Università
degli Studi
di Torino
Whence Policy?
Government Policies, Finance,
and Economic Integration
Giuseppe Bertola ; Anna Lo Prete
Università di Torino and CEPR; Università di Torino
TRENDS
1980s – early 2000s :
MORE Economic integration
MORE
Finance
LESS
Government policies
…aftermath of 2008-09 crisis ?
Panel OECD, 1980-2007,
5-year averages of standard country-level data:
FINANCE and OPENNESS
Financial Development  Openness ?
200
0
100
-50
50
0
-100
150
200
-40
-20
Levels
100
Openness
0
Openness
-50
100
Openness
Deviations from country means
-100
50
100
0
50
100
Deviations from country means
Financial Development
Financial Development
150
0
100
150
50
200
100
Levels
0
(Rajan Zingales,2003)
(Do Levchenko,2007)
(Beck,2002)
50
Financial Development
Financial Development
200
Levels
20
Deviations from country means
0
20
Openness
5
10
Financial Structure
0
5
10
Financial Structure
-40
-20
40
20
-10
-5
0
Financial Structure
5
10
-100
15
0
-100
-50
50
0
100
Deviations from country means
-50
0
200
50
150
Financial Development
Financial Development
150
100
0
150
50
200
100
Levels
50
(Tressel Detragiache,
2008)
50
0
Financial Development
Financial Development
Financial Development  Financial Structure ?
0
40
15
20
-10
-5
0
Financial Structure
5
10
GOVERNMENT POLICIES and OPENNESS
Openness  Government Size ?
Deviations from country means
100
Openness
2
4
-2
2
-4
200
5
50
100
Openness
150
-20
0
Openness
20
40
Deviations from country means
200
-40
-20
0
Openness
20
40
5
Social Policy
0
10
Deviations from country means
50
100
Openness
150
5
-5
0
Social Policy
0
200
-40
-20
-40
-20
0
Openness
20
40
0
-5
10
020
10
30
20
40
Levels
Social Policy
(Agell, 2002)
Social Policy
30
0
-40
10-4
Levels
Openness  Social Policy ?
40
0
Government Size
150
0
50
-2
0
Deviations from country means
Government Size
15
5 20
10
25
Levels
15
Government Size
(Rodrik,1997)
(Sinn,2003)
(Bertola Lo Prete,2008)
10
Government Size
20
25
4
Levels
(Rodrik,1998)
0
50
100
Openness
150
200
0
Openness
20
40
FINANCE and GOVERNMENT POLICIES
Financial Development  Government Size ?
50
100
0
0
-50
50
-100
15
Government Size
20
Levels
15
Government Size
20
25
-4
-2
2
4
0
10
20
Social Policy
Deviations
from country
means 2
-2
0
Government Size
4
50
100
-4
-100
0
-50
50
0
100
Deviations from country means
30
40
-5
0
5
10
Social Policy
-100
50
0
100
Levels
25
-50
150 100200 150
50
10
0
Financial Development
Financial Development
200
5
Financial Development
Financial Development
Financial Development  Social Policy ?
Substitution/
complement?
0
Government Size
-100
10
Deviations from country means
-50
100200
150
50
100
0
5
Financial Development
Financial Development
150
100
Deviations from country means
0
Substitution
(Bertola Koeniger,
2007)
Levels
50
Financial Development
Financial Development
200
Levels
0
10
20
Social Policy
30
40
-5
0
5
Social Policy
10
t
A SIMPLE MODEL
Two periods/contingencies:
perfect financial markets?
full smoothing: cH = cL = yL + yH /2
financial transaction unit cost μ? Constraint:
Max log utility:
t
Financial market yields welfare
Can be improved by (costly) redistribution τ:
max
With
set
Government redistribution:
less needed if smaller μ,
more costly if larger λ (deadweight loss).
t
yields welfare
Decreasing in λ, and also in μ as long as positive
finance, i.e.
If lowering λ and μ is possible but costly
(lower output if close the economy,
more instability if spur finance?)
do it,
depending on shape of costs and benefits.
THEORETICAL MECHANISMS
Openness, larger
mean of market incomes
perhaps larger dispersion
less effective national government policies:
larger deadweight losses
Financial market liberalization:
smaller transaction costs
More private finance
Less government
What drives related changes?
Financial market development’s
policy roots:




Financial structure
Openness
Government size
Social policy
Country specific choices,
Shaped by exogenous conditions
WHENCE POLICIES?
international trade opportunities
differ across countries/over time:
Country characteristics…
Natural Openness (i)
…global trends
Global Trade (t)
Legal Origin (l)
“Globalization”(it)
Globalization
by legal origin (l)
GLOBALIZATION and OPENNESS
by Legal Origin
English
German
Scandinavian
17.67634
107.0593
25.95957
175.2211
French
219.2012
2323.224
730.1363
1958.635
Globalization
Graphs by legor
Potentially useful instruments
GLOBALIZATION and FINANCIAL STRUCTURE
by Legal Origin
English
German
Scandinavian
7.5
20
2.8
21.15115
French
219.2012
2323.224
730.1363
1958.635
Globalization
Graphs by legor
Potentially useful instruments:
correlated with policies,
GLOBALIZATION and GOVERNMENT SIZE
by Legal Origin
English
German
Scandinavian
6.363288
15.20475
11.33991
18.67999
French
219.2012
2323.224
730.1363
1958.635
Globalization
Graphs by legor
Potentially useful instruments
differently correlated with different policies,
GLOBALIZATION and SOCIAL POLICY
by Legal Origin
English
German
Scandinavian
11.22097
27.19834
1.901056
32.33488
French
219.2012
730.1363
2323.224
1958.635
Globalization
Graphs by legor
Potentially useful instruments
along with main effects (can’t show).
Potentially useful instruments.
Financial Development,
Determinants of policies:
=
Legal Origin (l)
Globalization (it)
Global Trade (t)
Natural Openness(i)
Globalization*Legal Origin (lit)
Not the most important! but: exogenous.
Table 3. OLS regressions
-1.30
-3.263
-3.29
-5.000
-4.93
50
-0.59
0
-1.01
-50
-0.146
-100
-0.059
-20
-4
-2
0
Openness
20
40
0
2
Government Size
4
132
0.298
132
0.303
132
0.367
132
0.414
-10
-5
0
Financial Structure
-5
0
5
Social Policy
5
50
0
-50
50
0
-100
1.991
3.16
-50
Social Policy
-100
Government Size
Financial Development
100
-40
100
-0.106
Financial Development
100
3.878
5.30
50
4.965
7.75
0
5.445
7.99
-50
5.227
8.13
insignificant
4
-100
3
Openness
Observations
R2
Financial Development
2
Financial Development
Financial Structure
1
100
with country dummies
Dependent Variable: Financial Development
10
Table 4. IV regressions
Dependent Variable: Financial Development
1
2
Endogenous:
Financial Structure
7.092
7.598
5.98
5.36
Openness
-0.097
-0.79
Government Size
3
4
5
6
7
8
8.643
4.81
-0.122
-0.91
3.738
0.94
10.393
4.35
0.041
0.18
6.776
1.38
-2.599
-1.02
7.643
7.10
8.349
7.31
-0.182
-1.49
7.364
6.68
-0.127
-1.08
-3.264
-2.75
5.936
5.03
-0.334
-2.18
-5.795
-4.98
2.982
3.12
Social Policy
Exogenous:
English
Common Law
German
Commercial Code
Scandinavian
Commercial Code
Statistics:
Over-identifying
restrictions a
Similar to OLS but larger
and statistically different
9.609
1.20
45.288
5.10
1.690
0.17
7.305
0.81
43.796
4.78
1.221
0.12
8.019
0.83
55.347
3.11
-19.060
-0.75
3.239
0.26
70.499
2.85
-14.950
-0.59
3.435
(0.633)
2.429
(0.657)
1.214
(0.750)
0.386
(0.824)
18.549
(0.017)
17.088
(0.017)
14.546
(0.024)
6.452
(0.265)
Specification test b
6.966
(0.008)
9.041
(0.011)
9.638
(0.022)
10.493
(0.033)
14.394
(0.000)
14.902
(0.001)
13.827
(0.003)
14.039
(0.007)
Relevance of the
instruments c
Observations
18.261
13.958
3.960
6.232
12.993
10.840
9.088
16.824
132
132
132
132
132
132
132
132
Table A.1. ROBUSTNESS
Dependent Variable: Financial Development
Different Sets of Instrumental Variables
Endogenous:
Financial Structure
Openness
Government Size
Social Policy
Statistics:
Over-identifying
restrictions a
Specification test b
Relevance of the
instruments c
Observations
Different exogenous
time-varying trends
Different
dependent
variable
Add
per capita
GDP
Add dummy
for Advanced
countries
Country
dummies
instead of
Legal Origin
indicators
6.121
5.22
-0.372
-2.69
-6.112
-5.10
3.308
3.68
5.872
4.88
-0.356
-2.86
-6.007
-5.08
3.235
4.45
6.950
6.24
-0.218
-2.02
-4.345
-4.12
1.659
2.28
3.079
3.51
-0.388
-2.48
-6.608
-5.43
3.993
4.06
5.044
4.57
-0.279
-1.72
-6.328
-4.85
2.616
2.56
7.864
5.55
-0.356
-2.90
-2.810
-0.95
2.588
1.55
6.479
(0.372)
26.129
(0.000)
9.780
6.580
(0.361)
29.986
(0.000)
8.742
49.797
(0.001)
4.132
(0.388)
5.955
15.132
(0.010)
6.852
(0.144)
10.738
8.549
(0.128)
10.583
(0.032)
14.676
4.348
(0.500)
28.593
(0.000)
16.824
132
132
132
132
132
132
Shipment
Costs
World
Trade
Volume
Stock Market
Capitalization
Structural policy determinants of
Financial Development:
Financial
Structure
Negative
(small),
Openness
5.936
5.03
-0.334
Govt. Size
-2.18
-5.795
Social Policy
-4.98
2.982
3.12
Indirect
effects
through
other
policies.
Structural estimates,
What if an instrument changes?
10 p.p. decline of Global Trade (…after crisis?)
Predicted change in
Countries
Financial
Structure
Openness
Government
Size
Social
Policy
Financial
Portugal
(French)
-3.36
-10.68
0.70
-1.97
-26.32
United Kingdom
-3.12
-11.06
0.97
-1.32
-24.43
-3.05
-9.21
1.15
-1.68
-26.75
-3.02
-7.09
1.86
-0.04
-26.45
(Legal Origin)
Develop.
(English)
Germany
(German)
Finland
(Scandinavian)
Causes and effects of policies
We use exogenous “Globalization”
to identify roots of Financial Development
in policies.
• Can assess implications of any possible
change in policy for Financial Development
…instability, fragility…
• Future work: welfare (growth, distribution, …)