ECON7074 Macroeconomic Analysis How Important is Financial Development for Economic Growth and Development? Presenters: ▪ Jiaqi Liu (u7588965) ▪ Yuchao Wang (u7604743) How Important is Financial Development for Economic Growth and Development? Roadmap 1. Basic Concepts 2. FDI Data Sources 1.1. Finance System 1.2. Finance Development 2.1. 6 Categories → 20 Indices 3. Methodology: Three-Steps 3.1. Normalization & Treatment of Outliers 4. Result of Analysis 4.1. Correlation between FDI & Per Capita GDP ©Jiaqi Liu & Yuchao Wang (Master Program, ANU) 1.3. Finance Development Index （FDI） 2.2. Data Observations 3.2. Functional Form of the Aggregator & Weights 4.2. Conclusion 3.3. Putting it all Together 4.3. Financial Functions in Economy 2 How Important is Financial Development for Economic Growth and Development? PART 1: Basic Concepts 1.1. Finance System 1.2. Finance Development ©Jiaqi Liu & Yuchao Wang (Master Program, ANU) 1.3. Finance Development Index 3 How Important is Financial Development for Economic Growth and Development? 1.1. What is Financial System Figure 1: Financial System Structure Source: Suomen Pankki. (2019). Financial system. Suomen Pankki. ©Jiaqi Liu & Yuchao Wang (Master Program, ANU) 4 How Important is Financial Development for Economic Growth and Development? 1.2. Concept of Financial Development Figure 2: Financial Development Source: Svirydzenka, K. (2016). Introducing a New Broad-based Index of Financial Development; by Katsiaryna Svirydzenka; IMF Working Paper WP/16/5; January 2016. ©Jiaqi Liu & Yuchao Wang (Master Program, ANU) 5 How Important is Financial Development for Economic Growth and Development? 1.3. Financial Development Index Figure 3: Financial Development Index ©Jiaqi Liu & Yuchao Wang (Master Program, ANU) 6 How Important is Financial Development for Economic Growth and Development? PART 2: FDI Data Sources 2.1. 6 Categories → 20 Indices ©Jiaqi Liu & Yuchao Wang (Master Program, ANU) 2.2. Data Observations 7 How Important is Financial Development for Economic Growth and Development? 2.1. 6 Categories → 20 Indices • 6 Categories： • FID, FIA, FIE • FMD, FMA, FME • 20 Indices • FID: 4 Indices • FIA: 2 Indices • FIE: 6 Indices • FMD: 5 Indices • FMA: 2 indices • FME: 1 indices Table 1: Data Sources Source: Svirydzenka, K. (2016). Introducing a New Broad-based Index of Financial Development; by Katsiaryna Svirydzenka; IMF Working Paper WP/16/5; January 2016. ©Jiaqi Liu & Yuchao Wang (Master Program, ANU) 8 How Important is Financial Development for Economic Growth and Development? 2.2. Data Observations Table 2: Percent of Countries and Years with Data Availability Panel Data ❖ Time Series: 1980-2013 ❖ Coverages: 183 Countries ▪ AM: Advanced Markets = High income Countries ▪ EM: Emerging Markets = Middle-income Countries ▪ LIDC: Low-income Developing Countries Source: Svirydzenka, K. (2016). Introducing a New Broadbased Index of Financial Development; by Katsiaryna Svirydzenka; IMF Working Paper WP/16/5; January 2016. ©Jiaqi Liu & Yuchao Wang (Master Program, ANU) 9 How Important is Financial Development for Economic Growth and Development? PART 3: Methodology: Three-Steps 3.1. Normalization & Treatment of Outliers 3.2. Functional Form of the Aggregator & Weights ©Jiaqi Liu & Yuchao Wang (Master Program, ANU) 3.3. Putting it all Together 10 How Important is Financial Development for Economic Growth and Development? 3.1. Step 1: Normalization and Treatment of Outliers Figure 4: Min-Max Normalization Reasons ❖ Avoid the impact of outliers ❖ Treatment of variables with negative correlation ©Jiaqi Liu & Yuchao Wang (Master Program, ANU) 11 How Important is Financial Development for Economic Growth and Development? 3.2. Step 2: Functional Form of the Aggregator & Weights Figure 5: Aggregator Weighted Linear Average ©Jiaqi Liu & Yuchao Wang (Master Program, ANU) 12 How Important is Financial Development for Economic Growth and Development? Weights – The Principal Component Analysis (PCA) Table 3: Share of Variance Explained by PCA Components Source: Svirydzenka, K. (2016). Introducing a New Broad-based Index of Financial Development; by Katsiaryna Svirydzenka; IMF Working Paper WP/16/5; January 2016. ©Jiaqi Liu & Yuchao Wang (Master Program, ANU) 13 How Important is Financial Development for Economic Growth and Development? 3.3. Step 3: Putting it all Together Table 4: Summary Statistics of the Financial Development Index Source: Svirydzenka, K. (2016). Introducing a New Broad-based Index of Financial Development; by Katsiaryna Svirydzenka; IMF Working Paper WP/16/5; January 2016. ©Jiaqi Liu & Yuchao Wang (Master Program, ANU) 14 How Important is Financial Development for Economic Growth and Development? 3.3. Step 3: Putting it all Together Figure 6: Financial Development through Time ❖ 1. FDI of AE and EM has progressed noticeably. ❖ 2. Minimal FDI progress in lowincome countries. ❖ 3. Higher financial development higher income level. Source: Svirydzenka, K. (2016). Introducing a New Broad-based Index of Financial Development; by Katsiaryna Svirydzenka; IMF Working Paper WP/16/5; January 2016. ©Jiaqi Liu & Yuchao Wang (Master Program, ANU) 15 How Important is Financial Development for Economic Growth and Development? PART 4: Result of Analysis 4.1. Correlation between FDI & Per Capita GDP ©Jiaqi Liu & Yuchao Wang (Master Program, ANU) 4.2. Conclusion 4.3. Financial Functions in Economy 16 How Important is Financial Development for Economic Growth and Development? 4.1. Correlation between FDI & GDP per capita Figure 6: Financial Development through Time Source: Svirydzenka, K. (2016). Introducing a New Broad-based Index of Financial Development; by Katsiaryna Svirydzenka; IMF Working Paper WP/16/5; January 2016. ©Jiaqi Liu & Yuchao Wang (Master Program, ANU) Figure 7: GDP per capita through Time Same Coverages 17 How Important is Financial Development for Economic Growth and Development? 4.2. Correlation between FDI & GDP per capita Table 5: Pearson Correlation Analysis Table 7: FDI & GDP Per Capita Linear regression P>0.95，Sig<0.01 There is highly significant positive correlation between FDI and GDP per capita. ©Jiaqi Liu & Yuchao Wang (Master Program, ANU) 18 How Important is Financial Development for Economic Growth and Development? 4.2. Conclusion 1. Financial development (FDI) significant positive correlation economic development (GDP per capita) 2. Generally, countries with high financial development also have higher income level. ©Jiaqi Liu & Yuchao Wang (Master Program, ANU) 19 How Important is Financial Development for Economic Growth and Development? 4.3. Financial Functions in Economy(Extension) ① Producing Information & Reducing Information Costs Functions of Financial Development FIA+FIE ② Allocating Capital FME ③ Monitoring Firms FMD ④ Exerting Corporate Governance ⑤ Risk Amelioration FID FMD+FMA ⑥ Mobilization & Pooling of Savings ⑦ Facilitating Exchange ©Jiaqi Liu & Yuchao Wang (Master Program, ANU) FID FIE 20 How Important is Financial Development for Economic Growth and Development? Caveats & Limitations to the FD index ▪ Data coverage side: • Hard to find sufficiently extensive country and time period data on some institutions and activities (Svirydzenka, 2016). ▪ Conceptual side: • Not include their underlying drivers (such as the institutional, regulatory, and legal frameworks) or outcomes (financial stability measures) (Svirydzenka, 2016); • Some of the measures that the index uses may overstate the true level of financial development (Svirydzenka, 2016). • Higher FD ranking may not necessarily be a good thing, but may instead indicate that a country’s financial system is stretched beyond it structural and regulatory capabilities, with negative implications for growth and stability(Svirydzenka, 2016). ©Jiaqi Liu & Yuchao Wang (Master Program, ANU) 21 How Important is Financial Development for Economic Growth and Development? References Arestis, P., Demetriades, P. O., & Luintel, K. B. (2001). Financial Development and Economic Growth: The Role of Stock Markets. Journal of Money, Credit and Banking, 33(1), 16. https://doi.org/10.2307/2673870 Bloch, H., & Tang, S. H. K. (2003). The role of financial development in economic growth. Progress in Development Studies, 3(3), 243–251. https://doi.org/10.1191/1464993403ps063pr Dawson, P. J. (2008). Financial development and economic growth in developing countries. Progress in Development Studies, 8(4), 325–331. https://doi.org/10.1177/146499340800800402 Hassan, M. K., Sanchez, B., & Yu, J.-S. (2011). Financial development and economic growth: New evidence from panel data. The Quarterly Review of Economics and Finance, 51(1), 88–104. https://doi.org/10.1016/j.qref.2010.09.001 Suomen Pankki. (2019). Financial system. Suomen Pankki. https://www.suomenpankki.fi/en/financial-stability/the- financial-system-in-brief/ Svirydzenka, K. (2016). Introducing a New Broad-based Index of Financial Development; by Katsiaryna Svirydzenka; IMF Working Paper WP/16/5; January 2016. https://www.imf.org/external/pubs/ft/wp/2016/wp1605.pdf ©Jiaqi Liu & Yuchao Wang (Master Program, ANU) 22 How Important is Financial Development for Economic Growth and Development? ECON7074 Macroeconomic Analysis Thank you for your listening. ☺ Presenters: ▪ Jiaqi Liu (u7588965) ▪ Yuchao Wang (u7604743) ©Jiaqi Liu & Yuchao Wang (Master Program, ANU) 23
