finance and growth: a micro-founded approach
DESCRIPTION
Finance and Growth: a Micro-founded Approach. Federica Barzi Seminario 21-22 dicembre 2005 Dipartimento di Scienze Economiche Università di Verona. Objectives. relationship between the development of financial system structure and economic growth measures to encourage financial development - PowerPoint PPT PresentationTRANSCRIPT
Finance and Growth: Finance and Growth: a Micro-founded Approacha Micro-founded Approach
Federica BarziFederica BarziSeminario 21-22 dicembre 2005Seminario 21-22 dicembre 2005
Dipartimento di Scienze EconomicheDipartimento di Scienze EconomicheUniversità di VeronaUniversità di Verona
ObjectivesObjectives relationship between the development of financial relationship between the development of financial
system structure and economic growthsystem structure and economic growth measures to encourage financial developmentmeasures to encourage financial development equilibrium the financial system through the general equilibrium the financial system through the general
equilibrium model (FAGE)equilibrium model (FAGE) comparative statics analysis on a financial general comparative statics analysis on a financial general
equilibrium framework equilibrium framework impact of different financial policiesimpact of different financial policies
IssuesIssues which financial variables need to be modified in order which financial variables need to be modified in order
to ensure a sustainable financial-economic equilibrium to ensure a sustainable financial-economic equilibrium and growth?and growth?
does an optimum and correct balance between does an optimum and correct balance between freedom and control in financial flows movements freedom and control in financial flows movements exist and, if so, is it really best suited to provide exist and, if so, is it really best suited to provide economic growth?economic growth?
how can a financial authority gain control to lead the how can a financial authority gain control to lead the economy out of crises or stagnation?economy out of crises or stagnation?
How to gauge financial structure?How to gauge financial structure?
“…“…it is a holistic concept similar to the matrix of it is a holistic concept similar to the matrix of coefficients in an input-output table, the cells here coefficients in an input-output table, the cells here measuring the relationship of a given financial item measuring the relationship of a given financial item to the total of all financial instruments outstanding in to the total of all financial instruments outstanding in a country at a given date, or to the total transactions a country at a given date, or to the total transactions in financial instruments during a given period” in financial instruments during a given period” Goldsmith 1975Goldsmith 1975
AgentsAgents HouseholdsHouseholds FirmsFirms GovernmentGovernment Central bankCentral bank Rest of the worldRest of the world
+ Commercial banks+ Commercial banks+ Non-bank financial system+ Non-bank financial system+ Stock exchange markets+ Stock exchange markets(+ Financial planner)(+ Financial planner)
MethodologyMethodology Financial applied general equilibrium (FAGE)Financial applied general equilibrium (FAGE)
Stock-Flow consistent model (SFC)Stock-Flow consistent model (SFC)
Econometrics analyses (panel data)Econometrics analyses (panel data)
Implementation through dynamic modelsImplementation through dynamic models
AGEAGE Attempts to simulate numerically the general Attempts to simulate numerically the general
equilibrium structure of an economyequilibrium structure of an economy Walras law: demand equals supply for all Walras law: demand equals supply for all
commodities, at a set of relative prices that can be commodities, at a set of relative prices that can be identified (identified (Arrow-Debreu modelArrow-Debreu model))
An equilibrium does exists (An equilibrium does exists (Fixed point theorem, Fixed point theorem, Scarf’s algorithmScarf’s algorithm))
FAGEFAGE Basic data (national accounts, balance of Basic data (national accounts, balance of
payments, input-output tables, bank and financial payments, input-output tables, bank and financial systems interflows)systems interflows)
Benchmark equilibrium dataset Benchmark equilibrium dataset Choice of functional forms according to economic Choice of functional forms according to economic
and financial variables directly affected by changes and financial variables directly affected by changes in financial policy;in financial policy;
Calibration of the model;Calibration of the model; Counterfactual equilibrium for policy changeCounterfactual equilibrium for policy change
HINTS FOR MODELLINGHINTS FOR MODELLING
F-Listed Class (i)
F-Non Listed Class (j)
H-Investors Class (h)
H-Non Investors Class (k)
iAz
izzi
iiNDi AUdiv)FwXsPd(
i
Pr)FwXsPd(z
jzzj
jjNDj
hB
hD
hiAlablabh BrDrAUdivFwY
i
lablabk FwY
HINTS FOR MODELLING
F-Listed Class (i)
F-Non Listed Class (j)
H-Investors Class (h)
H-Non Investors Class (k)
SOURCES
1
jPB
FCOST
jFj KjjK
jPBaFP
patrpatrpatrpatr
i
1h
3h
2ihi1h BDAPT
patrpatrpatr1
k3
k2k BDPT
SOURCES
1
iPBiA
FCOST
iF iKiK
iiK
iiPBaAaFP
FAGEFAGEStrengthsStrengths WeaknessesWeaknesses
Solid Microfoundations Limited range of f. forms and stylized sectors of the economy
Estimation of Welfare Effects Sensitivity to closure rules
Distributional aspects Inability to assess the outcomes
Connection between aggregate variables and disaggregated sub-structure
Inter-temporal substitution and dynamics, expectations
Facilities for simulations of alternatives and flexibility
Large scale models closed to reality are impossible to solve
Applicability to complex problems Demanding data requirements
SFCSFC It implies the setting of a matrix (FAM - financial It implies the setting of a matrix (FAM - financial
accounting matrix) similar to a SAMaccounting matrix) similar to a SAM
This provides “This provides “a systematic listing of the financial a systematic listing of the financial stocks” where the assets of the agents are stocks” where the assets of the agents are displayed by rows and liabilities by columnsdisplayed by rows and liabilities by columns
SFCSFC Main differences between SAM and FAMMain differences between SAM and FAM SAM FAMDouble-entry table build on the base of an input- output table
The denomination of columns differ from that of rows
Monetary (nominal) flows Financial flowsTotal sum of rows have to equate the total sum of columns
No balancing requirements
EconometricsEconometrics i.e. : King-Levine (1993a) - i.e. : King-Levine (1993a) - Levine Zervos (1998) Cross-country regression modelCross-country regression model
G(j)= a + b F(i) + c X + uG(j)= a + b F(i) + c X + uG(j) = growth indicatorsG(j) = growth indicatorsF(i) = financial development indicators (FinDI)F(i) = financial development indicators (FinDI) X = other regressorsX = other regressors
Growth indicators Growth indicators King-Levine (1993a)King-Levine (1993a)
Long-run per capita growth ratesLong-run per capita growth rates
Capital accumulationCapital accumulation
Productivity growthProductivity growth
FinDIFinDI King-Levine (1993a)King-Levine (1993a)
DEPTH(+) DEPTH(+)
BANK (+)BANK (+)
PRIVY(+)PRIVY(+)
GDPSLIABILITIELIQUIDDEPTH
ASSETSDOMESTICBANKCENTRALCREDITBANKCREDITBANKOFRATIOBANK
GDPENTERPRISEPRIVATETOCREDITPRIVY
.INTERM.FINBANKNONOF.LIABBANKSOF.LIABCURRENCYSLIABILITIELIQUID
FinDILevine Zervos (1998)
Turnover ratio (+)
Stock market size( ̴)
TIONCAPITALIZAMARKETSTOCKSECOUNTRYAONTRADEDSHAREOFVALUETOTAL
GDPTIONCAPITALIZAMARKET
Role of institutions Role of institutions
Gov Rest of the World
-Income/corporate taxes-Export subsidies-Import tariffs-Value added taxes-Transfers to households andenterprises-Real government consumption-Real government investment-Infrastructure projects
-Development aid-Foreign portfolio investment-Foreign direct investment-Net credit to government-Debt relief (HIPC)-Foreign interest rate (LIBOR)-Factor income from abroad-Remittances-World prices for exports-World prices for imports-Grant element of concessional credits
Role of financial institutionsRole of financial institutions
Banking system Non-bank fin. system Stock Exchange
Central Bank:-Minimum foreign exchange reserves -Central Bank interest rate-Nominal exchange rateCommercial banks:-Access to credits-Flexibility of credit allocation
-Running of non-bank projects
-Fees for funds
management
-Capital adequacy requirements-Cost of listing-Takeover constraints
Stock market and growthStock market and growth Theoretical debate:Theoretical debate:
Does stock market support economic growth, Does stock market support economic growth, capital accumulation, productivity innovation?capital accumulation, productivity innovation?
How stock market and banks compete in funding How stock market and banks compete in funding firms’ growth?firms’ growth?
Possible complementaritiesPossible complementarities
Intuition
Simply listing on the national stock exchange does Simply listing on the national stock exchange does not necessarily foster resource allocationnot necessarily foster resource allocation
It must be implemented with the trading of It must be implemented with the trading of productive technologiesproductive technologies
Plus human capital investmentPlus human capital investment