Financialization & Economic Development

Financialization &

Economic Development“Tezer YELKENCİ”

THE LONG RUN CAUSALITY BETWEEN FINANCIAL DEVELOPMENT AND

ECONOMIC GROWTH HAS BEEN INSPECTED BY A

LARGE AND EXPANDING LITERATURE, AND IT

REMAINS UNCERTAIN.

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Izmir University of Economics ECON426 May 2011

AgendaIntroduction

Empirical Framework

Data

Results

Conclusion

Definitions Motivation

Testing for integration Testing for panel unit root Testing for panel cointegration

ADF unit root test Im, Pesaran and Shin panel unit root test Pedroni (Engle Granger based) panel cointegration test Economic growth regressions

Literature Review Dimitris K. Christopoulos and Efthymios G. Tsiones, 2004, Financial Development and Economic Growth M. Kabir Hassan, Benito Sanchez and Jung-Suk Yu, 2010, Financial Development and Economic Growth Chien-Chiang Lee and Chum-Ping Chang, 2009; FDI, Financial Development, and Economic Growth

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Introduction

Empirical Framework

Data

Results

Conclusion






Intr

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Definitions

Financialization


A term that describes an economic system or process that attempts to reduce all value that is exchanged (whether tangible, intangible, future or present promises, etc.) either into a financial instrument or a derivative of a financial instrument.

Economic Development

The increase in the standard of living in a nation's population with sustained growth from a simple, low-income economy to a modern, high-income economy.

Intr

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Motivation


Financialization

Economic Growth

Turkey

East Europe Countries & Middle-East Countries

?

?

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Introduction

Empirical Framework

Data

Results

Conclusion






Lite

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wDimitris K. Christopoulos and Efthymios G. Tsiones, 2004, Financial Development and

Economic Growth

Methodology


ADF unit root test Panel unit root test Panel cointegration test Johansen cointegration test

Conclusion

Long-run causality runs from financial development to growth, that the relationship is significant, and that there is no evidence of bi-directional causality.

Lite

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wM. Kabir Hassan, Benito Sanchez and Jung-Suk

Yu, 2010, Financial Development and Economic Growth


Methodology

Weighted least square regression Vector autoregressive model

Conclusion

There has been a positive association between finance and economic growth for developing countries but contradictory results for high-income countries; moreover, well-functioning financial systems may boost economic growth in middle and low income countries.

Lite

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wChien-Chiang Lee and Chum-Ping Chang,

2009; FDI, Financial Development, and Economic Growth


Methodology

Panel unit root test Pedroni’s panel cointegration test Likelihood-based cointegration test

Conclusion

An increase in FDI will likely produce a rise in domestic credit, and once this financial development indicator has crystallized to a desired level, the favorable effects of FDI on growth should be realized.

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Introduction

Empirical Framework

Data

Results

Conclusion






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Testing for Panel Unit Root

Testing for Integration

Panel Least Squares

Testing for Panel Cointegration

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Regression Model


Where;y = Growth of real GDP per capitaZ = the log of GDP per capitaS = Gross domestic savings as percentage of GDPTRD = Imports plus exports as percantage of GDPGE = Government final consumption expenditure as percantage of GDPP = Log of one plus inflation rateFD = DCBS or M3

Where;DCBS = Domestic credit provided by banking sector

as percentage of GDPM3 = Liquid liabilities as percentage of GDP

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Testing for Integration


Method: Augmented Dickey-Fuller unit root test

Lag Specification: Akaike Information Criterion

Where; Null Hypothesis: The variable has a unit root

Alternative Hypothesis: The variable doesn’t have a unit root

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Testing forPanel Unit Root Panel Cointegration


Method: Im, Pesaran and Shin panel unit root test

Method: Pedroni (Engle Granger based) panel cointegration test

Where;

Null Hypothesis: The variable has a unit root

Alternative Hypothesis: The variable doesn’t have a unit root

Where;

Null Hypothesis: No cointegrationAlternative Hypothesis: Cointegration



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Introduction

Empirical Framework

Data

Results

Conclusion






Data

Data


World Development Indicators

Published by the World Bank over the period 1980–2008.

27 countries included in terms of similarity with Turkey

Turkey Hungary Algeria Egypt Iran Jordan Kuwait Morocco Saudi Arabia Syrian Aran Republic Tunisia Armenia Azerbaijan Belarus Georgia

Ukraine Croatia Czech Republic Greece Macedonia

Serbia Slovenia Estonia Latvia Lithuania Moldova Luxembourg

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Empirical Framework

Data

Results

Conclusion






Resu

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Im, Pesaran and Shin Panel Unit Root Tests


VariablesLevels First differences

IPS IPS

Trade (% of GDP) (TRADE) 0.08482 -1.65991***

Liquid liabilities (% of GDP) (M3) 2.33714 -8.69737***

Inflation, consumer prices (P) -1.38438 -3.16616***

Gross domestic savings (% of GDP) (S) 0.22817 -18.6448***

General government final consumption expenditure (% of GDP)(GE) -1.64193* -13.8212***

GDP per capita (GGDP) 12.4481 -6.43033***

Domestic credit provided by banking sector (% of GDP)(DCBS) 1.76524 -11.1841***

• * , ** and *** indicate statistical significance at the 10%, 5% and 1% level respectively.• IPS is the Im, Pesaran and Shin t-test for a unit root in the model.

Resu

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Augmented Dickey-Fuller Unit Root Tests


Country GGDP GE M3

Levels Diff Levels Diff Levels Diff

Turkey -6.26 -6.13*** -1.26 -5.10*** -0.24 -5.92***Hungary -2.37 -5.70*** -2.41 -5.98*** -2.37 -3.21**Algeria -2.94* -5.41*** -2.15* -4.21*** -2.98* -3.24**Egypt -4.54*** -10.10 -2.07 -2.38*** -1.77 -2.67*Iran -3.35** -5.43*** -2.53 -2.09** -1.43 -3.15**Jordan -2.43 -10.21*** -1.99 -5.54*** -2.69* -1.80

Country DCBS S P TRADE

Levels Diff Levels Diff Levels Diff Levels Diff

Turkey -0.96 -5.53***

-2.54* -4.87*** -1.44 -7.08*** -1.99 -4.64***

Hungary -2.52 -3.39** -3.28** -4.27*** -1.40 -4.58*** -1.30 -3.50**Algeria 0.90 -

3.76***-0.49 -3.89*** -1.53 -4.60*** -1.23 -4.08***

Egypt -3.74***

-2.54 -2.65* -6.73*** -1.20 -8.12*** -2.65* -3.93***

Iran -2.73* -3.95***

-1.15 -3.26** -3.46** -5.52*** -0.06 -5.15***

Jordan -2.60 -2.79* -1.46 -5.16*** -3.31** -4.60*** -2.95* -3.20**

• * , ** and *** indicate statistical significance at the 10%, 5% and 1% level respectively.• The null hypothesis for the ADF test is that the series is non-stationary. Maximum lags were set at 5 and lag length is determined using the modified AIC criterion. • Levels and Diff denote the augmented Dickey-Fuller t-tests for a unit root in levels and first differences respectively.• GGDP refers to the growth of the real GDP per capita, GE refers to government final consumption expenditure as percentage of GDP, and M3 refers to liquid liabilities as percentage of GDP.

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Pedroni (Engle Granger based) Panel Cointegration Tests


TestPedroni (Engle Granger Based )

Statistics

Panel-v -1.876099

Panel-p -1.861387**

Panel-t -8.773494***

Panel-adf -8.105795***

Group-p 0.195285

Group-t -11.42351***

Group-adf -7.920420***

Dependant Variable: Economic Growth

• * , ** and *** indicate statistical significance at the 10%, 5% and 1% level respectively.

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Pedroni (Engle Granger based) Panel Cointegration Tests


Dependant Variable: Financial Development

TestPedroni (Engle Granger Based )

Statistics

Panel-v -1.605357

Panel-p 1.913495

Panel-t -0.114741

Panel-adf -1.644388**

Group-p 4.155627

Group-t -0.468908

Group-adf -2.187947**• * , ** and *** indicate statistical significance at the 10%, 5% and 1% level respectively.

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Economic Growth Regressions


Dependent Variable: GGDPCoefficien

t Std. Error t-StatisticMethod: Panel Least Squares C 0.921594 0.029868 3.085508***Included observations: 574 Z -0.125909 0.034989 -3.598509 DCBS -0.034700 0.007356 -4.717433***

S -0.047846 0.017813 -2.685980***GE -0.299874 0.047015 -6.378271**P -0.005251 0.000739 -7.103047***

TRADE 0.029658 0.005305 5.590477**R-squared 0.176363 S.E. of regression 5.568599Adjusted R-squared 0.167647 Sum squared resid 1758227Prob(F-statistic) 0.000000 Mean dependent var 2.610380Hannan-Quinn criter. 6.304988 S.D. dependent var 6.103687

Log likelihood -1.796590Akaike info criterion 6.284284

F-statistic 2.023499 Schwarz criterion 6.337365

Durbin-Watson stat 1.022821 • * , ** and *** indicate statistical significance at the 10%, 5% and 1% level respectively.

• GGDP refers to the growth of the real GDP per capita, GE refers to government final consumption expenditure as percentage of GDP, M3 refers to liquid liabilities as percentage of GDP, DCBS refers to domestic credit provided by banking sector as percentage of GDP, S refers to gross domestic savings as percentage of GDP, and P refers to inflation rate, consumer prices, and TRADE refers to imports plus exports as percentage of GDP.

Resu

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Economic Growth Regressions


• * , ** and *** indicate statistical significance at the 10%, 5% and 1% level respectively.• GGDP refers to the growth of the real GDP per capita, GE refers to government final consumption expenditure as percentage of GDP, M3 refers to liquid liabilities as percentage of GDP, DCBS refers to domestic credit provided by banking sector as percentage of GDP, S refers to gross domestic savings as percentage of GDP, and P refers to inflation rate, consumer prices, and TRADE refers to imports plus exports as percentage of GDP.

Dependent Variable: GGDP Coefficient Std. Error t-StatisticMethod: Panel Least Squares C 6.640.536 1.575.982 4.213585***Included observations: 451 Z 0.059450 0.250979 0.236873 M3 -0.030683 0.010351 -2.964219***

S -0.052202 0.021745 -2.400636**GE -0.283918 0.052972 -5.359790***P -0.005193 0.000763 -6.808556***

TRADE 0.037078 0.008624 4.299501**R-squared 0.182814 S.E. of regression 5.710585Adjusted R-squared 0.171771 Sum squared resid 1447919Prob(F-statistic) 0.000000 Mean dependent var 2.109145Hannan-Quinn criter. 6.363069 S.D. dependent var 6.274880Log likelihood -1.422201 Akaike info criterion 6.337919F-statistic 1.655469 Schwarz criterion 6.401734Durbin-Watson stat 1.099455

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Data

Results

Conclusion






Con

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Cross-sectional data leave question marks for in terms of the correlation that occurs as a result of non-stationary.

Time series data provides unreliable results in terms of short time spans of typical data sets.

Financialization has a significant positive effect on economic growth for Turkey, east european countries and middle-east countries.

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Economy & Finance

Financialization & Economic Development