Download Finance and Growth: a Micro

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
 equilibrium the financial system through the general
equilibrium model (FAGE)
 comparative statics analysis on a financial general
equilibrium framework
 impact of different financial policies
Issues
 which
financial variables need to be modified in
order to ensure a sustainable financial-economic
equilibrium and growth?
 does an optimum and correct balance between
freedom and control in financial flows movements
exist and, if so, is it really best suited to provide
economic growth?
 how can a financial authority gain control to lead the
economy out of crises or stagnation?
How to gauge financial structure?
 “…it
is a holistic concept similar to the matrix of
coefficients in an input-output table, the cells here
measuring the relationship of a given financial item
to the total of all financial instruments outstanding in
a country at a given date, or to the total transactions
in financial instruments during a given period”
Goldsmith 1975
Agents
 Households
 Firms
 Government
 Central bank
 Rest of the world
+ Commercial banks
+ Non-bank financial system
+ Stock exchange markets
(+ Financial planner)
Methodology
 Financial applied general equilibrium (FAGE)
 Stock-Flow consistent model (SFC)
 Econometrics analyses (panel data)
 Implementation through dynamic models
AGE
 Attempts
to simulate numerically the general
equilibrium structure of an economy
 Walras law: demand equals supply for all
commodities, at a set of relative prices that can be
identified (Arrow-Debreu model)
 An equilibrium does exists (Fixed point theorem,
Scarf’s algorithm)
FAGE





Basic data (national accounts, balance of
payments, input-output tables, bank and financial
systems interflows)
Benchmark equilibrium dataset
Choice of functional forms according to economic
and financial variables directly affected by
changes in financial policy;
Calibration of the model;
Counterfactual equilibrium for policy change
HINTS FOR MODELLING
F-Listed Class (i)
F-Non Listed Class (j)
iND  ( Pd i  Xs i   w z Fiz )  Udiv Ai  Ai
i
z
 ND
 ( Pd j  Xs j   w z Fjz )  Pr
j
j
z

H-Investors Class (h)
Yh  w lab  Flab   Udiv Ai  A ih  rD  D h  rB  Bh
H-Non Investors Class (k)
Yk  w lab  Flab

HINTS FOR MODELLING
F-Listed Class (i)

P  F  a  A
 a  PB



 
F-Non Listed Class (j)

P  F  a  PB


 

H-Investors Class (h)
H-Non Investors Class (k)
 K i
Fi
i
Ai
i
PBi
FCOST
Fj

i
1
K i
SOURCES
j
PBj
FCOST
PTh 
 K i
j
1
 K j  
Kj
SOURCES
   A    D
i 1i

PTk   2  D
h patr
i
k  patr
h patr
2
 3  B
h patr
 3  B
k  patr

1  patr

1 patr
FAGE
Strengths
Solid Microfoundations
Weaknesses
Estimation of Welfare Effects
Limited range of f. forms and
stylized sectors of the economy
Sensitivity to closure rules
Distributional aspects
Inability to assess the outcomes
Connection between aggregate
variables and disaggregated substructure
Facilities for simulations of
alternatives and flexibility
Applicability to complex problems
Inter-temporal substitution and
dynamics, expectations
Large scale models closed to
reality are impossible to solve
Demanding data requirements
SFC
 It
implies the setting of a matrix (FAM - financial
accounting matrix) similar to a SAM
 This provides “a systematic listing of the financial
stocks” where the assets of the agents are
displayed by rows and liabilities by columns
SFC

Main differences between SAM and FAM
SAM
Double-entry table build on
the base of an input- output
table
Monetary (nominal) flows
Total sum of rows have to
equate the total sum of
columns
FAM
The denomination of columns
differ from that of rows
Financial flows
No balancing requirements
Econometrics
 i.e. : King-Levine (1993a) - Levine Zervos (1998)

Cross-country regression model
G(j)= a + b F(i) + c X + u
G(j) = growth indicators
F(i) = financial development indicators (FinDI)
X = other regressors
Growth indicators
King-Levine (1993a)
 Long-run
 Capital
per capita growth rates
accumulation
 Productivity
growth
FinDI
King-Levine (1993a)

DEPTH(+)
LIQUID LIABILITIE S
DEPTH 
GDP
LIQUID LIABILITIE S  CURRENCY  LIAB. OF BANKS  LIAB. OF NON  BANK FIN.INTERM .

BANK (+)
BANK 

RATIO OF BANK CREDIT
BANK CREDIT  CENTRAL BANK DOMESTIC ASSETS
PRIVY(+)
PRIVY 
CREDIT
TO
PRIVATE
GDP
ENTERPRISE
FinDI
Levine Zervos (1998)

Turnover ratio (+)
TOTAL VALUE OF SHARE TRADED ON A COUNTRY SE
STOCK MARKET CAPITALIZA TION

Stock market size(̴)
MARKET
CAPITALIZA TION
GDP
Role of institutions
Gov
-Income/corporate taxes
-Export subsidies
-Import tariffs
-Value added taxes
-Transfers to households and
enterprises
-Real government consumption
-Real government investment
-Infrastructure projects
Rest of the World
-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 institutions
Banking system
Central Bank:
-Minimum foreign
exchange reserves
-Central Bank interest rate
-Nominal exchange rate
Commercial banks:
-Access to credits
-Flexibility of credit
allocation
Non-bank fin. system
-Running of non-bank
projects
-Fees for funds
management
Stock Exchange
-Capital adequacy
requirements
-Cost of listing
-Takeover constraints
Stock market and growth
 Theoretical debate:
 Does stock market support economic growth,
capital accumulation, productivity innovation?
 How stock market and banks compete in funding
firms’ growth?
 Possible complementarities
Intuition
 Simply
listing on the national stock exchange does
not necessarily foster resource allocation
 It
must be implemented with the trading of
productive technologies
 Plus human capital investment