Empirical Banking and Finance Growth

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Questions and Answers

What does the variable 'Financei' represent in the growth equation?

Banking sector indicators (correct)

Government expenditure

The growth rate of income per capita

Inflation rates

Which of the following variables is NOT part of the conditioning set?

Government size

Interest rate (correct)

Political stability

Log of initial per capita GDP

In the context of the growth equation, what does 'βGMM' represent?

Generalized method of moments estimator (correct)

Simple regression coefficient

Standard deviation of growth

Error correction term

What requirement is necessary for a just-identified case in the context of regression analysis?

Number of instruments equals the number of endogenous regressors Signup and view all the answers

Which of the following is an example of the full conditioning information set?

Exchange rate premium Signup and view all the answers

What does the COMMERCIAL-CENTRAL BANK ratio indicate?

The ratio of commercial bank assets to the combined assets of commercial and central banks. Signup and view all the answers

What does the term PRIVATE CREDIT refer to?

The value of credits issued by financial intermediaries specifically to the private sector. Signup and view all the answers

Which conclusion can be drawn from higher levels of PRIVATE CREDIT?

It suggests a greater development of financial services. Signup and view all the answers

What is a limitation of using PRIVATE CREDIT as a measure?

It does not directly measure the impact on information asymmetries or transaction costs. Signup and view all the answers

Why are commercial banks considered more effective than central banks in certain financial functions?

They are able to monitor managers and identify profitable investments effectively. Signup and view all the answers

What methodology does LLB primarily use to address potential biases in studying finance and growth?

Instrumental-variable estimation Signup and view all the answers

Which of the following statements best describes the relationship between financial intermediary development and economic growth?

Financial intermediaries can alter long-run growth rates. Signup and view all the answers

What is the main limitation when constructing indicators of financial services across different countries?

Challenges in creating accurate, comparable measures. Signup and view all the answers

What does the indicator of liquid liabilities measure?

Liquid liabilities of the financial system relative to GDP. Signup and view all the answers

Which econometric technique is NOT mentioned as used by LLB?

Time-series regression analysis Signup and view all the answers

What type of costs do financial intermediaries help mitigate according to the text?

Transaction and information costs Signup and view all the answers

Which of the following theoretical models is least likely to be supported by financial intermediary development?

Models predicting decreased economic activity. Signup and view all the answers

What does the term 'financial depth' refer to in the context of financial intermediary development?

The liquid liabilities of the financial system divided by GDP. Signup and view all the answers

Study Notes

Empirical Banking and Finance and Growth

Presentation by Stefano Caiazza, 2024-2025
Focuses on the relationship between financial development and economic growth

Levine, Loayza, and Beck (LLB) 2000 Study

Previous work showed financial development predicts economic growth, but causality wasn't established.
LLB uses new data and econometric methods to address concerns about simultaneity, omitted variables, and country-specific effects.
Two econometric techniques are used:
- Cross-sectional instrumental-variable estimator
- Generalized method-of-moments (GMM) dynamic panel estimators

Financial Intermediary Development

Theoretical models show economic agents form financial intermediaries to mitigate information & transaction costs.
Intermediaries influence savings & allocation decisions, impacting long-run growth.
Ideal measures of financial systems would identify profitable ventures, monitor managers, ease risk management and facilitate resource mobilization
Constructing accurate, comparable measures of financial services across countries for the last 35 years is difficult.

Financial Intermediary Development Indicators

Liquid Liabilities: Liquid liabilities of the financial system (currency + demand & interest-bearing liabilities of banks/nonbank intermediaries) / GDP x 100
- A standard measure of financial depth and overall intermediary size.
- Potential shortcomings in accurately measuring effectiveness in mitigating information asymmetry and easing transaction costs.
**Commercial-Central Bank:**Commercial Bank Assets / (Commercial Bank Assets + Central Bank Assets) x 100
- Measures the degree to which commercial banks allocate savings vs central banks. Banks are better suited to identify profitable investments, manage risk, and mobilize savings.
Private Credit: Value of credits by intermediaries to the private sector/ GDP x 100
- Measures credit issued to the private sector; broader measure than government credit. Higher levels indicate better intermediary financial services.

Descriptive Statistics (1960-1995)

Data summaries show means, medians, maximums, minimums, and standard deviations for liquid liabilities, commercial-central bank indicators, and private credit for various samples across countries.

Histogram of Financial Development and Income Per Capita (1960-1995)

Visualizes financial development across different income groups.
Financial indicators (liquid liabilities, commercial-central bank assets, and private credit) are compared with income per capita levels.

Cross-Country Analysis

Growth = a + βFinance + y(Conditions Set) + ε
- Model explaining real per capita GDP growth based on financial intermediary indicators (liquid liabilities, commercial central bank, private credit).
- Measures the effect of financial variables while considering other conditions (e.g., initial per capita GDP, school attainment).

Endogeneity and Estimators

The choice of instruments and number of these instruments affects the estimations.
Issues of just-identified and overidentified situations.
Descriptions of Ordinary Least Squares and Generalized Method of Moments estimators

GMM

GMM estimators use the analogy principle to estimate parameters based on sample moment conditions.
A classic example is estimating the population mean from sample data. The GMM approach extends this to linear regression models.
GMM estimations are based on conditional moment restrictions, and expectations are replaced with sample averages.

Possible Instruments for Financial Development

Candidates for instruments must be correlated with endogenous regressors, but not the error term or directly influence the growth variable
Variables like religion, latitude, ethnolinguistic fragmentation, wars, soil quality, storms/climate, mortality rates, and legal origin can be instruments for growth.

Religion and Economy

Max Weber (1864-1920): German sociologist studied how religiosity impacts economic outcomes (e.g., Protestant Ethic).
Religious beliefs can encourage work ethics, honesty, thrift, charity, and hospitality, affecting economic incentives.

Distance from Equator

Correlation between distance from the equator and economic growth, potentially due to differing climates, temperatures, and sunlight exposure in Sub-Saharan Africa compared to other regions.
International trade can be impacted by landlocked countries. High crime rates may be correlated with low income.

Low-/High-Income Countries and Distance from the Equator

World map showing countries classified based on income levels (low, lower middle, upper middle, and high income). This is related to geographic location in relation to the equator.

Ethnolinguistic Fragmentation

Ethnic conflict leads to instability and civil war.
Multiple ethnic groups are significantly associated with worse corruption (bureaucrats favor their own group).

Storms and the Impact on GDP

Severe weather events affect current and future GDP.
Some material prices are impacted in the short term but the effect disappears after two years.

Mortality Rate as an Instrument for Current Institutions

European settler mortality rates in colonies are used as an instrument to estimate the impact of institutions on economic performance.
Historical variation in settler mortality rates is used to gauge how these rates reflect institutional variation. High mortality rates influenced extractive institutions during colonization.

Legal Origin

Comparative legal systems are categorized into English, French, German, and Scandinavian systems, stemming from Roman law.
Description of the development and influence of each legal system (e.g., French Civil Code, German Civil Code)
Historical details of the compilation of legal codes.

Harvard Law School and Legal Analysis

Early "economic" analysis of legal systems began at Harvard Law School.
Studies by La Porta, Lopez-de-Silanes, Shleifer, and Vishny (LLSV) exploring the relationship between law and finance, government ownership of banks, and the economic consequences of legal origins.

Legal Origins in LLB Study

LLB use legal origins to instrument endogenous variables (e.g., English, French, and German systems, spread through conquest and imperialism).
Focus on how legal origins influence investor protection, financial development, and behavior of financial intermediaries.
Impact on creditor rights, enforcement, and accounting standards.

Analysis of Enforcement in Italy

Data from Italy on the time it took to recover debts (1992 and 2001).
Information on the effectiveness of the legal system in enforcing contracts, related to financial sector activities.

Bankruptcy Reform Timeline in Italy

A timeline of Italy's bankruptcy reforms (with important events like the Parmalat scandal and reform periods)
Information on the effect of reforms on the time it took to complete bankruptcy procedures.

Duration of Liquidation Procedures

Data (before and after reform), showing the length of liquidation procedures.
Information on potential impact of the legal reforms on efficiency and time required for completion.

Determinants of Financial Intermediary Development

LLB identified additional control variables, and instruments to further study issues of causality and robustness.
Focus on factors like legal systems, corruption, bureaucratic efficiency, property rights, and accounting standards.

Results

Countries with particular legal origins tend to develop specific types of laws, regulations, and enforcement mechanisms.
These create better financial markets since they affect financial intermediary function, information costs, allocation of resources, and growth.
The goal is to find ways to improve financial development and long-run economic growth.

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Description

Dive into the relationship between financial development and economic growth as explored by Stefano Caiazza in 2024-2025. This quiz covers the findings from Levine, Loayza, and Beck (LLB) 2000 study and the implications of financial intermediary development on long-run economic growth.