommendation to supplement policies for decent jobs creation is to promote social and solidarity enterprises and extend microfinance to informal enterprises.
