Econometric Analyses Based on Cross-Country Data · NOR SWECHE CAN JPN FIN GRC IRL PRT ESP AUS NZL...

Impact of National Financial Regulation on

Macroeconomic and Fiscal Performance

after the 2007 Financial Shock

‒ Econometric Analyses Based

on Cross-Country Dataon Cross-Country Data

Tobias Hagen

1

IWH/INFER-Workshop on

Applied Economics and Economic Policy

22-04-2013

Introduction • Cross-country heterogeneity of the “Great Recession”

– intensity and duration of the crises.

– rich countries more affected than poor countries.

• “… a unique opportunity to identify the link between the

structural characteristics of economic and institutional

systems before the crisis and their resilience with respect to

the global recessionary shock.” (Giannone et al., 2011).

1. Introduction

the global recessionary shock.” (Giannone et al., 2011).

• Role of financial market (de-)regulation before 2007?

Financial liberalization = “…reduction in the role of

government, and an increase in the role of the market, in

allocating credit” (Abiad et al., 2008).

• „New Database of Financial Reforms“ by Abiad et al. (2008)

– indicator for financial liberalization (FRI).

2

Introduction: Related Research• Cross-country studies by Giannone et al. (2011), Masciandaro et al. (2011),

Rosea and Spiegel (2011): Liberalization in financial (credit) markets or looser

credit market regulations ⇒ deeper recessions in 2008-2009.

• Panel country study by the IMF (2012): “…..a domestic financial system that is

dominated by some types of nontraditional bank intermediation has in some

cases been associated with adverse economic outcomes.”

• Historical time series by Reinhart and Rogoff (2011): „…banking crises […]

often precede or accompany sovereign debt crises; we find they help predict

1. Introduction

3

often precede or accompany sovereign debt crises; we find they help predict

them.”

• Based on the FRI used here and panel data for 5 emerging markets Abiad et

al. (2008) find “… strong evidence that financial liberalization, rather than

financial deepening, improves allocative efficiency”

• Based on the FRI used here and panel data for 1974-2004 Christiansen et al.

(2009) find that „… financial reforms, …, are robustly associated with

economic growth, but only in middle-income countries. …. the effect … is

explained by improvements in measured aggregate TFP growth, not by higher

aggregate investment. “

Introduction1. Introduction

What‘s new in this paper?

• Builds on Giannone et al. (2011)

• Outcome variables:

− GDP growth rates (2008-2011),

− Employment growth rates (2008-2010)

− Average budget deficits (2008-2010).

4

− Average budget deficits (2008-2010).

• Methodological difficulties are taken into account:

− outliers,

− functional form assumptions,

− model uncertainty with regard to explanatory variables

Table of Contents

1. Introduction

2. Dataset and Correlation Analyses

3. Methodology

5

4. Results

4.1 GDP Growth Rate Models

4.2 Deficit Rate Models

4.3 Employment Growth Rate Models

5. Summary and Conclusions

Dataset and Correlation Analyses

„Financial Reform Index“ (FRI) by IWF / Abiad et al. (2008): indicator for

financial liberalization:

• 91 economies (here: 88)

• annual, time-varying, 1973-2005

• seven aspects of financial sector policy aggregated to one indicator

• values between 0 (=fully repressed) and 21 (=fully liberalized)

• average 2001-2005 (more variance than if only 2005 is used)


6

World Bank Development Indicator: GDP, Employment, Deficit….)

World Bank Financial Structure Dataset: Variables measuring the size of

the financial market (financial deepening)

“Economic Freedom Dataset” of the Fraser-Institute: “Labour Market

Freedom Index” (control variable)…

Financial reform index (FRI)(i) reduction of credit controls and excessively high reserve requirements ,

(1) Are reserve requirements restrictive? (2) Are there minimum amounts of credit that must be

channeled to certain sectors? Are there ceilings on credit to other sectors? (3) Are there any credits

supplied to certain sectors at subsidized rates?

(ii) reduction of interest rate controls , (1) Are interest rates subject to ceilings/floors or determined by the central bank? (2) Are interest rates

allowed to float within a band or are partially liberalized? (3) Are interest rates determined at market

rates?

(iii) reduction of entry barriers, (1) To what extent does the government allow foreign banks to enter into a domestic market? (2) Does

the government allow the entry of new domestic banks (3) has the government eased branching

restrictions? (4) Does the government allow banks to engage in a wider range of activities?


7

restrictions? (4) Does the government allow banks to engage in a wider range of activities?

(iv) reduction of state ownership in the banking sector,This variable is based on the percentage of the state ownership of banks.

(v) reduction of capital account restrictions, (1) Is the exchange rate system unified? (2) Does a country set restrictions on capital inflow? (3) Does a

country set restrictions on capital outflow?

(vi) enhancement of prudential regulations and supervision of the banking sector(1) Has a country adopted a capital adequacy ratio based on the Basle standard? (2) Is a banking

supervisory agency independent from the executives’ influence? (3) Does a banking supervisory agency

conduct effective supervisions through on-site and off-site examinations?

(vii) liberalization of securities market policy (1) Has a country taken measures to develop security market? (2) Is a country’s equity market open to

foreign investors?

Abiad et al. (2008).

Advanced

Economies

(N=22)

Australia (AUS), Austria (AUT), Belgium (BEL), Canada (CAN), Denmark (DNK), Finland (FIN),

France (FRA), Germany (DEU), Greece (GRC), Ireland (IRL), Israel (ISR), Italy (ITA), Japan (JPN),

Netherlands (NLD), New Zealand (NZL), Norway (NOR), Portugal (PRT), Spain (ESP), Sweden

(SWE), Switzerland (CHE), United Kingdom (GBR), United States (USA)

Emerging and

Developing

Asia (N=12)

Bangladesh (BGD), Hong Kong (HKG), China (CHN), India (IND), Indonesia (IDN), Korea (KOR),

Malaysia (MYS), Nepal (NPL), Philippines (PHL), Singapore (SGP), Sri Lanka (LKA), Thailand (THA)

Latin America

and Caribbean

(N=17)

Argentina (ARG), Bolivia (BOL), Brazil (BRA), Chile (CHL), Colombia (COL), Costa Rica (CRI),

Dominican Republic (DOM), Ecuador (ECU), El Salvador (SLV), Guatemala (GTM), Mexico (MEX),

Nicaragua (NIC), Paraguay (PRY), Peru (PER), Uruguay (URY), Venezuela (VEN)

Sub-Saharan

Africa

Burkina Faso (BFA), Cameroon (CMR), Cote d'Ivoire (CIV), Ethiopia (ETH), Ghana (GHA), Kenya

(KEN), Madagascar (MDG), Mozambique (MOZ), Nigeria (NIG), Senegal (SEN), South Africa (ZAF),

List of Countries2. Dataset and Correlation Analyses

8

Africa

(N=14)

(KEN), Madagascar (MDG), Mozambique (MOZ), Nigeria (NIG), Senegal (SEN), South Africa (ZAF),

Tanzania (TZA), Uganda (UGA), Zimbabwe (ZWE)

Transition

Economies

(N=17)

Albania (ALB), Azerbaijan (AZE), Belarus (BLR), Bulgaria (BGR), Czech Republic (CZE), Estonia (EST),

Georgia (GEO), Hungary (HUN), Kazakhstan (KAZ), Kyrgyz (KGZ), Latvia (LVA), Lithuania (LTU),

Poland (POL), Russian Federation (RUS), Ukraine (UKR), Uzbekistan (UZB), Vietnam (VNM)

Middle East

and Northern

Africa (N=7)

Algeria (DZA), Egypt (EGY), Jordan (JOR), Morocco (MAR), Pakistan (PAK), Tunisia (TUN), Turkey

(TUR)

Members of

the Euro Area

(N=11)

Austria (AUT), Belgium (BEL), Estonia (EST), Finland (FIN), France (FRA), Germany (DEU), Greece

(GRC), Ireland (IRL), Italy (ITA), Netherlands (NLD), Portugal (PRT), Spain (ESP)


FRI OF THE ADVANCED ECONOMIES, AVERAGE 2001–2005

10

15

20

Fin

an

cia

l R

efo

rm I

nd

ex,

Ave

rag

e 2

00

1 t

o 2

00

5

9

05

Fin

an

cia

l R

efo

rm I

nd

ex,

Ave

rag

e 2

00

1 t

o 2

00

5

Fin

lan

d

Po

rtu

ga

l

Gre

ece

Ja

pa

n

No

rwa

y

Isra

el

Ge

rma

ny

Au

str

ia

Ita

ly

Ne

w Z

ea

lan

d

Sw

ed

en

Sw

itze

rla

nd

Be

lgiu

m

Ne

the

rla

nd

s

Au

str

alia

Ca

na

da

De

nm

ark

Fra

nce

Ire

lan

d

Sp

ain

Un

ite

d K

ing

do

m

Un

ite

d S

tate

s

Observation No. 1: Advanced countries have a higher FRI

Observation No. 2: The variation of FRI within the Advanced countries is rather low

10

15

20

Fin

ancia

l R

efo

rm Index, A

vera

ge 2

001 to 2

005

FRI OF DEVELOPING AND TRANSITION ECONOMIES, AVERAGE 2001–2005


10

05

Fin

ancia

l R

efo

rm Index, A

vera

ge 2

001 to 2

005

Eth

iopia

Chin

aV

ietn

am

Nepal

Uzbekis

tan

Bangla

desh

Bela

rus

Costa

Ric

aG

hana

Alg

eria

Pakis

tan

Bra

zil

Zim

babw

eIn

dia

Burk

ina F

aso

Cam

ero

on

Thaila

nd

Dom

inic

an R

epublic

Azerb

aija

nIn

donesia

Kazakhsta

nC

ote

d'Ivoire

Moro

cco

Sri L

anka

Ukra

ine

Senegal

Tunis

iaA

rgentina

Ecuador

Egypt, A

rab R

ep.

Jam

aic

aK

enya

Uganda

Colo

mbia

Kore

a, R

ep.

Mozam

biq

ue

Uru

guay

Nic

ara

gua

Alb

ania

Turk

ey

Guate

mala

Kyrg

yz R

epublic

Mala

ysia

Madagascar

Phili

ppin

es

Para

guay

Russia

n F

edera

tion

Tanzania

El S

alv

ador

Nig

eria

Bulg

aria

Venezuela

, R

BP

ola

nd

South

Afric

aB

oliv

iaC

hile

Peru

Georg

iaLithuania

Czech R

epublic

Jord

an

Hong K

ong S

AR

, C

hin

aM

exic

oS

ingapore

Hungary

Esto

nia

Latv

ia

Observation No. 3: A liberalized financial market is not a pre-condition for

economic development

FRI by country groups, 1973–2005 2. Dataset and Correlation Analyses

11

Source: Abiad et al. (2008, p 27).

Observation No. 4: Worldwide trend towards liberalization, especially in the first part of

the 1990s

DEU

TUR

ZAF

ARG

BOLBRA CHLCOL

CRI

DOM

ECU

NIC

PRY

PERURY

ISRJOR

EGY

BGDLKA

HKG

IND

IDN

KORMYS

NPL

PAK

PHL

SGPTHA

VNM

DZACMR

ETH

GHA

KEN

MAR

MOZ NGA

TZA

TUN

UGA

BFA

AZE

BLR

ALB

GEO

KAZ KGZ

BGRRUS

CHN

UZB

POL

20

40

Gro

wth

Rate

of R

eal G

DP

per

Capita in U

SD

2008-2

011

FRI (AVERAGE 2001–2005) AND CUMULATED GROWTH RATE OF GDP PER CAPITA

IN USD 2008–2011


USAGBR

AUTBEL

DNK

FRA

DEU

ITA

NLD

NOR

SWECHECAN

JPNFIN

GRC

IRL

PRTESP

AUS

NZL

ZAFCRI

SLVGTM

MEX

NIC

VEN

PAKDZACMR

CIV

KEN

MDG

ZWE SEN

TUN

UKR

CZE

EST

LVA

HUNLTU

-20

0

Gro

wth

Rate

of R

eal G

DP

per

Capita in U

SD

2008-2

011

5 10 15 20Financial Reform Index, Average 2001 to 2005

12

Bravais-Pearson Spearman

All Countries, N=88 -0.6501 (0.0000) 0.6366 (0.0000)

Only Advanced, N=22 0.0849 (0.7070) 0.0849 (0.7070)

Advanced + Asia, N=51 -0.8032 (0.0000) -0.7512 (0.0000)

Observation No. 5: Negative correlation

between post-2007 GDP growth and FRI.

However, not for the sample restricted

to advanced countries.

TUR

ARG

BOL BRA CHLCOL

DOM

ECUPRY

PERURY

ISRJOR

EGY

BGDLKA

HKG

IND

IDN

KORMYS

NPLPHL

SGPTHA

VNM

ETH

GHA

MAR

MOZNGA

TZAUGA

BFA

AZE

BLR

ALB

GEO

KAZKGZ

RUS

CHN

UZB

POL

20

40

Gro

wth

Ra

te o

f R

ea

l G

DP

per

Ca

pita in U

SD

200

8-2

011

NATURAL LOG OF GDP PER CAPITA IN USD IN 2006 AND

CUMULATED GDP GROWTH 2008-2011

Bravais-Pearson: -0.5224 (0.0000)

Spearman: -0.5445 (0.0000)

N = 88


USAGBR

AUTBEL

DNK

FRA

DEU

ITA

NLD

NOR

SWECHECAN

JPNFIN

GRC

IRL

PRTESP

AUS

NZL

ZAFCRI

SLVGTM

MEX

NIC

VEN

ISRPAK

SGPTHADZA

CMR

CIV

KEN

MDG

ZWESEN

TUNBGRRUS

UKR

CZE

EST

LVA

HUNLTU

-20

0G

row

th R

ate

of R

ea

l G

DP

per

Ca

pita in U

SD

200

8-2

011

4 6 8 10 12Log real GDP per Capita in USD in 2006

13

Observation No. 6: Rich countries were hit harder by the recession

Econometric Model1. GDP Growth Rate Model Based on the “Finance and Growth research” (Levine, 2005)

2011,iy = real GDP per capita in USD in 2011

ui = i.i.d. error term

FRI = Financial Regulation Index

X = Matrix of control variables

α, β1, β2, γ parameters to be estimated

2. Average Budget Deficit Model Based on Bohn (1998)

i=1,...,N countries; N=88

B = Budget balance in current

( ) iii

i

iiuXFRIy

y

yy++++=

−γββα 22006,1

2007,

2007,2011,ln

∑2010

3. Methodology

3. Employment Growth Rate ModelE = Employment per Population ≥15

B = Budget balance in current

local currency

Y = GDP in current local currency

D = Stock of government debt in

% of GDP

14

average deficit ratio 2008 - 2010

( ) iii

t ti

t tiuXFRID

Y

B++++=

∑∑

=

= γββα 22006,12010

2008 ,

2010

2008 ,ln

( ) iii

i

iiuXFRIE

E

EE++++=

−γββα 22006,1

2007,

2007,2010,ln

Econometric Problems1. Large heterogeneity of the countries

• always hard to handle in cross-sectional studies (without panel data)

• different samples

• include a lot of control variables, for example:

− GDP growth rate 2002-2006,

− Population in 2006

− Dummies for country groups: advanced countries, emerging Asia, transition countries,

Sub-Saharan Africa, Latin America, Middle East and North Africa, Euro

− Openess (EX + IM / GDP) in 2006

3. Methodology

15

− Openess (EX + IM / GDP) in 2006

− Size of financial sector (“financial deepening”): Financial system deposits to GDP, Stock

market capitalization to GDP…

2. Outliers

• for example: China, Norway, Ireland

• different samples

• median regression (quantile regression)

• robust regression (MM-estimator; Yohai 1987; Jann 2010)

3. Non-linear Effects

• Specify FRI as 4 Dummies

• Use Robinson's (1988) semiparametric regression estimator

4. Low variance of the FRI variable – most advanced countries have

FRI=21

• Average of 2001 to 2005

• Sample without FRI = 21 countries

( ) ( ) iii

i

iiuXFRIfy

y

yy+++=

−γβ 2006,1

2007,

2007,2011,ln

Econometric Problems3. Methodology

• Sample without FRI = 21 countries

5. Endogeneity of FRI with respect to the outcome variables?

6. Model uncertainty about the choice of explanatory variables (see

Magnus et al. 2010)• An approach to deal with this difficulty is the “Bayesian model

averaging” technique within a linear regression model (Magnus et al.

2010, and De Luca and Magnus 2011).

16

Results Growth Regression: Basic (1)

OLS

FRIi -1.585***

(-3.63)

( )2006,ln iy -0.905

(-0.98)

ln (popi,2006) 1.228*

(1.67) Country groups (base: emerging Asia) i,2006

advanced

transition

Sub-Saharan Africa

Latin America

4. Results

17

Middle East

and North Africa

Euro member

openness i,2006

( ) 2002,2002,2006, iii yyy −

Constant α̂ 19.54

(1.39)

N 88

adj. R2

/ §pseudo R

2 0.429

Mean (median) dependent

variable 7.2 (5.2)

mean FRIi 16.2

Notes: t statistics based on robust standard errors in parentheses; * p < 0.10, ** p < 0.05, *** p < 0.01

Heterogeneity of the countries?

Omitted variable bias?

Results Growth Regression: Heterogeneity? (1) (2) (3)

OLS OLS OLS

FRIi -1.585*** -1.333*** -1.235***

(-3.63) (-2.90) (-2.89)

( )2006,ln iy -0.905 -0.523 -1.685

(-0.98) (-0.44) (-1.30)

ln (popi,2006) 1.228* 1.296* 1.527*

(1.67) (1.73) (1.72) Country groups (base: emerging Asia) i,2006

advanced -6.654** 0.412

(-2.23) (0.09)

transition -2.473 -4.639

(-0.78) (-1.25)

Sub-Saharan Africa -6.044 -3.930

(-1.56) (-1.12)

Latin America -1.456 2.046

(-0.45) (0.56) Middle East -6.899** -4.854

4. Results

18

Middle East

and North Africa

-6.899** -4.854

(-2.01) (-1.31)

Euro member -4.161** -4.786**

(-2.13) (-2.36)

openness i,2006 0.0208

(1.19)

( ) 2002,2002,2006, iii yyy − 0.213***

(3.03)

Constant α̂ 19.54 15.70 11.59

(1.39) (0.94) (0.68)

N 88 88 88

adj. R2

/ §pseudo R

2 0.429 0.476 0.520

Mean (median) dependent

variable 7.2 (5.2) 7.2 (5.2) 7.2 (5.2)

mean FRIi 16.2 16.2 16.2


Outliers?

Results Growth Regression: Outliers? (1) (2) (3) (5)

OLS OLS OLS MM

FRIi -1.585*** -1.333*** -1.235*** -0.972*

(-3.63) (-2.90) (-2.89) (-1.95)

( )2006,ln iy -0.905 -0.523 -1.685 -3.086*

(-0.98) (-0.44) (-1.30) (-1.88)

ln (popi,2006) 1.228* 1.296* 1.527* 1.931**

(1.67) (1.73) (1.72) (2.01) Country groups (base: emerging Asia) i,2006

advanced -6.654** 0.412 4.417

(-2.23) (0.09) (0.70)

transition -2.473 -4.639 -3.901

(-0.78) (-1.25) (-0.95)

Sub-Saharan Africa -6.044 -3.930 -3.762

(-1.56) (-1.12) (-0.99)

Latin America -1.456 2.046 1.950

(-0.45) (0.56) (0.48)

4. Results

19

Latin America (-0.45) (0.56) (0.48)

Middle East

and North Africa

-6.899** -4.854 -3.065

(-2.01) (-1.31) (-0.66)

Euro member -4.161** -4.786** -4.603***

(-2.13) (-2.36) (-2.58)

openness i,2006 0.0208 0.0329

(1.19) (1.53)

( ) 2002,2002,2006, iii yyy − 0.213*** 0.257*

(3.03) (1.91)

Constant α̂ 19.54 15.70 11.59 8.855

(1.39) (0.94) (0.68) (0.49)

N 88 88 88 88

adj. R2 / §pseudo R2 0.429 0.476 0.520

Mean (median) dependent variable 7.2 (5.2) 7.2 (5.2) 7.2 (5.2) 7.2 (5.2)

mean FRIi 16.2 16.2 16.2 16.2


(1) (2) (3) (5) (8)

OLS OLS OLS MM OLS

FRIi -1.585*** -1.333*** -1.235*** -0.972* -0.942**

(-3.63) (-2.90) (-2.89) (-1.95) (-2.34)

( )2006,ln iy -0.905 -0.523 -1.685 -3.086* -1.515

(-0.98) (-0.44) (-1.30) (-1.88) (-1.11)

ln (popi,2006) 1.228* 1.296* 1.527* 1.931** 0.743

(1.67) (1.73) (1.72) (2.01) (0.78) Country groups (base: emerging Asia) i,2006

advanced -6.654** 0.412 4.417 -2.150

(-2.23) (0.09) (0.70) (-0.34)

transition -2.473 -4.639 -3.901 -4.218

(-0.78) (-1.25) (-0.95) (-1.11)

Sub-Saharan Africa -6.044 -3.930 -3.762 -3.961

(-1.56) (-1.12) (-0.99) (-1.01)

Latin America -1.456 2.046 1.950 0.734

(-0.45) (0.56) (0.48) (0.18)

4. Results

Results Growth Regression: Outliers?

Linearity

assumption?

20

(-0.45) (0.56) (0.48) (0.18) Middle East

and North Africa

-6.899** -4.854 -3.065 -4.971

(-2.01) (-1.31) (-0.66) (-1.22)

Euro member -4.161** -4.786** -4.603*** -3.937

(-2.13) (-2.36) (-2.58) (-0.92)

openness i,2006 0.0208 0.0329 0.00993

(1.19) (1.53) (0.45)

( ) 2002,2002,2006, iii yyy − 0.213*** 0.257* 0.218***

(3.03) (1.91) (2.82)

Constant α̂ 19.54 15.70 11.59 8.855 20.51

(1.39) (0.94) (0.68) (0.49) (1.06)

N 88 88 88 88 77

adj. R2 / §pseudo R2 0.429 0.476 0.520 0.395

Mean (median) dependent variable 7.2 (5.2) 7.2 (5.2) 7.2 (5.2) 7.2 (5.2) 8.4 (7.8)

mean FRIi 16.2 16.2 16.2 16.2 15.7

Notes: t statistics based on robust standard errors in parentheses;

* p < 0.10, ** p < 0.05, *** p < 0.01

without

FRIi = 21 countries

and China

4. Results

Results Growth Regression: Linearity Assumption?

FRI dummies (base: [0 –13.5]) OLS

[13.6–16.0] -2.860

(-0.98)

[16.1–19.05] -6.670** (-2.05)

[19.1–21.0] -10.06** (-2.53)

20

Gro

wth

Ra

te o

f R

eal G

SP

per

Capita in U

SD

in 2

00

8-2

011

Non-parametric fit of f(FRIi) in the GDP Growth Rate Model

Dummy Specification of FRIi (excerpt)

21

-30

-20

-10

010

Gro

wth

Ra

te o

f R

eal G

SP

per

Capita in U

SD

in 2

00

8-2

011


Statistical test

H0: Linear specification and

non-parametric fit is not different

� p-value: 0.202

� H0 is not rejected:

� linearity assumption seems

appropriate

Robinson (1988) semiparametric regression estimator

Is it the regulation or

the size of the financial sector (financial deepening)?

World Bank Financial Structure Dataset: measured in 2006

Liquid

liabilities to

GDP

Financial

system

deposits to

GDP

Private credit

by deposits

money banks

to GDP

Stock market

capitalization

to GDP

Stock market

total value

traded to GDP

Liquid liabilities to GDP1.000

Correlation matrix (p-values)

4. Results

22

Liquid liabilities to GDP

Financial system deposits to

GDP

0.9477 1.000

(0.0000)

Private credit by deposits

money banks to GDP

0.7530 0.7860 10.000

(0.0000) (0.0000)

Stock market capitalization

to GDP

0.7070 0.7464 0.6033 10.000

(0.0000) (0.0000) (0.0000)

Stock market total value

traded to GDP

0.6310 0.6594 0.7204 0.7508 10.000

(0.0000) (0.0000) (0.0000) (0.0000)

FRI0.3384 0.4747 0.5743 0.3491 0.4231

(0.0013) (0.0000) (0.0000) (0.0021) (0.0002)

4. Results

Results Growth Regression: Regulation and/or size? (6) (7)

OLS OLS

FRIi -1.112** -0.750*

(-2.45) (-1.69)

( )2006,ln iy -1.767 -2.808*

(-1.36) (-1.90)

ln (popi,2006) 1.450 1.387

(1.56) (1.48)

Country groups (base: emerging Asia) i,2006

advanced -0.355 0.272

(-0.07) (0.05)

transition -5.702 -8.447**

(-1.44) (-2.12)

Sub-Saharan Africa -3.788 -3.557

(-1.07) (-0.89)

Latin America 1.973 2.739

23

Latin America 1.973 2.739

(0.55) (0.71) Middle East

and North Africa

-4.970 -4.486

(-1.37) (-1.21)

Euro member -4.620** -4.193*

(-2.24) (-1.96)

openness i,2006 0.0173 0.0155

(0.86) (0.86)

( ) 2002,2002,2006, iii yyy − 0.230*** 0.263**

(2.69) (2.13)

Fin.system deposits in % of GDP i,2006 0.0076

(0.33)

Stock market capitalization in % of GDP i,2006 0.0094

(0.75)

Constant α̂ 11.39 14.70

(0.62) (0.77)

N 86 74

adj. R2

/ §pseudo R

2 0.506 0.533

Mean (median) dependent variable 7.2 (5.2) 6.3 (4.7)

mean FRIi 16.4 16.8

Summary

An increase in the FRI by one unit, leads to

• a loss of GDP growth of approx. 1 percentage-points between

end of 2007 and end of 2011, that is, an annual loss of

approx. ¼ percentage points GDP growth.

• an increase in the annual deficit ratio by 0.4 percentage

points.

5. Conclusions

24

points.

• an employment growth loss of approx. 0.7. percentage-points

between end of 2007 and end of 2010, that is, an annual loss

of approx. 0.2 percentage points employment growth, if

only countries with FRIi > 13 are included.

5. Conclusions

Conclusions: Experiencing a déjà vu?

“It has become increasingly clear that financial and

capital market liberalization (...) was at the core of the

problem. It is no accident that the two large developing

countries that survived the crisis – and continued with

remarkably strong growth in spite of a difficult global

economic environment – were India and China, both

25

economic environment – were India and China, both

countries with strong controls on these capital flows.”

Stiglitz (2000, P. 1075) about the East Asian Crisis 1997-1998

DEU

TUR

ZAF

ARG

BOLBRA CHLCOL

CRI

DOM

ECU

NIC

PRY

PERURY

ISRJOR

EGY

BGDLKA

HKG

IND

IDN

KORMYS

NPL

PAK

PHL

SGPTHA

VNM

DZACMR

ETH

GHA

KEN

MAR

MOZ NGA

TZA

TUN

UGA

BFA

AZE

BLR

ALB

GEO

KAZ KGZ

BGRRUS

CHN

UZB

POL

20

40

Gro

wth

Rate

of R

eal G

DP

per

Capita in U

SD

2008-2

011

FRI (AVERAGE 2001–2005) AND CUMULATED GROWTH RATE OF GDP PER CAPITA

IN USD 2008–2011


USAGBR

AUTBEL

DNK

FRA

DEU

ITA

NLD

NOR

SWECHECAN

JPNFIN

GRC

IRL

PRTESP

AUS

NZL

ZAFCRI

SLVGTM

MEX

NIC

VEN

PAKDZACMR

CIV

KEN

MDG

ZWE SEN

TUN

UKR

CZE

EST

LVA

HUNLTU

-20

0

Gro

wth

Rate

of R

eal G

DP

per

Capita in U

SD

2008-2

011


Conclusions / Future Research

5. Conclusions

What are the channels?

� Asset prices? (see, e.g., Favara and Imbs, 2011)

Which components of financial deregulation?

27

Thank you very much

for your attentionQuestions? Questions?

Comments?

28

Paper: Hagen, Tobias (2013). Impact of National Financial Regulation on

Macroeconomic and Fiscal Performance after the 2007 Financial Shock – Econometric

Analyses Based on Cross-Country Data. Economics Discussion Papers, No

2013-26, Kiel Institute for the World Economy.

http://www.economics-ejournal.org/economics/discussionpapers/2013-26

APPENDIX

Appendix

29

-50

5G

row

th R

ate

of re

al G

DP

per

cap

ita

20

08

-20

11

in

%

Percentage change of real GDP per capita from 2007 to 2011 Appendix

-15

-10

Gro

wth

Ra

te o

f re

al G

DP

per

cap

ita

20

08

-20

11

in

%

Gre

ece

Irela

nd

Italy

Den

ma

rk

Spa

in

United

Kin

gd

om

New

Ze

ala

nd

Norw

ay

Fin

land

Port

uga

l

Ja

pa

n

United

Sta

tes

Fra

nce

Neth

erl

an

ds

Belg

ium

Can

ad

a

Sw

itzerl

an

d

Austr

ia

Sw

ed

en

Austr

alia

Ge

rma

ny

Isra

el

30

020

40

Gro

wth

Rate

of re

al G

DP

per capita 2

008-2

011 in %

Percentage change of real GDP per capita from 2007 to 2011 Appendix

-20

Gro

wth

Rate

of re

al G

DP

per capita 2

008-2

011 in %

Latv

iaE

sto

nia

Madagascar

Cote

d'Ivoire

Ukra

ine

Hungary

Venezuela

, R

BE

l S

alv

ador

Lithuania

Mexic

oG

uate

mala

Czech R

epublic

Senegal

Zim

babw

eC

am

ero

on

South

Afric

aK

enya

Nic

ara

gua

Pakis

tan

Tunis

iaC

osta

Ric

aA

lgeria

Bulg

aria

Thaila

nd

Russia

n F

edera

tion

Sin

gapore

Turk

ey

Burk

ina F

aso

Jord

an

Mala

ysia

Hong K

ong S

AR

, C

hin

aG

eorg

iaC

olo

mbia

Phili

ppin

es

Kore

a, R

ep.

Chile

Bra

zil

Egypt, A

rab R

ep.

Kyrg

yz R

epublic

Nepal

Boliv

iaK

azakhsta

nE

cuador

Para

guay

Moro

cco

Tanzania

Pola

nd

Uganda

Dom

inic

an R

epublic

Alb

ania

Mozam

biq

ue

Nig

eria

Azerb

aija

nIn

donesia

Vie

tnam

Bangla

desh

Sri L

anka

Peru

Arg

entina

India

Uru

guay

Ghana

Uzbekis

tan

Bela

rus

Eth

iopia

Chin

a

31

-50

5G

row

th R

ate

of E

mp

loym

ent-

Po

pu

latio

n R

atio

20

08

-20

11 in %

Percentage change of employment-population ratio from 2007 to 2011 Appendix

32

-15

-10

Gro

wth

Ra

te o

f E

mp

loym

ent-

Po

pu

latio

n R

atio

20

08

-20

11 in %

Irela

nd

Spa

in

United

Sta

tes

Den

ma

rk

Port

uga

l

Fin

land

New

Ze

ala

nd

Italy

Gre

ece

Sw

ed

en

United

Kin

gd

om

Can

ad

a

Neth

erl

an

ds

Norw

ay

Ja

pa

n

Fra

nce

Austr

alia

Sw

itzerl

an

d

Belg

ium

Austr

ia

Ge

rma

ny

Isra

el

Percentage change of employment-population ratio 2007 to 2011

-50

5G

row

th R

ate

of E

mp

loym

ent-

Po

pu

latio

n R

atio

20

08

-20

11 in in %

Appendix

33

-15

-10

Gro

wth

Ra

te o

f E

mp

loym

ent-

Po

pu

latio

n R

atio

20

08

-20

11 in in %

Latv

iaE

sto

nia

Lithu

an

iaJam

aic

aS

outh

Afr

ica

India

Bulg

aria

Hun

ga

ryH

ong

Kon

g S

AR

, C

hin

aC

ze

ch R

epub

licE

cua

do

rG

eo

rgia

Mo

rocco

Kore

a, R

ep.

Mexic

oT

ha

iland

Mala

ysia

Ch

ina

Sri

La

nka

Alb

an

iaC

osta

Ric

aA

rge

ntina

Uga

nd

aU

kra

ine

Ru

ssia

n F

ed

era

tion

Mozam

biq

ue

Eth

iop

iaS

ing

ap

ore

Bela

rus

Ta

nza

nia

Mad

ag

asca

rV

ietn

am

Zim

bab

we

Jord

an

Burk

ina F

aso

Kyrg

yz R

ep

ub

licB

an

gla

desh

Cote

d'Ivo

ire

Pakis

tan

Sen

eg

al

Ne

pa

lG

han

aG

uate

mala

Eg

ypt,

Ara

b R

ep.

El S

alv

ado

rN

ige

ria

Boliv

iaC

am

ero

on

Dom

inic

an

Rep

ub

licU

zb

ekis

tan

Ve

ne

zue

la,

RB

Nic

ara

gua

Tun

isia

Aze

rbaija

nK

enya

Bra

zil

Phili

pp

ine

sIn

don

esia

Peru

Pa

ragu

ay

Co

lom

bia

Turk

ey

Ka

zakh

sta

nP

ola

nd

Uru

gu

ay

Alg

eria

Ch

ile

010

20

Deficit R

atio in %

, A

ve

rag

e 2

008

to 2

01

0

Average budget deficit 2008-2010Appendix

-20

-10

Deficit R

atio in %

, A

ve

rag

e 2

008

to 2

01

0

Irela

nd

Gre

ece

United

Sta

tes

United

Kin

gd

om

Port

uga

l

Ja

pa

n

Fra

nce

Spa

in

Isra

el

Italy

Belg

ium

Neth

erl

an

ds

Austr

ia

Ge

rma

ny

Austr

alia

Can

ad

a

Den

ma

rk

New

Ze

ala

nd

Fin

land

Sw

ed

en

Norw

ay

34

-50

5D

eficit R

atio in %

, A

ve

rag

e 2

008

to 2

01

0

Average budget deficit 2008-2010Appendix

-10

-5D

eficit R

atio in %

, A

ve

rag

e 2

008

to 2

01

0

Sri

Lan

ka

Eg

ypt, A

rab R

ep.

Gha

na

Lithu

ania

Jo

rdan

Pa

kis

tan

Po

lan

d

Ma

laysia

Ken

ya

Latv

ia

Co

lom

bia

Ge

org

ia

Ukra

ine

India

Burk

ina

Fa

so

Eth

iopia

Cze

ch

Re

pub

lic

Hun

gary

Sou

th A

fric

a

Turk

ey

Ph

ilipp

ines

Gu

ate

mala

El S

alv

ado

r

Co

sta

Ric

a

Ug

an

da

Kyrg

yz R

epu

blic

Bra

zil

Esto

nia

Tun

isia

Nic

ara

gu

a

Uru

gua

y

Th

aila

nd

Ind

on

esia

Co

te d

'Ivoir

e

Bulg

ari

a

Russia

n F

ede

ratio

n

Ch

ile

Aze

rba

ijan

Mo

rocco

Be

laru

s

Peru

Kazakhsta

n

Kore

a,

Rep

.

Para

gua

y

Hong

Kon

g S

AR

, C

hin

a

Sin

ga

pore

35

GBR

AUTBEL

DNK

FRA

DEU

ITANLD

NOR

SWE

CHE

CAN

JPN

FINGRCPRT

TUR

AUS

NZL

ZAF

ARG

BOLBRA

CHL

COL

CRI

DOM

ECU

SLVGTM

MEX

NIC

PRY PER

URY

VEN

ISR

JOREGY

BGD

LKA

HKG

IND

IDN

KOR

MYS

NPL PAK

PHL

SGP

THA

VNM

DZA

CMR

ETH

GHA CIV

KEN

MDG

MAR

MOZ

NGA

ZWESEN

TZA

TUN

UGA

BFA

AZE

BLRALB

GEO

KAZ

KGZ

BGR

RUS

CHNUKR

UZB

CZEHUN

POL

-50

5G

row

th R

ate

of

the

Em

plo

ym

ent-

to-P

op

ula

tion

Ra

tio

200

8-2

010

FINANCIAL REFORM INDEX (AVERAGE 2001–2005) AND

CUMULATED GROWTH RATE OF THE EMPLOYMENT TO POPULATION RATIO 2008–2010

Appendix

USA

IRL

ESP

JAM

EST

LVA

LTU

-15

-10

Gro

wth

Ra

te o

f th

e E

mp

loym

ent-

to-P

op

ula

tion

Ra

tio

200

8-2

010


36

Pearson Spearman

All Countries, N=88 -0.4165 (0.0000 -0.4389 (0.0000

Only Advanced, N=22 -0.3288 (0.1352) -0.2207 (0.3237)

Advanced + Asia, N=51 -0.4508 (0.0009) 0.5228 (0.0001)

Negative correlation between

post-2007 employment growth

and FRI

FIGURE 8: FINANCIAL REFORM INDEX (AVERAGE 2001–2005)

AND AVERAGE DEFICIT RATIO 2008–2010

AZEBLR BGRCAN

CHLCIV DNKEST

FIN

HKG

IDNKAZ

KORMAR NZL

NIC

NOR

PRYPERRUS

SGP

SWETHA TUNURY

010

20

Deficit R

atio, A

vera

ge

20

08-2

01

0

Bravais-Pearson: -0.0527 (0.6717)

Spearman: -0.0976 (0.4319)

N=67

Appendix

37

AUSAUT

AZE

BELBRA

BGR

BFA

CANCHL

COL

CRI

CIV

CZE

DNK

EGY

SLVEST

ETH

FIN

FRAGEO

DEU

GHA

GRC

GTMHUN

IND

IDN

IRL

ISRITA

JPN JORKEN

KGZ

LVALTU

MYS

MAR

NLD

NZLNIC

PAK

PHL

POL

PRT

RUS

ZAF

ESP

LKA

THA TUN

TURUGA

UKR

GBRUSA

URY

-20

-10Deficit R

atio, A

vera

ge

20

08-2

01

0


No correlation between post-2007 budget deficits and FRI

Results Deficit Regression I (1) (2) (3) (4) (5) (8)

OLS OLS OLS Median MM OLS

FRIi -0.456** -0.352 -0.428*** -0.465** -0.393*** -0.301*

(-2.23) (-1.56) (-3.06) (-2.13) (-2.66) (-1.97)

( )2006,ln iD -0.543 -0.417 1.172 -0.0953 0.198 0.425

(-0.98) (-0.69) (1.56) (-0.15) (0.41) (0.86)

( )2006,ln iy 0.792 1.021** 0.885** 0.621 0.614** 0.664**

(1.47) (2.04) (2.18) (0.93) (2.04) (2.06)

ln (popi,2006) -0.713* -0.884* -0.354 -0.584 -0.423 0.0938

(-1.74) (-1.81) (-1.05) (-1.41) (-1.55) (0.31)

Country groups (base: emerging Asia) i,2006

Advanced -2.464 -3.362* -2.402 -2.075 0.0804

(-1.21) (-1.76) (-1.15) (-1.52) (0.06)

Transition -2.712* 1.000 -0.501 -0.736 0.676

(-1.75) (0.64) (-0.17) (-0.59) (0.41)

Sub-Saharan Africa -2.112 -0.774 -0.802 -1.060 0.293

(-1.49) (-0.53) (-0.23) (-0.63) (0.19)

Latin America -1.920 0.0780 -0.654 0.0833 1.721

Appendix

38

Latin America -1.920 0.0780 -0.654 0.0833 1.721

(-1.33) (0.05) (-0.26) (0.05) (1.18)

Middle East and North Africa -2.885** -0.831 -2.169 -1.106 0.299

(-2.16) (-0.58) (-0.66) (-0.59) (0.20)

Euro member -3.438 -2.129 -1.373 -0.597 -2.462**

(-1.59) (-1.44) (-1.20) (-0.73) (-2.26)

openness i,2006 0.00464 0.0128* 0.010*** 0.0142**

(0.59) (1.86) (2.66) (2.54)

∑∑ ==

2006

2002 ,

2006

2002 , t tit ti YB

0.932*** 0.605*** 0.681*** 0.746*** (7.23) (4.03) (4.78) (5.41)

( ) 2002,2002,2006, iii yyy − -0.100* -0.0914 -0.0561 -0.0601

(-1.93) (-1.00) (-0.80) (-0.87)

Constant α̂ 12.23** 13.69 2.471 12.62 7.212 -5.597

(2.08) (1.34) (0.29) (1.06) (0.72) (-0.70)

N 66 66 58 58 58 47

adj. R2

/ §pseudo R

2 0.044 0.111 0.546 0.469 0.722

Mean (median) dependent variable -2.8

(-2.6)

-2.8

(-2.6)

-2.8

(-2.7)

-2.8

(-2.7)

-2.8

(-2.7)

-2.7

(-2.7)

without FRIi = 21

countries,

China and Norway Notes: t statistics based on robust standard errors in parentheses; * p < 0.10, ** p < 0.05, *** p < 0.01

FRI dummies (base: [0 –13.5]) OLS

[13.6–16.0] -1.501

(-1.27)

[16.1–19.05] -2.283

(-1.54)

[19.1–21.0] -2.915*

(-1.83)

Results Deficit Regression II5

Figure 10: Non-parametric fit of f(FRIi) in the Deficit Ratio Model

Dummy Specification of FRIi (excerpt)

Statistical test

Appendix

39

-20

-15

-10

-50

De

ficit

Ra

tio

, A

ve

rag

e 2

00

8-2

01

0


Statistical test

H0: The linear specification and the


• Standardized Test statistic T: 1.455

• Critical value (95%): 1.96

• Approximate P-value: 0.15

�� H0 is not rejected: linearity

assumption seems (barely)

appropriate

Appendix

Results Employment Growth Regression I (1) (2) (3) (4) (5) (8)

OLS OLS OLS Median MM OLS

FRIi -0.386*** -0.345** -0.433** -0.254 -0.121 -0.185

(-2.78) (-2.25) (-2.53) (-1.40) (-0.93) (-1.32)

( )2006,ln iE -2.170 -4.727 -8.243** -5.630 -3.585 -1.453

(-1.33) (-1.29) (-2.56) (-1.23) (-0.50) (-0.49)

( )2006,ln iy -0.214 -0.504 -0.884* -0.762 -0.666 -0.388

(-0.82) (-1.10) (-1.83) (-1.12) (-1.32) (-0.78)

ln (popi,2006) 0.188 0.0591 0.291 0.0886 -0.000593 0.197

(0.53) (0.19) (0.89) (0.29) (-0.00) (0.56)

Labour market freedom index -0.192 -0.335 -0.186 -0.239 -0.0206

(-0.73) (-1.32) (-0.57) (-0.71) (-0.09) Country groups (base: emerging Asia) i,2006

advanced 2.243 4.887** 2.611 1.431 2.068

(1.44) (2.50) (1.00) (0.81) (0.91)

transition -1.420 0.729 -0.620 -0.758 0.483

(-0.92) (0.46) (-0.69) (-0.59) (0.37)

Sub-Saharan Africa 0.286 1.331 0.901 0.455 0.732

40without FRIi = 21

countriesNotes: t statistics based on robust standard errors in parentheses; * p < 0.10, ** p < 0.05, *** p < 0.01

Sub-Saharan Africa 0.286 1.331 0.901 0.455 0.732

(0.21) (1.11) (0.69) (0.39) (0.68)

Latin America 2.585** 4.694*** 2.970*** 2.464* 3.384***

(2.30) (3.63) (2.83) (1.93) (2.86)

Middle East and North Africa -0.00176 0.506 0.327 0.754 2.187

(-0.00) (0.28) (0.16) (0.23) (1.25)

Euro member -3.152* -3.600*** -2.890 -0.909 -1.102

(-1.88) (-2.65) (-1.11) (-0.40) (-0.74)

Openess i,2006 0.0163** 0.00843 0.00543 0.00549

(2.27) (0.85) (0.93) (0.82)

( ) 2002,2002,2006, iii EEE − -0.281*** -0.171 -0.110 -0.102

(-3.14) (-1.42) (-0.85) (-1.45)

( ) 2002,2002,2006, iii yyy −

-0.0304 -0.0270 0.00740 -0.00805

(-0.78) (-0.60) (0.28) (-0.28)

Constant α̂ 12.48 27.50 41.46*** 30.83 21.65 6.739

(1.35) (1.62) (2.68) (1.28) (0.77) (0.47)

N 88 85 85 85 85 74

adj. R2

/ §pseudo R

2 0.164 0.269 0.373

§0.275 0.078

Mean (median) dependent variable -1.2 (-0.5) -1.2 (-0.5) -1.2 (-0.5) -1.2 (-0.5) -1.2 (-0.5) -0.4 (-0.1)

mean FRIi 16.2 16.2 16.2 16.2 16.2 15.8

Appendix

Results Employment Growth Regression IIDummy Specification of FRIi (excerpt)FRI dummies (base: [0 –13.5]) OLS

[13.6–16.0] 0.306

(0.33)

[16.1–19.05] -0.624

(-0.64)

[19.1–21.0] -3.689***

(-2.82)

10

Gro

wth

Ra

te o

f E

mp

loym

en

t to

Po

pu

lation

Ra

tio

20

08-2

010

Figure 11: Non-parametric fit of f(FRIi) in the Employment Growth Model

Statistical test

41

-10

-50

5G

row

th R

ate

of E

mp

loym

en

t to

Po

pu

lation

Ra

tio

20

08-2

010


Statistical test

H0: The linear specification and the


• Standardized Test statistic T: 3.405

• Critical value (95%): 1.96

• Approximate P-value: 0.00

�� H0 is rejected: linearity

assumption not appropriate

However, (linear) negative

relationship for FRIi > 13 ?

Results Employment Growth Regression III

Reduced sample of 71 countries with FRIi > 13, assuming linearity (excerpt)

(12) (13) (14)

OLS Median MM

FRIi -0.707*** -0.545** -0.521*

(-2.96) (-2.11) (-1.87)

N 71 71 71

adj. R2

/ §pseudo R

2 0.4817

§0.3471

Mean (median) dependent variable -1.4 (-0.7) -1.4 (-0.7) -1.4 (-0.7)

mean FRIi 17.5 17.5 17.5

Appendix

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