role of financial sector in economic growth noureen adnan
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Role of Financial Sector in Economic Growth Noureen Adnan. Outline. Introduction Financial development index & growth Existing Literature My contribution Variables Data, sources & methodology Empirical results Conclusion. Developed Financial System. - PowerPoint PPT PresentationTRANSCRIPT
Role of Financial Sector in
Economic Growth
Noureen Adnan
Outline
• Introduction• Financial development index & growth• Existing Literature• My contribution• Variables• Data, sources & methodology• Empirical results• Conclusion
2
Introduction
Developed Financial System
Promote Savings , offers hedging and diversification
Promote Savings , offers hedging and diversification
More funding to Private sector
More funding to Private sector
Reduce information, monitoring & transaction costs
Reduce information, monitoring & transaction costs
Economic Growth
Economic Growth
3
Financial Development index and Economic Growth (2008)
Authors Date
Number of Countries
Data Range
Frequency
Methodology Main results
Goldsmith 1969
35 1860-1963 Annual Cross country regressions
Rough parallelism viewed Positive
Atje & Jovanovic
1993
40 1960-1985 Annual Cross country regressions
Positive in favor of market based
financial system
Levine & Zervos
1996
41 1976-1993 Annual Cross country regression
Positive in favor of market based
financial system
Ross Levine 1997
77 1960-1989 Annual Cross country regressions
Positive
Levine & zervos
1998
24 1976 Averaged1997-851986-93
Pooled dataCross country
regression
Positive
Ross Levine 1999
71 1960-1995 Annual Cross country regression
positive
Existing Literature
Existing Literature Authors Date Number
of Countries
Data Range
Frequency Methodology Main results
Rajan & Zingales 1998 41 1980-1990
Annual RegressionsFixed effects
Positive
Claessens et al 2000 80 1988-1995
Annual Cross country regressions
Financial liberalization
positively effect growth
Carkovic &Levine 2002 40-54 1975-1988
5 yr average
Generalised Method of Moments
Cross country regressions
Strong positive
Arestis & Luintel 2001 5 1972-1999
Annual Vector auto regressive (VAR)
Positive in favor of bank based
financial system
Caporale et al 2004 7 1977-1998
Annual Cross country regressions
Positive in favor of market
based financial system
James & McKibbon 2006 Malaysia 1960-2001
Annual Cointegration testsLikelihood Ratio Tests
Lagrange Multiplier Tests
Reverse causality Found
No Long run relationship
My contribution
•Length of data
•Examined at levels
•Stationary series
•Growth rates
Variables
Financial development indicators
Bank: is the extent to which the central bank versus commercial banks is distributing credit
Depth: Depth measures the size of financial intermediaries and it is equal to the liquid liabilities of the financial system divided by GDP.
Privy: is the allocated credit to private enterprises divided by GDP.
Turnover ratio: is the total value of shares traded on country’s stock exchange divided by the stock market capitalization.
Value traded Ratio: is the ratio of total value of shares traded on a country’s stock exchanges divided by GDP
Financial development indicators
ESDS Data SetsIMF International Financial Statistics World Bank Development Indicators
• GDP (constant dollars)
• GDP per capita
• Banking Development indicators
• Inflation
• Fiscal to GDP (Government final consumption expenditure )
• Trade to GDP (sum of exports and imports to GDP)
Other Data Sources
• Ross Levine’s Data Sets
• Rogoff’s Data Sets
Sample
• Panel data sets
• 1960-2006
Methodology
• Panel data fixed effects, least square dummy
variables
• IPS unit root tests
• Two stage least squares
Variable Expected signs
Bank +
Depth +
Privy +
Turnover Ratio +
Value traded ratio +
Model used for LSDVGit = αi + β’ Fit + ξit i= 1, …, N ; t= 1, …, T
Control Variable Expected signs
Inflation -
Trade to GDP +
Fiscal to GDP +
Exchange Rate regimes +
LSDV ResultsDependent Variable Real GDPFinancial indicators & control variables
All Low income Low mid income
Upper mid income High income
C 25.0527* 24.8963* 24.6573* 24.8815* 26.1523*
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
Bank 0.1580* 0.0310 0.2811* 0.1519 1.0464*
(0.0003) (0.5879) (0.0009) (0.1354) (0.0001)
Depth 0.2490* 0.2905* 0.2848* 0.3381* 0.4050*
(0.0000) (0.0035) (0.0000) (0.0000) (0.0000)
Privy 0.0778* 0.0277 -0.0674** 0.1608* 0.1385*
(0.0003) (0.6850) (0.0488) (0.0010) (0.0001)
Turnover Ratio -0.0501* -0.0859* -0.0963* 0.0396** -0.1242*
(0.0000) (0.0006) (0.0000) (0.0494) (0.0000)
Value Traded Ratio 0.0945* 0.1823* 0.1065* 0.0213 0.1224*
(0.0000) (0.0000) (0.0000) (0.1759) (0.0000)
Inflation -0.0207* -0.0063 -0.0197** -0.0268** -0.0200
(0.0010) (0.7139) (0.0311) (0.0416) (0.1405)
Fiscal_GDP -0.0094* -0.0049 -0.0116* -0.0104* -0.0169*
(0.0000) (0.1997) (0.0002) (0.0196) (0.0051)
Trade_GDP 0.0045* 0.0051* 0.0011 0.0060* 0.0037*(0.0000) (0.0000) (0.2464) (0.0000) (0.0000)
Exchange rate regime 0.0229* -0.0685 0.0063 0.0128 0.0555*
(0.0337) (0.1947) (0.7709) (0.6191) (0.0001)
All the variables are in terms of natural log
LSDV ResultsDependent Variable Dlog Real GDPFinancial indicators & control variables
All Low income Low mid income
Upper mid income High income
C 0.0657* 0.0282 0.0779* 0.1395* 0.1319*
(0.0000) (0.4259) (0.0000) (0.0000) (0.0000)
Bank 0.0373* 0.0104 0.0921* 0.0654 0.2622*
(0.0007) (0.4340) (0.0008) (0.1523) (0.0000)
Depth -0.0543* -0.0659*** -0.1543* 0.0188 -0.0629*
(0.0004) (0.0849) (0.0000) (0.5159) (0.0043)
Privy 0.0049 -0.0215 0.0391** -0.0330 0.0099
(0.6425) (0.5230) (0.0368) (0.1672) (0.5052)
Turnover Ratio -0.0033 -0.0082 -0.0048 0.0094 -0.0145*
(0.2760) (0.3354) (0.3993) (0.1170) (0.0077)
Value Traded Ratio 0.0071** 0.0095 0.0075 -0.0017 0.0134*
(0.0113) (0.2299) (0.1762) (0.7557) (0.0022)
Inflation -0.0047* -0.0068** -0.0071* -0.0002 -0.0023
(0.0011) (0.0578) (0.0086) (0.9560) (0.2824)
Fiscal_GDP -0.0014* 0.0004 -0.0002 -0.0031* -0.0052*
(0.0016) (0.6847) (0.7677) (0.0016) (0.0000)
Trade_GDP 0.0001*** 0.0006* 0.0000 0.0000 0.0000
(0.0959) (0.0049) (0.9382) (0.6993) (0.8687)
Exchange rate regime -0.0092* -0.0137 -0.0197* -0.0217* -0.0030
(0.0000) (0.3457) (0.0002) (0.0004) (0.1596)
All the variables are in terms of natural dlog
Two stage least squaresDependent Variable Dlog Real GDPFinancial indicators & control variables
All Low income Low mid income
Upper mid income High income
C -0.0045 -0.0710 0.1033 0.0334 -0.009824
(0.8595) (0.7676) (0.3653) (0.5949) (0.9115)
Bank 0.1097 -0.0908 -0.0410 0.3371 0.916967
(0.1187) (0.7292) (0.7625) (0.1231) (0.0252)**
Depth -0.2179 -0.2051 -0.7148 -0.1263 -0.283306
(0.1293) (0.6474) (0.3464) (0.3643) (0.3055)
Privy 0.2476* 0.2673 0.2769*** 0.1205 0.171019
(0.0031) (0.7159) (0.0654) (0.2259) (0.2505)
Turnover Ratio 0.0019 0.0054 0.0308 0.0325 0.007211
(0.9253) (0.961) (0.3787) (0.2129) (0.8093)
Value Traded Ratio 0.0132 -0.0775 -0.0515 -0.0249 -0.013821
(0.6629) (0.6644) (0.3708) (0.5647) (0.7223)
Inflation 0.0008 -0.0006 0.0019 0.0015 -0.000463
(0.4037) (0.9144) (0.5796) (0.6294) (0.8683)
Fiscal_GDP 0.0003 0.0005 -0.0002 -0.0000329 0.000411
(0.1557) (0.532) (0.8157) (0.8847) (0.3074)
Trade_GDP 0.0062 -0.0250 -0.0324 -0.0066 0.010118
(0.2871) (0.8001) (0.385) (0.6444) (0.2825)
Exchange rate regime -0.0054 0.0680 0.0058 0.0011 -0.000979
(0.2217) (0.6743) (0.6925) (0.8816) (0.8889)
All the variables are in terms of natural dlogAll variables are instrumented by their lagged values
Conclusion
It is found that the level of financial
development positively effect the level of
growth during the period of 1960 – 2006,
whereas the endogeneity could not be proved .
Future Aims
Construction of financial development index by using principal component .