Financialization & Economic Development
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  • 1. Financialization & Economic Development “Tezer YELKENCİ”
  • 2. THE LONG RUN CAUSALITY BETWEEN FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH HAS BEEN INSPECTED BY A LARGE AND EXPANDING LITERATURE, AND IT REMAINS UNCERTAIN.
  • 3. FinancializationandEconomic Development Izmir University of Economics ECON426 May 2011 Agenda Introduction 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
  • 4. FinancializationandEconomic Development Agenda Introduction 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 Izmir University of Economics ECON426 May 2011
  • 5. Introduction Definitions Financialization Izmir University of Economics ECON426 May 2011  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.
  • 6. Introduction Motivation Izmir University of Economics ECON426 May 2011 Financialization Economic Growth Turkey East Europe Countries & Middle-East Countries ? ?
  • 7. FinancializationandEconomic Development Agenda Introduction 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 Izmir University of Economics ECON426 May 2011
  • 8. LiteratureReview Dimitris K. Christopoulos and Efthymios G. Tsiones, 2004, Financial Development and Economic Growth Methodology Izmir University of Economics ECON426 May 2011  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.
  • 9. LiteratureReview M. Kabir Hassan, Benito Sanchez and Jung-Suk Yu, 2010, Financial Development and Economic Growth Izmir University of Economics ECON426 May 2011 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.
  • 10. LiteratureReview Chien-Chiang Lee and Chum-Ping Chang, 2009; FDI, Financial Development, and Economic Growth Izmir University of Economics ECON426 May 2011 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.
  • 11. FinancializationandEconomic Development Agenda Introduction 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 Izmir University of Economics ECON426 May 2011
  • 12. EmpiricalFramework Izmir University of Economics ECON426 May 2011 Testing for Panel Unit Root Testing for Integration Panel Least Squares Testing for Panel Cointegration
  • 13. EmpiricalFramework Regression Model Izmir University of Economics ECON426 May 2011 Where; y = Growth of real GDP per capita Z = the log of GDP per capita S = Gross domestic savings as percentage of GDP TRD = Imports plus exports as percantage of GDP GE = Government final consumption expenditure as percantage of GDP P = Log of one plus inflation rate FD = DCBS or M3 Where; DCBS = Domestic credit provided by banking sector as percentage of GDP M3 = Liquid liabilities as percentage of GDP
  • 14. EmpiricalFramework Testing for Integration Izmir University of Economics ECON426 May 2011 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
  • 15. EmpiricalFramework Testing for Panel Unit Root Panel Cointegration Izmir University of Economics ECON426 May 2011 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 cointegration Alternative Hypothesis: Cointegration Lag Specification: Akaike Information Criterion Lag Specification: Akaike Information Criterion
  • 16. FinancializationandEconomic Development Agenda Introduction 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 Izmir University of Economics ECON426 May 2011
  • 17. Data Data Izmir University of Economics ECON426 May 2011 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
  • 18. FinancializationandEconomic Development Agenda Introduction 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 Izmir University of Economics ECON426 May 2011
  • 19. Results Im, Pesaran and Shin Panel Unit Root Tests Izmir University of Economics ECON426 May 2011 Variables Levels 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.
  • 20. Results Augmented Dickey-Fuller Unit Root Tests Izmir University of Economics ECON426 May 2011 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.
  • 21. Results Pedroni (Engle Granger based) Panel Cointegration Tests Izmir University of Economics ECON426 May 2011 Test Pedroni (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.
  • 22. Results Pedroni (Engle Granger based) Panel Cointegration Tests Izmir University of Economics ECON426 May 2011 Dependant Variable: Financial Development Test Pedroni (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.
  • 23. Results Economic Growth Regressions Izmir University of Economics ECON426 May 2011 Dependent Variable: GGDP Coefficient Std. Error t-Statistic Method: 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 5.568599 Adjusted R-squared 0.167647 Sum squared resid 1758227 Prob(F-statistic) 0.000000 Mean dependent var 2.610380 Hannan-Quinn criter. 6.304988 S.D. dependent var 6.103687 Log likelihood -1.796590 Akaike 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.
  • 24. Results Economic Growth Regressions Izmir University of Economics ECON426 May 2011 • * , ** 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-Statistic Method: 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 5.710585 Adjusted R-squared 0.171771 Sum squared resid 1447919 Prob(F-statistic) 0.000000 Mean dependent var 2.109145 Hannan-Quinn criter. 6.363069 S.D. dependent var 6.274880 Log likelihood -1.422201 Akaike info criterion 6.337919 F-statistic 1.655469 Schwarz criterion 6.401734 Durbin-Watson stat 1.099455
  • 25. FinancializationandEconomic Development Agenda Introduction 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 Izmir University of Economics ECON426 May 2011
  • 26. Conclusion Conclusion Izmir University of Economics ECON426 May 2011 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.
  • 27. ThankYou Izmir University of Economics ECON426 May 2011