Download Financial Liberalisation In New Zealand

Financial Liberalisation In
New Zealand
The Impact on Savings and Investment
Phillip Mellor
The Theory
The Financial Sector and Economic
Development

The McKinnon-Shaw Hypothesis

The Complementarity Hypothesis


Savings and Physical Capital are complementary to
one another
The Debt Intermediation View of Money

Money is a form of debt to its issuer
The Financial Sector and Economic
Development

The Role of the Financial Sector
1.
2.
3.
4.
5.
To facilitate trading, hedging, diversifying and
pooling of risk
Allocating resources
Monitoring managers and exerting corporate
control
Mobilizing savings
Facilitate the exchange of goods and services
Financial Development and Economic
Growth

Financial Intermediaries


Create money and administer the payments mechanism
Bringing together savers and investors



Specialized knowledge and informational advantages
Rationing via the interest rate
Stock Markets



Promote acquisition of information about firms
Risk diversification
Liquidity services
Financial Development and Economic
Growth

Financial Repression

Holding interest rates below equilibrium and directed credit

The costs of financial repression




Inefficient non-price rationing of credit
Quasi-tax on growth
Low savings
The benefits of limited financial repression


Forcing households to save via credit constraints
Overcoming market failure in financial markets (e.g. externalities and
information asymmetries)
Financial Liberalisation as a means of
Financial Development

Measuring Financial Liberalisation


Abiad and Mody’s (2005) index
Consequences of Financial Liberalisation

Fragility of the financial sector



South Korea
New Zealand?
Sequencing of Financial Liberalisation


Reform of the real economy
Then reform of the financial sector
The Case of New Zealand
New Zealand’s Decade of Reform

Economic and Political Motivations for Reform



Theoretical Background



Economic Stagnation and Decline
The 1984 election and initial public support
Principal-Agent Theory
Public Choice Theory
The Sequence of Reform
Year
Real GDP, 1995/96 Prices
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
70
19
68
19
66
19
64
19
62
19
60
GDP (NZ$m)
Real Gross Domestic Product
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
Financial Liberalisation in NZ

The Financial Sector pre-reform


High degree of intervention and regulation
Financial disintermediation

Sequencing of Financial Liberalisation

The Financial Sector post-reform

Very open financial sector, virtually no specific
regulations
Investment
Investment (% of Real GDP)
25.00
20.00
15.00
10.00
5.00
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
70
19
68
19
66
19
64
19
62
19
60
0.00
Year
Private Investment
Public Investment
Total Investment
Key Point: Public and Private Investment have diverged following liberalisation
Savings
30.00
20.00
15.00
10.00
5.00
-5.00
Year
Gross Domestic Savings (Claus and Scobie)
Private Savings
But there is a problem with how savings is measured
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
70
19
68
19
66
19
64
19
62
0.00
19
60
Savings (% of Nominal GDP)
25.00
M2 (RBNZ measure)
Year
Domestic Credit
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
70
19
68
19
66
19
64
19
62
19
60
M2 (% of Nominal GDP)
Credit and the Money Supply
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
The Evidence
Empirical Results for the Case of New Zealand
Empirical Results

Empirical results for New Zealand indicate that financial
liberalisation has had a positive impact on investment but a
negative impact on savings

Estimated elasticities



Financial Liberalisation-Investment = 0.112
Financial Liberalisation-Savings = -0.125
The estimated model also found some evidence that the
Complementarity Hypothesis is relevant to the case of New
Zealand
Conclusions

Financial liberalisation has increased the share of total
investment to GDP




Increased the efficiency of the financial sector
Higher real interest rates more accurately reflect the scarcity of
financial resources and increase the real return to investors
Increased the ability of firms and individuals to invest by reducing
credit constraints
Financial liberalisation has decreased the share of gross
domestic savings to GDP


Lower credit constraints make it easier to borrow for consumption /
investment rather than save.
Transitional effects on savings behaviour as firms and individuals
adjust to the new financial and economic structure.
Questions?