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The Role of Financial System in Economic Growth. Presented By: Saumil Nihalani. Topics. Overview Current Model Suggested New Model Review of Literature Overview of Terms New Model Empirical Analysis Results and Findings Policy Analysis Conclusion Recommendation. Overview. - PowerPoint PPT Presentation
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The Role of Financial System in Economic Growth
Presented By:Saumil Nihalani
Topics Overview Current Model Suggested New Model Review of Literature Overview of Terms New Model Empirical Analysis Results and Findings Policy Analysis Conclusion Recommendation
Overview One of the most important aspects in
the field of Economy and Finance: Effects of financial systems on
economic growth Therefore, to examine the link between:
Financial markets, financial intermediaries, and economic growth would be interesting to study
Existing Model Model Developed by Demirguc-Kunt
and Levine, 1996; Levine, 2002 and 2003; Beck and Levine, 2002 suggests that: Financial System does not influence
the economic growth of a country However, the provision of financial
services plays a significant role in the economic growth
Suggested New Model For developing countries:
Regardless of the type of dominant financial system, the Credit View Monetary Policy ( Credit or Credit Variable) is significant in explaining the economic growth
For developed countries: Credit and Stock Market Capitalization
positively influence economic growth
Review of Literature Goldsmith(1969):
Relationship between financial development and economic development
Suggested that concurrent development of the financial system and economy
King and Levine (1993): To examine statistical significance of the variables
( bank credit, credits of the central bank..) when regressed towards GDP growth
Rousseau and Wachtel (1998), Bassanini and Leahy (2001):
To examine econometric approaches on: Co-integration and causality analysis Panel data / cross section analysis
Terms
Proxy variable: It is an observed variable that is related but not identical to an unobserved explanatory variable in multiple regression analysis
Lagged dependent variable: It is an explanatory variable that is equal to the dependent variable from an earlier time period. It increases the data requirements, but it provides simple way to account for historical factors that cause current differences in the dependent variable that are difficult to account for in other ways
Pooled effects models: Estimation model that estimates with independently pooled cross sections, panel data, or cluster samples, where the observations are pooled across time as well as cross sectional units
Terms Fixed effects models: Estimation model for panel
data or cluster samples where the error term contains unobserved effect
Random effects models: Estimation model where the unobserved effect is assumed to be uncorrelated with the explanatory variables in each time period
F-Test: Method of testing null hypothesis that includes more than one coefficient
F-Statistic: A statistic used to test multiple hypothesis about the parameters in a multiple regression model
Durbin-Watson (DW) Statistic: Used to test for first order serial correlation in the error of a time series regression model under the classical linear model assumption
The New Model My intension is to develop the model:
To study determinants of GDP To develop a model to help policy makers To know how much of the changes in GDP
are explained by the explanatory variables in the model
Model is useful because: Its ability to quantify the relationship
between variables
Empirical Analysis Data:
Used from 1960 to 1999 Variables used to characterized given country’s
financial system: Domestic credit to private non-financial entities
(“Credit”) Stock market capitalization
Countries have been divided as: Developed and Developing Countries Dominance of Intermediaries or Financial Market
Used 1995 GDP Prices ( in U.S. Dollars )
Empirical Analysis I have used Panel data analysis approach to
discover connection between financial market and economic growth
It is a data set constructed from repeated cross-sections over time
It permits more observations to use and allows more freedom
The proxy variable for development of financial market is:
Stock market capitalization The proxy variable for development of
financial intermediaries is: Credit to Private non-financial entities
Empirical Analysis The model is Explained by:
Table 2- Credit as a Proxy for Financial Development: Developed and Developing Countries; k1 = 1 and k2 = 0
Results and Findings Influence of Credit on GDP:
F-Test result shows that the fixed effects model is more appropriate than the pooled effects model
Hausman test indicates that the random effects model is more appropriate than fixed effects model
In the random effects model, the proxy for financial development is
Statistically significant in explaining GDP for the developed countries
Statistically less significant for developing countries Credit is statistically significant for the entire country
sample Overall, the results indicate that there is direct
relation between credit and GDP growth
Results and Findings Influence of Stock Market on GDP:
Random effects model is observed to be significant Positive and statistically significant influence of stock
market capitalization on GDP growth The estimated coefficient is less statistically
significant for developing countries than for the developed countries
See table on following slide…
Table 4 - Stock Market Capitalization as a Proxy for Financial Development: Developed
and Developing; Countries k1 = 0 and k2 = 1
Results and Findings When the countries are divided according to the
type of the respective financial system, financial intermediaries’ dominance, financial market dominance:
The stock market capitalization has an ambiguously positive and statistically significant relation with GDP growth
The result observed to be true for pooled, fixed, and random effects model
Therefore, the stock market capitalization is significant for countries where the financial market dominate
This result is opposite where Credit is Proxy variable Countries with bank-based and intermediate systems, stock
market capitalization has a diminished role in explaining GDP growth
Table 5 - Stock Market Capitalization as a Proxy for Financial Development: different Financial Systems k1 = 0 and k2 = 1
Policy Analysis Even though the findings are not
comprehensive, the results do provide clear
picture for credit policy implications Policy makers should concentrate on ensuring
a sound credit environment, rather than developing policies that in favor mainly on bank-based or market-based financial system
Conclusion Regardless of type of financial system, the credit
variable is significant in explaining GDP growth When countries divided based on the dominant
financial systems, stock market capitalization has positively and statistically significant role with GDP growth
Both credit and stock market capitalization have a positive role on GDP growth in developed countries
Credit has statistically significant role on GDP growth in developing countries
Recommendation I recommend this model is a good
tool for: Policy makers of:
Federal government State government
Policy makers: To focus on credit view of monetary
policy that encourage credit to private non-financial entities, which in turn boost GDP growth
Thank you! For:
Your Time Your Interest