Financial market development and trade openness: evidence from emerging economies

International trade is said to be the engine of economic growth. Despite an enormous effort to explain this phenomenon, the relationship between financial market development and trade openness and integration into the world economy is still an enigma. This article investigates the relationship between financial market development and trade openness. To do this, we develop a long-run and short-run model (a bounds testing approach to cointegration) for 18 emerging economies over the period 1980 to 2011. Estimates from all models show that financial market development, including both the stock market and the banking sector, has significant effect on trade openness in both short-run and long-run phenomena in the majority of countries. Despite many similarities among emerging economies, additional evidence suggests that the link between either stock market development or banking sector development with trade openness works via each country’s specific structure.     

The determinants of foreign direct investment in Malaysia: A case for electrical and electronic industry

This study attempts to analyse the determinants of inward FDI in the electrical and electronic (E&E) industry in Malaysia using bounds test approach for the 1980–2008 period. It is found that GDP, real exchange rate, financial development, corporate income tax, macroeconomic uncertainty and social uncertainty factors significantly affect inward FDI in E&E sector in Malaysia. Empirical results indicate that GDP, real exchange rate, financial development and macroeconomic uncertainty are positively related to inward FDI in E&E sector in the long run. However, corporate income tax and social uncertainty have a negative impact on inward FDI in E&E sector. Furthermore, the Granger causality results also indicate that all explanatory variables Granger-cause FDI in the long-run, but in the short-run only macroeconomic and social uncertainties Granger-cause FDI. The impact of social uncertainty is found to be greater than macroeconomic uncertainty. Thus, foreign investors in E&E sector seem to be more concern about the level of social security and safety when choosing their investment destination.     

Inter-linkages between competition and stabilisation policies in the banking sector and stock market development in Europe

The banking sector and the stock market in Europe have been adversely impacted by a series of global financial crises over the last two decades. Major financial reforms were implemented to enhance the stability and competition within the banking sector. Measures were also implemented to create a vibrant stock market in Europe to stimulate economic growth in Europe. This study examines the interactions between stock market development, banking competition, and banking stability in European countries from 1996 to 2016. The purpose of the study is to understand the inter-linkages between these variables to ascertain the spillover impact of policy reforms in the banking sector on the stock market and vice-versa. Using a vector error-correction model, the study finds long-run and short-run inter-linkages between banking competition, banking stability, and stock market development in European countries. The study’s most robust result is that banking competition and banking stability stimulate stock market development in the long run. There is also some evidence that healthy competition in the banking sector and stock market development instils greater stability in the banking sector. The results suggest that policy measures put in place to create a vibrant stock market must include elevating banking competition and banking stability, with policymakers being cognizant that causality may be bidirectional.     

Insurance development,banking activities,and regional output: evidence from China

This paper applies panel cointegration tests and panel vector error correction models to investigate the interrelationship among the banking sector, insurance market, and regional output based on the samples from 25 Chinese provinces. We first find that there is a fairly strong long-run cointegrating relationship among real GDP, banking credit, and real insurance premiums. Second, both insurance markets (life and non-life) and the banking sector have a positive effect on real output. Third, we determine that banking activities and economic growth exhibit long-run and short-run bidirectional causalities. Fourth, there is fairly strong evidence in favor of the hypothesis for the long-run bidirectional causal relationships between insurance premiums and economic growth, taking into account the critical channel of the banking sector. Finally, we provide some beneficial suggestions for investors and policy-makers.     

Banking sector depth and economic growth nexus: a comparative study between the natural resource-based and the rest of the world’s economies

This paper investigates the relationship between banking sector depth and long-term economic growth in the natural resource-based economies vis-à-vis economies that are not dependent on natural resources. For the empirical investigation, a Generalised Method of Moments estimator for dynamic panel data models is adopted for 194 countries spanning the period 1964–2013. Using different measures of banking sector depth and economic growth, the investigation yields three key findings. First, the banking–growth relationship is non-linear and positive within certain levels of banking sector depth in both country groups. Second, the time lag between the change in the level of banking sector depth and the effect on economic growth is shorter in the natural resource-based countries than in the other countries. Finally, the total effect of banking sector deepening on long-term economic growth is weaker in economies with abundant natural resources than in the rest of the world.     

Feldstein–Horioka puzzles

The high correlation between national saving and investment rates in advanced economies—the Feldstein–Horioka puzzle—has been referred to as the “mother of all puzzles.” Perhaps more puzzling is that for emerging economies saving–investment correlations tend to be significantly lower, though still positive. This deepens the Feldstein–Horioka puzzle because the mobility of capital is generally believed to be much lower in emerging economies than in advanced economies, and a country with less mobile capital should have a tighter relationship between local saving and investment rates. This paper develops a DSGE model that, without resorting to any real or financial friction, simultaneously explains these two aspects of the Feldstein–Horioka puzzle: positive saving–investment correlations in both advanced and emerging economies and significantly lower saving–investment correlations in emerging economies than in advanced economies. The main features of the model include long-run risk, an endogenous world interest rate, and cross-correlations of national and global shocks. The findings hold for both quarterly time series and long-run averages.     

Exchange rate volatility and its impact on domestic investment

The relationship between exchange rate uncertainty and domestic investment has attracted some attention in macro literature. Previous studies that investigated the relation concentrated on firm level data with mixed results. In this paper we argue that the relationship applies equally at the aggregate. We assess the short-run and long-run effects of exchange rate volatility on domestic investment in each of the 36 countries in our sample using time-series data. The application of the bounds testing approach indicates that exchange rate volatility has significant short-run effects on domestic investment in 27 countries. The short-run effects are translated into the long-run only in 12 countries.     

Stock and credit market expansion and economic development in emerging markets: further evidence utilizing cointegration analysis

This paper empirically investigates the relationship between equity and credit market development and economic growth, in a sample of five very important ‘emerging’ markets. In particular, employing a multivariate time-series methodology to test for long-run trends and causality between variables that proxy for stock market development, credit market development and economic development. The results seem to suggest that equity markets have a role to play only in relatively liberalized economies, like Chile and Mexico. In financially repressed economies, like India, the equity market does not affect real sector growth. Furthermore, the banking crises in the 1980s and 1990s in Chile and Mexico resulted in a negative relation between economic growth and the credit market. In South Korea, equity and credit markets both affect economic growth, but not vice versa. In countries where the nature of the stock market has been speculative, like Taiwan, a negative relationship is detected between equity market development and economic development.     

PRICE-BASED MEASUREMENT OF FINANCIAL GLOBALIZATION: A CROSS-COUNTRY STUDY OF INTEREST RATE PARITY

Abstract.   We characterize the relationship between ex post exchange rate depreciation and the interest differential for both developed and emerging market economies. The measured ex post uncovered interest differentials in terms of both levels and absolute values are then related to a set of variables that capture macroeconomic and policy conditions. We find that a wide diversity in the coefficient relating depreciations and interest differentials can be attributed to differences in inflation volatility, financial development, capital account openness, legal development and the nature of the exchange rate regimes. The robust results are mainly found in the emerging market country grouping.     

Macroeconomic performance index: a new approach to calculation of economic wellbeing

Since the rise of the global financial crisis, there has been revival of interest in performance indexes that measure the overall stance of the economy and the wellbeing of households. Such indexes typically consist of inflation, growth, employment and long-term interest rates. We develop such an index by appending exchange rate and weighting each variable by the inverse of its variance in order to prevent the more volatile variable to dominate the index. We call this macroeconomic performance index (MPI) and argue that such an index better explains the overall economic stance especially in emerging economies. We generate the index using data from three emerging economies, namely Turkey, Brazil and Poland. Our analysis indicates that the index has a nonlinear structure and hence we analyse its behaviour using threshold autoregressive (TAR) model. It is observed that MPI captures the economic stance and main economic incidents quite successfully in each subject country. To further see the relevance of the MPI, we run TAR cointegration analysis with consumer confidence indexes (CCIs) for the subject countries with TAR cointegration test. The results indicate long-term relationship between the MPI and CCI in all three countries.     

European Banking Distress and EMU: Institutional and Macroeconomic Risks

Financial stability in Europe has received renewed attention with the advent of EMU. This paper examines whether EU country banking systems are particularly vulnerable to systemic risk. Our approach is to explore episodes of banking sector distress for a large sample of countries, highlighting the experience of the EU. We estimate multivariate probit models linking the likelihood of banking problems to a set of macroeconomic variables and institutional characteristics such as aspects of bank supervision and regulation, restrictions on bank portfolios, and development of the banking system. Given these characteristics, the model predicts a low probability of banking sector distress in EMU countries.
JEL classification : G 21; E 44; F 41     

Determinants of Interest Rate Pass-through for Emerging Market Economies: The Role of Financial Market Structure

It is essential for central banks to assess whether or not the pass-through from monetary policy rates to credit and deposit interest rates is complete in order to ensure price stability. In this article, we analyze interest rate pass-through process for emerging market economies. Since emerging market countries lack large panel data sets that are typically available for developed countries, it is hard to analyze the determinants of pass-through coefficients for emerging market countries. To overcome the data issue, we developed a country selection procedure that minimizes heterogeneity among the countries included in the analysis. Our findings indicate that banking sectors?? competition plays a more important role for emerging market countries than their developed counterparts.     

Does external shock trigger systemic banking distress?

Before 2007, many studies claimed that wide-scale banking distress in various countries was preceded and could be predicted by deteriorating macroeconomic indicators such as falling GDP growth rate. However, these researches were mostly based on “event studies” which identified crises too late. By using banking sector asset price data, the paper finds that economies still thrive in the “pre-crisis” period in terms of increasing GDP growth. The slowdown of economy in terms of a fall in GDP growth is generally associated with the post-crisis period coinciding with the bubble burst process. Thus, this result supports the policy view that it is not useful to postpone macroeconomic stability to conceal banking sector weakness.     

Investigating the semiconductor industry cycles

The aim of this article is to investigate the links between semiconductor sales and various macroeconomic, financial, industrial variables including inventories, equipment orders or semiconductor sector stock index. Statistical properties of these variables are studied. Both short-run and long-run interactions are analysed. On the short-run, our results indicate that relationships often imply feedbacks. Through the implementation of cointegration analysis, we separately identify both sales value and investments in the semiconductor market. An impulse–response analysis confirms the relevance of our choice of data and stability tests demonstrate that the parameters remain constant during the entire sample. The Vector Error Correction Models (VECMs) offer a representation respecting cycle theories and market actor analyses.     

Sovereign default risk and state-owned bank fragility in emerging markets: evidence from China and Russia

In this paper we investigate the interdependence of the sovereign default risk and banking system fragility in two major emerging markets, China and Russia, using credit default swaps as a proxy for default risk. Both countries’ banking industries have strong ties with their governments and public sector, even after a series of significant reforms in the last two decades. Our analysis is built on the case studies of each country’s two biggest banks. We employ a bivariate vector autoregressive (VAR) and vector error correction (VECM) framework to analyse the short- and long-run dynamics of the chosen CDS prices. We use Granger causality to describe the direction of the discovered dynamics. We find evidence of a stable long-run relationship between sovereign and bank CDS spreads in the chosen time period. The more stable relationship is found in cases where the biggest state-owned universal banks in emerging markets are closely managed by the government. But the fragility of those banks does not directly affect the state of public finances. However, in cases where state-owned banks directly participate in large governmental projects, banking fragility may result in the deterioration of state funds, while raising the risk of sovereign default.     

Long-Run Elasticities of the Demand for Money in Korea:Evidence from Cointegration Analysis

Most recent studies have employed the cointegration technique to investigate the long-run stability of the demand for money. This study considers the case of Korea. It is shown that in the long-run while Ml monetary aggregate is cointegrated with income, interest rate, and the exchange rate, M2 is not. However, results from error correction models reveal that both Ml and M2 have short-run relationship with their determinants. [E41]     

Consolidation and commercial bank net interest margins: Evidence from the old and new European Union members and candidate countries

This paper examines the effects of financial reforms on the determinants of commercial bank net interest margin in the banking systems of the new EU member countries and candidate countries by dividing the sample period (1995–2006) into two sub-periods: consolidation period (1995–2000) and post-consolidation period (2001–2006). The paper also compares the new and old EU members to check whether differences with respect to the determinants of net interest margins between these two groups of countries exist within the same time period. The results indicate that size and managerial efficiency are negatively and significantly related to net interest margins in the two sub-periods. Regulators should promote merger and acquisition and market entry in order to increase the scale and efficiency of banks operating in the sector. Exploitation of the scale economies seems to be important in decreasing the interest rate spread in the sampled banking sectors. The results further indicate that all macroeconomic variables are statistically insignificant in the second sub-period, suggesting that differences in macroeconomic fundamentals have decreased among the sampled countries due to the increased convergence process in recent years. As for the comparison of the new and old EU members, the results suggest that the financial and economic convergence between the new and old members has not been completed. Macroeconomic differences within the group and between the groups still exist.     

International Financial Contagion: Why are Eastern Europe's banks not failing when everybody else's are?

While the Asian financial crisis spread to Russia and Brazil, the transition economies in Central and Eastern Europe (CEECs) are largely unaffected by international financial contagion. This is the more surprising considering that most economies have experienced severe banking sector problems in the past, that large bad loan ratios are still prevalent, that banking regulation and supervision are only slowly improving, and that stabilizing policies have slowly been eliminated. What insulated the CEECs from the recent wave of financial instability? To consider the counterfactual, we first provide a framework that links banking crises to financial deregulation. We then focus on a number of macro- and microeconomic factors, using data compiled from the IMF's International Financial Statistics, from the World Bank's World Debt Tables, and from the BIS's Consolidated International Banking Statistics. We first compare past experiences in CEECs with those in other emerging economies as a cross-sectional reference point. We then consider whether the situation in CEECs has changed since the last banking sector problems, in order to establish a reference point across time. Our results indicate that the factors leading up to past banking crises are generally different in CEECs from those in other emerging economies. However, in recent years, the characteristics of CEECs have become more similar to those of other emerging economies.     

Remittances and the real effective exchange rate

We examine the long-run relationship between remittances and the real exchange rate for less-developed countries. In a key departure from the literature, we employ a panel cointegration approach using an innovative method for the measurement of the multilateral real effective exchange rate and we focus on high-remittance economies. We find a small inelastic, but significant, long-run relationship which confirms a Dutch disease type effect. The short-run relationship is explored using a panel vector error correction model which confirms that short-run causality is unidirectional running from remittances to the exchange rate. Potential asymmetries in this relationship are identified using quantile regression analysis.