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Jean Louis Arcand, Enrico Berkes and Ugo Panizza IMF Working paper 2011
Content
Motivation of the paper Literature revue/stylized facts Datas and Methodology Results Extensions
Conclusion
Literature
First empirical studies : Goldsmith (1969), positive relationship finance and long run growth. Higher efficiency of investments Joan Robinson (1952) economic growth causes financial development. "Where enterprises leads, finance follows" In the 90's studies concentrates on the causality from finance to growth: King and Levine (1993) financial depth predict growth, Levine and Zervos (1998) stock market liquidity positive impact on growth, Levine Loayza and Beck (2000), Rajan and Zingales (1998) industrial sector more dependent on finance.
Literature (ctd)
In the 2000's skepticism. Concern about the robustness of the finance growth nexus :
Demetriades and law (2006), no impact with poor institutions, Rousseau and Watchel (2002), no impact with double digit inflation, Rioja and Valev (2004) Concerns about "too large" financial systems : Easterly Islam and Stiglitz (2000), Rajan (2005), Rousseau and Watchel (2011)
To sum up, trade off short/long term growth. Positive impact in the long run despite higher volatility in the short run. Loayza and Ranciere (2006), Rancire Tornell and Westermann (2008)
Data
Country and industry level data :
Methodology
Yi=a0+BPC+CPC^2+Zt+e
PC : measure total credit to private sector (PC) Importance of using deposits bank and other financial institutions since 2000. Indeed in the US total credit to private sector four times larger than banking deposits. Yi : capture GDP growth Zi : set of control variables generally used in the literature => log of initial GDP per capita, initial stock of human capital, inflation, trade openess, ratio of government expenditure to GDP
Results
Omitted variable bias corrected with Quadratic term (non monotonicity)
Although it depends on the method used, negative marginal effect of financial depth when PC reaches 80-100% of GDP
Results consistent with respect : Different estimators: simple OLS, Panel GMM as well as Semi parametric estimators Different data : Country/Industry level Findings robust to controlling for macroeconomic volatility, banking crisis and institutional quality
Results
Comparing with other results
Results similar to those of Stiglitz, Easterly and Islam (2000). Treshold effect on output volatility Consistent with the "vanishing effect" found by Rousseau and Watchel (2011) Contradict Rioja and Valev (2004), positive impact of financial depth in regions of high finance
Panel estimation
Use of time Variation dividing the sample into 6 non overlapping 5-year periods GMM method to deal with endogeneity. It includes time fixed effects, lag values of PC and all other control variables "Vanishing effect" of financial depth because of growing financial sector over time : between 2000-10, countries with PC/GDP>90% increased from 4% to 22% of the sample
Extensions
Volatility, Crises and Heterogeneity
LGDP(t-1) PC(t-1) PC2(t-1) HVOL PC(t-1)HVOL PC2(t-1)HVOL BKCR(t) PC(t-1)BKCR(t) PC2(t-1)BKCR(t) LEDU(t-1) 1.570** LGC(t-1) -1.734*** LOPEN(t-1) 1.323*** LINF(t-1) -0.133 Cons. -0.074 N. Obs. 917 N. Cy. 133 AR1 p-value AR2 p-value OID -5.12 0.00 -1.34 0.180 119.5
-1.898***
1.726*** -1.570*** 1.041*** -0.032 0.070 917 133 -5.11 0.00 -1.27 0.203 122.7 1960-2010 0.7 0.65
2.155*** -1.709** 1.008* -0.010 1.604 872 133 -4.95 0.00 -1.02 0.307 126.3 1970-2010 1.06
-2.134** -0.013 0.689 1.871*** -1.843*** 0.999** -0.032 1.590 872 133 -4.87 0.00 -1.18 0.236 122.4 1970-2010 0.81 1.13
LGDP(t-1) PC(t-1) PC2(t-1) HVOL PC(t-1)HVOL PC2(t-1)HVOL BKCR(t) PC(t-1)BKCR(t) PC2(t-1)BKCR(t) LEDU(t-1) 1.570** LGC(t-1) -1.734*** LOPEN(t-1) 1.323*** LINF(t-1) -0.133 Cons. -0.074 N. Obs. 917 N. Cy. 133 AR1 p-value AR2 p-value OID -5.12 0.00 -1.34 0.180 119.5
-1.898***
1.726*** -1.570*** 1.041*** -0.032 0.070 917 133 -5.11 0.00 -1.27 0.203 122.7 1960-2010 0.7 0.65
2.155*** -1.709** 1.008* -0.010 1.604 872 133 -4.95 0.00 -1.02 0.307 126.3 1970-2010 1.06
-2.134** -0.013 0.689 1.871*** -1.843*** 0.999** -0.032 1.590 872 133
-4.87 0.00 -1.18 0.236 122.4 1970-2010 0.81 1.13
-0.746 -1.929 1.228 -1.657 0.188 0.978 -1.4 82 1.300 -0.525 819 115 -4.82 0.00 -1.47 0.142 95.83 1 0.70 0.60 917 133 -5.33 0.00 -1.60 0.12 110.1 1 0.81 0.82 828 116 -4.93 0.00 -1.47 0.147 99.8 1 0.58 1.05 917 133 -5.34 0.00 -1.54 0.123 111.9 1 0.64 0.77
Indusrty level data Estimated Model is following: VAGRi,j = SHVAi,j + EFj (PCi + PC2i ) + j + i VAGRi,j- real value added growth of industry j in country i over the 1990-2000 period SHVAi,j-initial share of value added of industry j over total industrial value added in country i Efj-index of external financial dependance for industry j in the 1990s (R&Z index) j and i- a set of industry and country fixed effects
0.0648***
Conclusions
There is a non-monotone realtionship between financial depth and economics growth
There is a certain threshold-around 80-100% of GDP-above which finance starts having negative effect on economic growth
Thank you!!!