Financial deepening and economic growth

The core of Shapley–Shubik games and general equilibrium models with a Venn diagram is applied for a theory on the role of real finance in economic growth among advanced economies. Then the dynamic computable general equilibrium (DCGE) models for Germany, France, the UK, Japan and the USA are constructed to assess the validity of the over-financing hypothesis that has reappeared after the financial crisis of 2008. Actual financial deepening ratios observed in the nonconsolidated balance sheet of the OECD exceeded by factors of 3.5, 2.4, 5.1, 11.6 and 4.8 than the optimal financial deepening ratios implied by DCGE models, respectively, in these countries because of excessive leveraging and bubbles up to 19 times of GDP which were responsible for this great recession. Containing such massive fluctuations for macroeconomic stability and growth in these economies are not possible in conventional fiscal and monetary policy models and require a DCGE analysis like this along with adoption of separating equilibrium strategy in line of Miller–Stiglitz–Roth mechanisms to avoid problem of asymmetric information in the process of financial intermediation so that the gaps between actual and optimal ratios of financial deepening remain as small as possible.     

Managing Financial Integration and Capital Mobility—Policy Lessons from the Past Two Decades

Emerging market experience over the past two decades has revealed the tenuous links between external financial integration and faster growth, and the proclivity of such integration to fuel costly crises. Emerging markets learned, converging to the middle ground of the macroeconomic trilemma. Following their crises of 1997–2001, emerging markets added financial stability as a goal, self‐insured by building up international reserves, and adopted a public finance approach to financial integration. The global crisis of 2008–09 illustrated that the advanced economies “overshot” the optimal degree of financial deregulation, while the resilience of the emerging markets validated their public finance approach to financial integration.     

危机损失、经济复苏与金融结构比较——什么样的金融体系更能摆脱危机

本文从比较分析视角出发,研究在应对金融危机的过程中,不同的金融结构对经济增长的作用。我们利用57个国家从1960到2009年的面板数据检验了金融结构、金融发展水平与经济增长之间的相互联系。研究结果表明,只有当金融发展水平较高的经济体选择市场导向的金融结构时,才能降低金融危机的损失,提高经济复苏速度,而金融发展水平较低的经济体的最佳选择则是银行导向的金融结构。最后,本文结合中国的现实情况提出了相关的政策建议。     

What matters in the finance–growth nexus of advanced economies? Evidence from OECD countries

Over the last decades, a large strand of finance and growth literature has provided ample evidence on the importance of financial deepening for economic development. Yet, recently, the focus of public debate has shifted towards the role of the financial system structure, an area in which empirical research remains relatively sparse and exploratory in nature. With this article, we aim to contribute to that debate by analysing the role the financial system structure plays in economic growth and risk. Focusing on stock markets and studying OECD economies over 1994–2013, we find that, ceteris paribus, financial systems with relatively larger stock markets facilitate economic growth and dampen economic risk. Our findings remain robust under application of instrumental variable and system generalized method of moments estimators, as well as when we use an alternative definition of stock market development, estimate median regressions, examine relatively high-frequency annual data, control for systemic banking crises or apply quadratic specifications. We find no such effect for private bond markets or private credit volume. Overall, our results suggest that financial system structure matters for the economic development of advanced economies and highlight the importance of a debate about the optimal structure of an economy’s financial system.     

Thresholds in finance–growth nexus: Evidence from G‐7 economies

This study explores the finance and economic growth nexus in G‐7 economies as these countries experience significantly higher levels of financial development. Using a balanced panel of 31 years from 1983 to 2013, we provide new evidence on the finance–growth relationship. We show the presence of nonlinearity as there is an inverted U‐shaped relationship between finance and growth in the long run. Estimating the thresholds in the finance–growth nexus, we notice that there exists a threshold effect of finance at 109% of Gross Domestic Product (GDP). We observe that exceeding the threshold would hinder the countries instead of furthering economic growth as too much finance is harmful. Based on the panel Granger causality test results, we claim that financial development should be associated with optimal growth performance. Our findings for the G‐7 economies offer some useful policy inferences to the emerging and developing economies in designing their financial development strategies.     

The dynamics of financial development,globalisation, economic growth and life expectancy in sub‐Saharan Africa

The importance of life expectancy is recognised in the development economics literature because of its increasing effects on labour productivity and economic growth in long‐run. However, no published study to date empirically examines the nonlinear relationships between globalisation, financial development, economic growth and life expectancy in sub‐Saharan African (SSA) countries. Therefore, our study intends to fill this gap by using non‐parametric cointegration test and multivariate Granger causality test towards a non‐linear empirical understanding of the factors affecting the life expectancy. We consider the case of 16 sub‐Saharan African economies using annual data over the period 1970–2012. The empirical analysis indicates that financial development, globalisation and economic growth appear to have a positive impact upon life expectancy in sub‐Saharan African economies, except for Gabon and Togo. Our empirical findings may provide insightful policy implications towards improving population health conditions which are vital for promoting the productivity of labour force and long‐run economic growth in sub‐Saharan African countries. In light of these policy implications, governments should incorporate globalisation, financial development and economic growth as key economic instruments in formulating sustainable developmental policy to promote life expectancy for the people in sub‐Saharan African countries.     

Financial Trilemma in China and a Comparative Analysis with India

A key challenge facing most emerging market economies today is how to simultaneously maintain monetary independence, exchange rate stability and financial integration subject to the constraints imposed by the trilemma, in an era of widespread globalization. In this paper we review and contrast the trilemma policy choices and trade‐offs faced by the two key drivers of global economic growth: China and India. China's trilemma configurations are unique relative to other emerging markets in terms of the predominance of exchange rate stability, and in the failure of the trilemma regression to capture a consistently significant role for financial integration. In contrast, the trilemma configurations of India are in line with choices made by other emerging countries. Over time, India, like other emerging economies, has converged towards a middle ground among the three policy objectives, and has achieved comparable levels of exchange rate stability and financial integration buffered by sizeable international reserves.     

Domestic and global output gaps as inflation drivers: What does the Phillips curve tell?

We study how domestic and global output gaps affect CPI inflation. We use a New-Keynesian Phillips curve framework which controls for non-linear exchange rate movements for a panel of 26 advanced and 22 emerging economies covering the 1994Q1−2017Q4 period. We find that both global and domestic output gaps are significant drivers of inflation both in the pre-crisis (1994–2008) and post-crisis (2008–2017) periods. Furthermore, after the crisis, in advanced economies the effect of the domestic output gap declines, while in emerging economies the effect of the global output gap declines. Our results suggest that emerging and advanced economies have become more similar to each other in terms of output gaps as inflation drivers. The paper demonstrates the usefulness of the New Keynesian Phillips curve in identifying the impact of global and domestic output gaps on inflation.     

The Financial Sector and Economic Growth*

The Mankiw–Romer–Weil (1992) augmented Solow–Swan ( Solow 1956 ; Swan 1956 ) model is extended to incorporate the financial sector in this study. Distinguishing between financial capital, physical capital and human capital, the research attempts to identify, in particular, the effects of financial capital on economic growth. The effects of financial sector efficiency on economic growth are also examined. The financial sector augmented model is tested on a cross‐section of 35 economies. Strong support is found for the model.     

The determinants of cross‐border bank flows to emerging markets

This paper studies the determinants of cross‐border bank lending on a panel dataset comprising 17 advanced and 28 emerging market economies from 1993 to 2008. The empirical framework is based on a gravity model of financial flows. Our main findings are that the decrease in cross‐border lending in the 2007–2008 crisis was mostly due to global rather than country‐specific risk factors, and that central and eastern Europe was less affected by this decrease than other emerging market regions because of its stronger financial and monetary ties with creditor countries, and its relatively sound banking systems. These results are fairly robust to several different specifications, sub‐samples and econometric methodologies.     

Financial Development and Economic Activity in Advanced and Developing Open Economies: Evidence from Panel Cointegration

This study considers the effects of financial development on output in a panel cointegration framework, focusing on the implications of trade and financial openness. Our analysis indicates that after controlling for cross‐sectional dependence, the typical relationship between finance and output does not hold in the long run. This relationship, however, is re‐established once we account for economic openness. While trade openness emerges as more important for developing countries, financial openness is more important for advanced economies. In the long run, causality runs from financial development to output in the advanced economies, while in developing economies causality is bidirectional. There is no short‐run causality between financial development and output, however.     

Financial deepening and income inequality: Is there any financial Kuznets curve in China? The political economy analysis

The interconnectedness of financial deepening and income inequality has been a highly controversial discussion which has not been concluded despite many empirical and theoretical studies up to date. One of the basic building blocks for many research designs is the reliance upon the Kuznets inverted U-shaped curve which postulates that in the first phase of economic growth income inequality increases, peaks and then decreases to a tolerable level in the later phase after a certain income level had been attained. The role of financial deepening in financing economic growth is an indispensable and necessary condition enabling us to easily draw an analogy between financial deepening and income inequality in a financial version of the Kuznets curve. In spite of 30 years of economic and financial reforms in China, which represents a fairly young history of economic growth and development, there are many indicators that Chinese experience significantly deviates from the presupposed inverted U-shaped curve trajectory and its final equalizing effect. This paper relies on financial deepening data measured by monetary aggregate M2/GDP and domestic banking credit/GDP ratios in its claim that they significantly correlate with rising income inequality. The author’s intention consists not in claiming that financial deepening per se causes income inequality, but provides a political economy analysis of the specific institutional and power configuration which leads to their positive relationship. This configuration is determined by the prevailing banking model, the hukou system, financial repression and the decentralized authoritarian system. On the other hand, the absence of inequality-narrowing institutitons further aggravate the problem. All the aforementioned factors are geared at avoiding mechanical and spurious claims that financial deepening increases or decreases income inequality across countries. A historical institutionalism approach to explain China’s path related to the Kuznets curve prediction shows the central validity of open and inclusive institutions in generating inequality-narrowing benefits of financial deepening.     

Interest rate reforms,financial deepening and economic growth in Tanzania: a dynamic linkage

In this paper we examine the dynamic relationship between interest rate reforms and economic growth in Tanzania using two tests. In the first test, we examine the impact of interest rate reforms on financial deepening using a financial deepening model. In the second test, we examine whether the financial deepening, which results from interest rate reforms, Granger‐causes economic growth – using a trivariate model. The empirical findings of our results reveal that there is a significant positive relationship between interest rate reforms and economic growth in Tanzania. However, the results fail to find any support for finance‐led growth.     

Determinants of labour productivity: Comparison between developing and developed countries of Asia‐Pacific

The current study investigates the trends in labour productivity of the major developing and developed economies of the Asia‐Pacific region and examines its determinants over the period 1980–2014. The study analyses capital deepening, human capital, technology, share of agriculture in GDP, financial development, institutional quality, inflation as well as macroeconomic variables as potential determinants of productivity, and identifies the differences in the impact of these factors on the productivity of developing and developed countries. Using panel cointegration and group‐mean fully modified ordinary least squares estimation, the study finds that capital deepening, human capital, technology, institutional quality and macroeconomic variables (i.e. government size and openness) are significant determinants of labour productivity of both developing and developed economies of the Asia‐Pacific region. The study further finds that while both trade openness and foreign direct investment affect productivity of developing economies positively, only trade openness has a positive and significant impact on the productivity of developed economies. The share of agriculture in GDP affects the labour productivity of developing Asia‐Pacific economies significantly but not that of developed economies. Furthermore, capital deepening has a much higher impact on the productivity of developing Asia‐Pacific economies than that of developed economies.     

Soaring dragons,roaring tigers,growling bears

We perform a comparative analysis of regional growth and convergence in China, Russia and India over the period 1993–2003 by means of non‐parametric methods and kernel density estimates. Our results indicate that wealthy regions were largely responsible for the rapid growth in all three countries. For China and India, capital dissipation was identified as the major determinant of regional growth. In Russia, capital deepening impeded positive changes in labour productivity, leaving technological change as the only source of regional growth. Furthermore, we find that the increasing regional income inequality in all three countries was driven by technological change which more than offset the convergence resulting from capital deepening in China and India.     

Financial development,industrialization, the role of institutions and government: a comparative analysis between India and China

This research is the first comparative attempt incorporating the role of economic, demographic, sectoral contribution, government and trade in explaining financial development for India and China. Using time-series estimations, we establish that institutional quality and government size impede financial development, whereas urbanization, industrialization and service sector growth help in financial development for both countries. Trade openness also enhances Indian financial development but hinders Chinese financial development. We suggest that the policy advisers should not underestimate the role of urbanization, industrialization and service sector growth in implementing financial development. Finally, we find that the institutions and governments will play a key role for both economies in enhancing finance and growth.     

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.     

Trade-offs between macroeconomic and financial stability objectives

Ten years after the 2008-09 global financial crisis, most advanced economies have recovered and global economic growth has taken hold. However, partly due to accommodative financial conditions, financial risks are on the rise while inflation remains subdued. This revives the debate on the role of monetary policy in containing financial risks. This paper provides a framework to investigate trade-offs between macroeconomic and financial stability when the central bank has a financial stability objective. Relying on a New Keynesian model with an endogenous financial bubble, our simulations suggest that a central bank attempting to “lean against the wind” may face trade-offs between inflation/output stability and financial stability. We therefore argue that the interest rate should be used for achieving traditional macroeconomic goals, and a second, macroprudential instrument should complement the policy rate to tackle financial risk accumulation.     

中国的金融深化和生产率关系的再检测:1987-2001

金融中介和增长的关联问题在发展经济学文献中广受关注。金融中介的深化增加投资的流动性,提高金融资源的回报,从而提高生产率,所以被认为是经济增长的“发动机”。本文利用省份面板数据研究了中国各地区生产率变化如何受到金融深化过程的影响。通过构建对金融深度的适当测度,本文发现金融深化和生产率增长之间呈显著为正的关系。考虑到沿海和内地金融深化模式的差异,既然地区差距越来越被认为是与生产率差异相联的,这一发现同时解释了中国地区差距的扩大趋势。     

后危机时期国际金融格局的变动及其对美国经济的影响

2008年金融危机给世界经济带来了重大的影响,国际金融格局也发生了显著变化。本文主要分析了国际汇率体系、国际收支和国际储备体系、国别经济政策与国际间经济政策协调的变化。在后危机时期,美国经济也受国际金融格局变化的影响,包括美元中心地位的问题、“中心一外围”模式可持续性的问题和美国的国际经济领导权问题。本文得出的主要结论是：国际几种主要货币汇率波动增大,国际汇率体系弹性增大,国际收支总体失衡程度下降,美元为主的国际储备体系呈多元化趋势,先进经济体与新兴发展经济体的经济协调在加强,美元的霸权地位面临挑战,美国在国际分工中的中心地位在下降,美国在国际经济的主导地位也在逐渐下降,新兴经济体获得更多的话语权。