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Financial Liberalisation In New Zealand
The Impact on Savings and Investment
Phillip Mellor
The Theory
The Financial Sector and Economic Development
The McKinnon-Shaw Hypothesis The Complementarity Hypothesis
Savings and Physical Capital are complementary to one another
The Debt Intermediation View of Money Money is a form of debt to its issuer
The Financial Sector and Economic Development
The Role of the Financial Sector1. To facilitate trading, hedging, diversifying and
pooling of risk2. Allocating resources 3. Monitoring managers and exerting corporate
control 4. Mobilizing savings5. Facilitate the exchange of goods and services
Financial Development and Economic Growth Financial Intermediaries
Create money and administer the payments mechanism Bringing together savers and investors
Specialized knowledge and informational advantages Rationing via the interest rate
Stock Markets Promote acquisition of information about firms Risk diversification Liquidity services
Financial Development and Economic Growth Financial Repression
Holding interest rates below equilibrium and directed credit
The costs of financial repression Inefficient non-price rationing of credit Quasi-tax on growth Low savings
The benefits of limited financial repression Forcing households to save via credit constraints Overcoming market failure in financial markets (e.g. externalities and
information asymmetries)
Financial Liberalisation as a means of Financial Development
Measuring Financial Liberalisation Abiad and Mody’s (2005) index
Consequences of Financial Liberalisation Fragility of the financial sector
South Korea New Zealand?
Sequencing of Financial Liberalisation Reform of the real economy Then reform of the financial sector
The Case of New Zealand
New Zealand’s Decade of Reform Economic and Political Motivations for Reform
Economic Stagnation and Decline The 1984 election and initial public support
Theoretical Background Principal-Agent Theory Public Choice Theory
The Sequence of Reform
Real Gross Domestic Product
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Year
GD
P (
NZ
$m)
Real GDP, 1995/96 Prices
Financial Liberalisation in NZ
The Financial Sector pre-reform High degree of intervention and regulation Financial disintermediation
Sequencing of Financial Liberalisation
The Financial Sector post-reform Very open financial sector, virtually no specific
regulations
Investment
Key Point: Public and Private Investment have diverged following liberalisation
0.00
5.00
10.00
15.00
20.00
25.00
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Year
Inve
stm
ent
(% o
f R
eal
GD
P)
Private Investment Public Investment Total Investment
Savings
But there is a problem with how savings is measured
-5.00
0.00
5.00
10.00
15.00
20.00
25.00
30.00
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Year
Sav
ing
s (%
of
No
min
al G
DP
)
Gross Domestic Savings (Claus and Scobie) Private Savings
Credit and the Money Supply
0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Year
M2
(% o
f N
om
inal
GD
P)
M2 (RBNZ measure) Domestic Credit
The EvidenceEmpirical Results for the Case of New Zealand
Empirical Results
Empirical results for New Zealand indicate that financial liberalisation has had a positive impact on investment but a negative impact on savings
Estimated elasticities Financial Liberalisation-Investment = 0.112 Financial Liberalisation-Savings = -0.125
The estimated model also found some evidence that the Complementarity Hypothesis is relevant to the case of New Zealand
Conclusions Financial liberalisation has increased the share of total
investment to GDP Increased the efficiency of the financial sector Higher real interest rates more accurately reflect the scarcity of
financial resources and increase the real return to investors Increased the ability of firms and individuals to invest by reducing
credit constraints
Financial liberalisation has decreased the share of gross domestic savings to GDP Lower credit constraints make it easier to borrow for consumption /
investment rather than save. Transitional effects on savings behaviour as firms and individuals
adjust to the new financial and economic structure.
Questions?