Does income inequality really matter for credit booms?

Rym Ayadi, Sami Ben Naceur, Sandra Challita
02/12/2020

The central question of this paper is whether income inequality causes credit booms along with other factors. We distinguish between different types of credit boom: real estate, household, and firms’ credit booms, as well as credit booms that turn into crises.

Using a sample of 70 countries between 1990 and 2016, we find that income inequality does not cause credit booms in our global sample. When splitting the data by income level, we find that income inequality is a determinant of credit booms turning into crisis in high income countries.

Capital inflows increase the likelihood of credit boom occurrence and countries experiencing high economic growth tend to have more credit booms. Finally, in countries with fixed exchange rate regimes, credit booms are more frequent.

A Conceptual Framework for Transitioning to an Authentic Sustainable World

Othmane Benmoussa
20/11/2020

In this article, using the ESIMOP / PROMISE framework of Roberto Rigobon and systems thinking concepts, we propose a dynamic systems perspective, to raise questions about the processes of change that are required, on multiple scales.

Based on this way of thinking, the example of COVID-19 episode highlights more than ever the critical need to find a clever equilibrium between human activity (in its several forms) and the Earth’s ability to cope, giving due consideration to the resulting general implications.

Bank Capital and the Cost of Equity

Mohamed Belkhir, Ralph Chami, Sami Ben Naceur, Anis Samet
12/10/2020

Using a sample of publicly listed banks from 62 developed and developing, including MENA, countries over the 1991-2017 period, we investigate the impact of capital on banks’ cost of equity. We report the highest median cost of equity in Lebanon with 25.1%. Consistent with the theoretical prediction that more equity in the capital mix leads to a fall in firms’ costs of equity, we find that better capitalised banks enjoy lower equity costs. Our baseline estimations indicate that a 1 percentage point increase in a bank’s equity-to-assets ratio lowers its cost of equity by about 18 basis points. Our results also suggest that the form of capital that investors value the most is sheer equity capital; other forms of capital, such as Tier 2 regulatory capital, are less (or not at all) valued by investors. Additionally, our main finding that capital has a negative effect on banks’ cost of equity holds in both developed and developing countries. The results of this paper provide the missing evidence in the debate on the effects of higher capital requirements on banks’ funding costs.

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