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on Financial Development and Growth |
| By: | Cole, Rebel; Moshirian, Fari; Wu, Qionbing |
| Abstract: | Previous research has established (i) that a country’s financial sector influence future economic growth and (ii) that stock market index returns affect future economic growth. We extend and tie together these two strands of the growth literature by analyzing the relationship between banking industry stock returns and future economic growth. Using dynamic panel techniques to analyze panel data from 18 developed and 18 emerging markets, we find a positive and significant relationship between bank stock returns and future GDP growth that is independent of the previously documented relationship between market index returns and economic growth. We also find that much of the informational content of bank stock returns is captured by country-specific and institutional characteristics, such as bank-accounting-disclosure standards, banking crises, enforcement of insider trading law and government ownership of banks. |
| Keywords: | Banks; Economic Growth; Emerging Markets; Financial Development |
| JEL: | G15 G21 O11 G14 O43 |
| Date: | 2007–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4714&r=fdg |
| By: | Khemraj, Tarron |
| Abstract: | This paper argues that the liberalization of the Guyanese financial system did not lead to the growth as postulated by the theory that underpins the reform agenda. The paper posits that the oligopolistic nature of the banking system is the key omission of the theory. Oligopoly banks will seek to mark-up the loan rate and contract credit to private agents when those agents cannot pay the minimum mark-up rate. Empirical validation of the mark-up loan rate comes from an excess liquidity preference curve that is horizontal at a very high loan rate. The flat curve signifies that non-remunerative excess liquidity and interest paying loans are perfect substitutes at a very high loan rate. After banks restrict loans, they will either hold excess reserves and/or foreign assets. Such investment behavior presents a developmental bottleneck, and therefore a key explanation for the growth stagnation after the liberalization. The paper also argues that indirect monetary policy, a cornerstone of financial liberalization, is ineffective at the high minimum mark-up rate. Monetary policy can only be effective at very high interest rates, which are detrimental to growth and employment creation. |
| Keywords: | finance-growth nexus; oligopoly banking; monetary policy; Guyana |
| JEL: | O16 E52 O11 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4722&r=fdg |