Finance and Growth: the Long-run and Short-run Puzzle Effect
By
Binam Raj Ghimire
Economic Growth:
Importance
Evolution of economy
Catching up with Growth
Source: http://borgenproject.org/Pictures.html
Motivation
“developments in finance enabled the industrial revolution”
- Walter Bagehot (1873)
“where enterprise leads finance follows”-Joan Robinson (1952)
“although conclusions must be stated hesitantly and with ample qualifications, ………….. suggests a positive first-order relationship between financial development and economic growth.”
- Ross Levine (1997, 2005)
Source: picture top: http://www.spartacus.schoolnet.co.uk, picture bottom: Brown University, Providence
Walter Bagehot
Ross Levine
In Literature
No Silver Bullets but …5 common ingredients
Openness to Trade
Macroeconomic stability
High rates of saving and investment
Allowed market allocation of resources
Committed, honest & capable governments
A recent report: 13 Countries, 7% pa growth, 25 Yrs.
Source: Commission on Growth and Development
Variables for Financial Development (Banks)
HSBC Bank Mexico, Source: www.newcityskyline.com
Bank Development
- Private Credit / GDP
Beck, Kunt and Levine (2007) – Bangladesh 23 % Thailand 65%
Headcount: 1983 – 26% 2000 – 36% (Could have been 15% – population living on less than one dollar a day)
Variables for Financial Development (Stock Market)
NASDAQ at Times Square, Source: www.nasdaq.com
Stock Market Development
- Capitalisation
- Traded value
- Turnover
Control Variables
Data & Methodology
titititititi XMCYY ,,3,2,11-,, -
Panel Data, Pooled, Fixed and Random Effect, OLS
25 Yrs. 208 Countries
Where
Y = Real per capita GDP
C = Private Credit
M = Stock Market
X = Control Variables
Short run and long run dynamics in economics
Short-run
Long-run
Economy is unstable
Economy is in equilibrium
Real GDP per capita growth rate
World, East Asia & Pacific1997
Results
Regressors 1 2 3 1 2 3Constant -0.021 -0.017 -0.016 0.034 0.036 0.042
(0) (0.0484) (0) (0.137) (0.0484) (0.0261)Financial Depth - Private credit 0.016 0.025 0.022 -0.039 -0.055 -0.056(domestic credit to private sector - % of GDP) (0) (0) (0) (0.0186) (0.0001) (0.0001)Turnover 0.012 0.009(stocks traded, turnover ratio) (0) (0.1783)Capitalisation -0.004 0.033(market capitalization of listed companies - % of GDP) (0.0188) (0.0001)Value traded 0.000 0.023(stocks traded, total value - % of GDP) (0.8617) (0.0041)Government consumption -0.049 -0.053 -0.057 -0.349 -0.422 -0.407(government final consumption expenditure -% of GDP) (0) (0) (0) (0) (0) (0)Capital formation 0.216 0.220 0.214 0.336 0.326 0.319(gross capital formation - % of GDP) (0) (0) (0) (0) (0) (0)Inflation -0.016 -0.020 -0.017 -0.021 -0.026 -0.027(inflation, consumer prices - annual %) (0) (0) (0) (0) (0) (0)Trade openness 0.001 -0.007 -0.006 -0.002 0.004 0.004(trade - % of GDP) (0.627) (0) (0.0001) (0.9493) (0.8236) (0.8453)Education -0.114 -0.097 -0.096 -0.128 -0.032 -0.021(secondary school enrollment - %) (0) (0) (0) (0.2485) (0.7096) (0.8129)Adjusted R-squared 0.451 0.428 0.400 0.405 0.455 0.445
Long- Run Short- RunVariables
Growth Effect with Financial Depth and Stock Market
Conclusion
Rethinking – Is there a link between financial development and economic growth?
Source: Logo – bbc.co.uk