US electrification in the 1930s
Carl Kitchens, 29 January 2014
Economists have found that large-scale infrastructure investments tend to increase economic growth and reduce poverty. However, there has been relatively little research on the effects of smaller, more targeted investment projects. This column discusses recent research on the effects of the US Rural Electrification Administration, which provided subsidised loans for connecting farms to the electric grid. Counties that received electricity through the REA witnessed smaller declines in agricultural productivity, smaller declines in land values, and more retail activity than similar counties that did not.
In 1930, fewer than 10% of farms in the US had access to electricity. By the mid-1950s, almost every farm in the country had electricity. While the US was able to extend electricity to its rural locations rapidly over a 25-year period, much of the developing world still remains without electricity today. In 2012, 1.3 billion people lived without electricity worldwide.
Topics: Development, Economic history
Tags: Agriculture, electricity, electrification, growth, infrastructure, investment, subsidies, technology
Why Asian firms hold cash
Charles Yuji Horioka, Akiko Terada-Hagiwara, 25 January 2014
Corporate saving has sharply increased over the last two decades, but there has been relatively little research on its determinants. This column presents recent work that estimates Asian firms’ cash flow sensitivity of cash. The impact of cash flow on the increase in firms’ cash holdings is positive and statistically significant, and larger and more highly significant for smaller firms. Since smaller firms are more likely to be financially constrained, these results suggest that Asian firms – especially smaller ones – save more when their cash flow increases in order to finance future investments
In many, if not most, economies, sharp declines in household saving rates have been offset by sharp increases in corporate saving rates for the past two decades (see, for example, Karabarbounis and Neiman 2012). Even so, relatively little research has been done on the determinants of corporate saving.
Topics: Financial markets
Tags: Asia, borrowing constraints, corporate saving, financial frictions, investment, saving, savings
Dark side of housing-price appreciation
Indraneel Chakraborty, Itay Goldstein, Andrew MacKinlay, 25 November 2013
Higher asset prices increase the value of firms’ collateral, strengthen banks’ balance sheets, and increase households’ wealth. These considerations perhaps motivated the Federal Reserve’s intervention to support the housing market. However, higher housing prices may also lead banks to reallocate their portfolios from commercial and industrial loans to real-estate loans. This column presents the first evidence on this crowding-out effect. When housing prices increase, banks on average reduce commercial lending and increase interest rates, leading related firms to cut back on investment.
Policymakers around the world often worry about decreases in real-estate prices and other asset prices, and take measures to prevent them. For example, in the aftermath of the financial crisis, the Federal Reserve has engaged in large-scale asset purchases – especially of mortgage-backed assets – to support the housing market and, in turn, the overall economy.
Topics: Financial markets, Monetary policy
Tags: asset prices, banks, Federal Reserve, housing, investment, lending, real estate
How to get around credit constraints? The role of renting and leasing during financial crises
Peter N. Gal, Gabor Pinter, 21 September 2013
Renting capital goods makes up 20% of total capital expenses by US companies and this type of capital spending increases in downturns. This column discusses research showing that the systematic pattern of corporate leasing can be linked to credit constraints. This means that a robust rental sector has the potential to mitigate the negative effects of financial disruptions when obtaining credit becomes difficult.
How does the ownership of capital affect the aggregate behaviour of the economy? Does it matter whether firms own or rent production capital such as machinery, equipment, offices, and structures?
Topics: Financial markets
Tags: business cycles, credit constraints, financial crises, investment, rental markets
Informal or formal financing: First evidence on co-funding of Chinese firms
Hans Degryse, Liping Lu, Steven Ongena, 21 August 2013
Non-bank financing originating in the shadow banking system has increasingly become an issue for policymakers. This column argues that informal financing has, in fact, been an essential element of corporate performance in China. Through reviewing the interaction between informal and formal financing, evidence suggests that informal financing simultaneously granted with formal financing (co-funding) is helpful for growth, especially for small firms.
The credit squeeze in June 2013 has triggered policymakers’ concern worldwide about a potential debt crisis in China, while at the same time the Chinese government has moved to crack down on undisciplined lending in order to alleviate the debt-bubble fears emanating from the shadow banking system.1
Topics: Development, Financial markets
Tags: China, Finance, investment
Save more to improve infrastructure in Latin America and the Caribbean
Eduardo Cavallo, 3 April 2013
Latin America and the Caribbean have less infrastructure than the rest of the world. What they have is also of much poorer quality. This column argues that to reap the rewards of good infrastructure, Latin American and Caribbean countries must increase both investment and saving over the long-term by creating institutional capacity, strengthening the rule of law, and building stable macroeconomic-policy frameworks. It won’t be easy.
Saving and investment, like the chicken and the egg, involve circular causality. But regardless of causality, there is no doubt that Latin America and the Caribbean need more of both.
That the region has an infrastructure problem hardly requires an explanation:
Tags: Caribbean, investment, Latin America, savings
Fire-sale FDI: All smoke and no fire?
Ron Alquist, Linda Tesar, Rahul Mukherjee, 26 March 2013
Is foreign direct investment different in times of crisis? This column tests the ‘fire-sale foreign direct investment hypothesis’, finding that acquisitions undertaken during crisis periods do not fundamentally differ from those undertaken during non-crisis periods. The fire-sale foreign direct investment notion may well be ‘all smoke, and no fire’.
When times are bad, governments tend to welcome foreign direct investment, but they worry that they are selling the family silver for cheap. This ‘fire-sale FDI’ phenomenon, as Krugman called it in the 1990s, is a perennial concern of nations whose currencies have recently plummeted.
Tags: FDI, fire-sale FDI, investment
Public investments for long-term economic growth: the case of health
Michael Stolpe, 22 March 2013
The crisis has shot holes in government budgets devoted to pro-growth public goods. This column argues that health-related public goods support long-term economic growth. Governments may be more inclined to focus on spending related directly to jobs, such as education and welfare-to-work programmes, but health should not be forgotten
Crisis or not, healthcare cries out for large-scale public investments that lock in what appears to be an historic trough in government borrowing costs in many of the world’s advanced countries.
Topics: Health economics
Tags: Ageing, Europe, investment, Japan, US
Avoiding middle-income growth traps
Pierre-Richard Agénor, Otaviano Canuto, Michael Jelenic, 21 December 2012
Many of the emerging economies of the last two decades are now ensnared by ‘the middle-income trap’, in which middle-income countries don’t quite push through to high income status. This column presents recent research suggesting that, if governments act early and decisively to improve access to advanced infrastructure, enhance the protection of property rights, and reform labour markets, trapped economies – like their East Asian counterparts in the 1990s – can push on through.
In the postwar era, many countries have managed to quickly reach middle-income status, but few have gone on to become high-income economies1. Rather, after an initial period of rapid ascent, many countries have experienced a sharp slowdown in growth and productivity, falling into what has been called a ‘middle-income trap’:
Topics: Development, International trade, Labour markets, Productivity and Innovation
Tags: income, innovation, investment, labour market reform, middle income
Oil exporters’ dilemma: How much to save and how much to invest
Reda Cherif, Fuad Hasanov, 10 November 2012
Policymakers in many commodity-exporting countries confront the question of how much to consume, save, and invest out of revenues from commodity exports. This column says policy should focus on improving productivity in the tradeable sector and reducing volatility through diversifying this sector. This would lower precautionary saving needs, increase investment, raise consumption, and improve welfare.
Policymakers in many commodity-exporting countries confront the question of how much to consume, save, and invest out of revenues from commodity exports (see van der Ploeg and Venables 2008). In the face of highly volatile commodity revenues (especially from oil), governments have to balance several objectives at the same time.
Topics: Energy, Macroeconomic policy
Tags: investment, oil exports, savings