Financial Deepening

2019 ◽  
Vol 18 (2) ◽  
pp. 111-137
Author(s):  
Shankha Chakraborty
Keyword(s):  
Financial Development ◽  
Financial Market ◽  
Capital Accumulation ◽  
Agency Problems ◽  
Financial Structure ◽  
Financial Deepening ◽  
External Finance ◽  
Long Run ◽  
Financial Contract ◽  
Further Development

This article proposes a tractable model of the evolution of financial structure. Firms invest out of internal assets and by borrowing from banks and the financial market. In the presence of moral hazard, whereby owner–managers may intentionally reduce profitability of investment to appropriate resources, banks can monitor firms and partially alleviate agency problems. Under the optimal financial contract, banks monitor and outside investors lend to firms only if they borrow from banks too. The model is broadly consistent with financial development facts. Capital accumulation is facilitated by an increasing reliance on both types of external finance. Initially firms rely more heavily on expensive bank finance. With further development, banks eliminate much of the agency problem and firms substitute in favour of cheaper market finance. The short- and long-run effects of financial sector reforms are considered. JEL: E44, G20, O16

Foreign Capital, Natural Resource Rents and Financial Development: A New Approach

2020 ◽  
pp. 097215092096136
Author(s):  
Muhammad Shahbaz ◽  
Mohammad Ali Aboutorabi ◽  
Farzaneh Ahmadian Yazdi
Keyword(s):  
Financial Development ◽  
Natural Resource ◽  
Capital Accumulation ◽  
Foreign Capital ◽  
New Approach ◽  
Resource Rents ◽  
Long Run ◽  
Natural Resource Rents ◽  
Rich Countries ◽  
The Impact

This article explores the impact of financial development on the ‘natural resources rents–foreign capital accumulation nexus’ in selected natural resource–rich countries during 1970Q1–2016Q4. In doing so, we propose a new approach by applying the autoregressive distributed lag (ARDL) rolling regression technique for our empirical purpose. The results show that financial development has a positive and significant effect on the way natural resource rents affect foreign capital in the case of Australia, Chile, Ecuador, Egypt and Peru in both the short run and the long run. We achieve the same results in the case of Colombia and Iran too, but just in the long run. Also, short-term and long-term negative effects of financial development on the rents–foreign capital nexus are witnessed just in the case of Algeria. We provide some empirical evidence for further robustness of our findings. Finally, we suggest that there is a necessity for the development of the financial system in natural resource–rich countries to reach higher levels of foreign capital, which has a crucial role in their economic growth.

Financial Depth and Exchange Rate Volatility

2016 ◽  
Vol 62 (1) ◽  
pp. 19-30 ◽  
Author(s):  
Massomeh Hajilee ◽  
Omar M. Al Nasser
Keyword(s):  
Exchange Rate ◽  
Financial Market ◽  
Exchange Rate Volatility ◽  
Financial Deepening ◽  
Bounds Testing ◽  
Exchange Rate Uncertainty ◽  
Long Run ◽  
Financial Depth ◽  
Short Run ◽  
The Many

It is empirically well established that financial depth increases the power of the financial system and helps both government and the private sector to have access to adequate funds without a noticeable change in asset prices and exchange rates. Exchange rate uncertainty is considered one of the many factors that affect financial market performance. In this study, we try to determine the short-run and long-run effects of exchange rate volatility on financial depth in 26 selected countries, classified as developed, developing, and emerging economies over the period 1980-2011. Our findings indicate that exchange rate volatility has short-run and long-run effects in the majority of countries in this study. We found for 16 countries out of 26, financial depth responds significantly to exchange rate volatility (nine positive, seven negative). Furthermore, using the bounds testing approach shows that exchange rate volatility has significant impact on financial deepening in 20 out of 26 countries in the short run. The results show that despite similar classification and grouping, the estimated results could be very country specific depending on each country’s particular characteristics. We suggest that for every country, it is crucial to choose and implement appropriate financial market and exchange rate policies.

scholarly journals The Asymmetric Influence of Financial Development on Economic Growth in Kenya: Evidence From NARDL

SAGE Open ◽  
2020 ◽  
Vol 10 (1) ◽  
pp. 215824401989407 ◽  
Author(s):  
Hao Chen ◽  
Duncan O. Hongo ◽  
Max William Ssali ◽  
Maurice Simiyu Nyaranga ◽  
Consolata Wairimu Nderitu
Keyword(s):  
Economic Growth ◽  
Financial Development ◽  
Government Spending ◽  
Capital Accumulation ◽  
Research Question ◽  
Government Expenditure ◽  
Model Specification ◽  
Long Run ◽  
Short Run ◽  
Auto Regressive

This study analyzed the asymmetric effects of financial development on economic growth using a model augmented with inflation and government expenditure asymmetries to inform model specification. The research question used entails, Do their asymmetry changes significantly influence growth? Using the nonlinear auto-regressive distributive lag (NARDL), the most significant results posit that positive shocks in financial development in the short run and its negative shocks in the long run increase and decrease economic growth, respectively. Regarding inflation, its positive (negative) shocks in both runs, respectively, reduce (increase) economic growth. In comparison, positive shocks in financial development that spur growth in the short run and negative shocks in financial development (government expenditure) that increase (reduce) growth are the most domineering effects as the rest of the shocks insignificantly affect growth. Results clearly demonstrate to an environment steered by stable and sustainable inflation that regulated government expenditure and comprehensive financial system deepening would positively cause economic growth. Therefore, appropriate policies that favor low inflation and reduced government spending, expansion of feasibly reformed financial institutions, capital accumulation, and increased resource mobilization should be instituted if real growth is to positively happen.

scholarly journals Financial Structure and Economic Growth: The Nigerian Experience, 1980-2017

2019 ◽  
Vol 5 (1) ◽  
pp. 33-48
Author(s):  
Emeka Nkoro ◽  
Aham Kelvin Uko
Keyword(s):  
Economic Growth ◽  
Stock Market ◽  
Financial Development ◽  
Growth Dynamics ◽  
Financial Structure ◽  
Growth Effect ◽  
Control Variables ◽  
Relationship Analysis ◽  
Long Run ◽  
Effect On Growth

This study investigated the role of financial structure in explaining economic growth dynamics in Nigeria using annual time series from 1981-2017. The study employed the vector error correction model (VECM) in the analysis of the data. As lead up to financial structure and economic growth relationship analysis, the competing theoretical views of bank and market based financial system and economic growth were explored. The result of the study showed that economic growth, financial development variables and the underlying control variables are cointegrated. The result of the economic growth effect of financial development showed that stock market and bank-based have a significant effect on growth. This implies that both bank-based and market-based matter in explaining economic growth dynamics.  On the relationship between financial structure and economic growth, the study revealed that economic growth, financial structure and the underlying control variables have a long run relationship. The study also revealed that financial structure which captures the combination of stock market-based and bank-based has a positive significant effect on growth. A significant coefficient of financial structure implies that financial structure matters in explaining growth. Therefore, the study posits that the overall financial structure is the most useful way to assess the financial systems since both bank and stock market system matter in explaining economic growth as against bank-based versus market-based debate. Based on the empirical evidence, the study therefore recommends that there should be continuous holistic reforms of both banking and stock market simultaneously, as the development in one sector has a neglect effect on the other.

Assessing the Role of Remittances and Financial Deepening in Growth: The Experience of Lebanon

2017 ◽  
Vol 17 (1) ◽  
pp. 20150059 ◽  
Author(s):  
Salah Abosedra ◽  
Ali Fakih
Keyword(s):  
Financial Development ◽  
Strong Support ◽  
Financial Deepening ◽  
Quarterly Data ◽  
Long Run ◽  
Short Run ◽  
Growth Volatility ◽  
The Relationship

We investigate the relationship between remittances, financial deepening and the growth of the Lebanese economy using quarterly data from 1993 to 2011. Our results provide strong support for the theoretical contention that remittances and financial development share a robust long-run relationship with growth in Lebanon. However, the results indicate that short-run effects on growth volatility are statistically insignificant from financial development but strongly significant from remittances. These results extend recent findings on the financial development, remittances and growth nexus and imply that benefits expected from remittances for addressing growth volatility in Lebanon materialize more than those associated with financial development.

scholarly journals The influence of financial market development on investment activities in a developing country

2017 ◽  
Vol 7 (4) ◽  
pp. 41-50
Author(s):  
Shirley Malope ◽  
Thobeka Ncanywa ◽  
Tony Matlasedi
Keyword(s):  
Financial Development ◽  
Impulse Response ◽  
Financial Market ◽  
Policy Implications ◽  
Market Development ◽  
Government Bonds ◽  
Speed Of Adjustment ◽  
Long Run ◽  
Johansen Cointegration ◽  
Financial Market Development

Financial markets are considered developed if there is improvement in the size, activity, efficiency and stability of the financial system. The study looked at how financial development based on debt, stock, money and foreign markets affect investment. The Johansen cointegration and Vector Error Correction Model (VECM) were used to estimate the short and long run relationship and test for the speed of adjustment. Granger causality test informed about direction of causality, variance decompositions and impulse response indicated effects of shocks. The Johansen cointegration test showed that the variables have a long run relationship. VECM showed that the speed of adjustment is about 13%, which means that variables will converge to equilibrium relatively quickly. The impulse response function indicated that financial market development indicators have short-run effects on investment in the first quarters after the initial shocks. Variance decomposition also indicated that specifically government bonds had greater effect in predicting future investments. The policy implications of these findings are for government to place greater priority on government bonds as its effect on investment is greater than other financial development proxies. Policies should focus on allowing greater risk diversification and improving the independence of the financial sector from government interference.

scholarly journals Financial Development and Poverty Reduction: Evidence from Selected African Countries

2017 ◽  
Vol 8 (4) ◽  
pp. 90 ◽  
Author(s):  
Yaya Keho
Keyword(s):  
Economic Growth ◽  
South Africa ◽  
Financial Development ◽  
Cote D'ivoire ◽  
Poverty Reduction ◽  
Côte D’Ivoire ◽  
Financial Deepening ◽  
African Countries ◽  
Long Run ◽  
Positive Effect

This paper examines the relationship between financial development, economic growth and poverty reduction in nine African countries for the period 1970-2013. It uses the ARDL bounds testing approach. The results show evidence of long-run relationship among the variables in height countries with GDP and financial deepening having a positive effect on poverty reduction in five countries (Benin, Cameroon, Cote d’Ivoire, Gabon and South Africa), and poverty reduction having a positive effect on economic growth in three countries (Ghana, Nigeria and Senegal). The study also reveals bidirectional long-run causality between economic growth and poverty reduction in Cote d’Ivoire, Gabon and South Africa, and bidirectional long-run causality between finance and poverty reduction in Benin, Cameroon and South Africa. These findings suggest that policies aimed at increasing economic growth and improving access to credit would reduce poverty but also that measures of poverty reduction would lead to economic growth and financial deepening in these countries.

scholarly journals Determinants Of Savings In The SADC Region: The Role Of Foreign Capital And Financial Development

2015 ◽  
Vol 31 (6) ◽  
pp. 2107 ◽  
Author(s):  
Forget Mingiri Kapingura ◽  
Sylvanus Ikhide ◽  
Asrat Tsegaye
Keyword(s):  
Financial Development ◽  
Foreign Capital ◽  
Panel Cointegration ◽  
Financial Sector ◽  
Ordinary Least Squares ◽  
Financial Deepening ◽  
Financial Flows ◽  
Financial Sector Development ◽  
Long Run ◽  
Domestic Savings

The study examines the determinants of savings in the SADC region, mainly focusing on the roles played by external financial flows and financial development in mobilising domestic savings utilising panel cointegration method and the Dynamic ordinary Least Squares (DOLS) approach from 1980 to 2009. Following the review of literature, the empirical model adopted established that there is a long-run relationship between the variables of interest. The results indicate that income, proxied with GDP, financial sector development and foreign capital have a positive relationship with savings. The results also suggest that financial sector development has played a very important role in influencing savings in the region. However on the other hand the results indicate that interest rate and dependency ratio have influenced savings negatively. The empirical results support the hypothesis that foreign savings bridges the gap between domestic demand and supply of finance in the SADC countries. There is need to attract more foreign capital given that it compliments domestic savings. At the same time policies aimed at financial deepening should still be pursued to further deepen the financial system in the SADC countries to further enhance savings. 

scholarly journals Finance And Poverty Reduction In China: An Empirical Investigation

2011 ◽  
Vol 10 (8) ◽  
pp. 103 ◽  
Author(s):  
Sin-Yu Ho ◽  
Nicholas M. Odhiambo
Keyword(s):  
Causal Relationship ◽  
Financial Development ◽  
Poverty Reduction ◽  
Testing Procedure ◽  
Bounds Testing ◽  
Long Run ◽  
Domestic Credit ◽  
Short Run ◽  
Further Development ◽  
Per Capita Consumption

In this paper, the causal relationship between financial development and poverty reduction is examined in China, using the newly developed ARDL-Bounds testing procedure. The paper uses two proxies of financial development against private per capita consumption - a proxy for poverty reduction to examine this linkage. The results of the study show that the causal relationship between financial development and poverty reduction is sensitive to the proxy used to measure the level of financial development.When the domestic credit to the private sector (DCP/GDP) is used as a proxy for financial development, a bidirectional causality is found to prevail between financial development and poverty reduction in the short run. However, when the broad money supply ratio (M2/GDP) is used as a proxy, a bidirectional causality between financial development and poverty reduction is found to prevail in the short run, but a unidirectional causal flow from poverty reduction to financial development is found to predominate in the long run. These results show that the poverty-reduction programmes, which have been ongoing in China for decades, are likely to lead to further development of the financial sector in the long run.

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