Panel V: FD =Turn Over Ratio Panel VI: FDEV =Value Traded
V. Conclusion and Policy Implications
Impulse-responses for 1 lag VAR of dtr dy1 dgb dinst
Errors are 5% on each side generated by Monte-Carlo with 500 reps
response of dtr to dtr shock s
response of dtr to dy1 shock s
response of dtr to dgb shock s
response of dtr to dinst shock s
response of dy1 to dtr shocks
(p 5) dtr dtr
(p 95) dtr
0 6
-0.0022 0.0034
response of dy1 to dy1 shocks
(p 5) dy1 dy1
(p 95) dy1
0 6
-0.0000 0.0342
response of dy1 to dgb shocks
(p 5) dgb dgb
(p 95) dgb
0 6
-0.0031 0.0013
response of dy1 to dinst shocks
(p 5) dinst dinst
(p 95) dinst
0 6
-0.0000 0.0054
response of dgb to dtr shocks
(p 5) dtr dtr
(p 95) dtr
0 6
-0.1728 0.2041
response of dgb to dy1 shocks
(p 5) dy1 dy1
(p 95) dy1
0 6
-0.2190 0.2838
response of dgb to dgb shocks
(p 5) dgb dgb
(p 95) dgb
0 6
-0.0636 1.8725
response of dgb to dinst shocks
(p 5) dinst dinst
(p 95) dinst
0 6
-0.1805 0.1064
response of dinst to dtr shocks
(p 5) dtr dtr
(p 95) dtr
0 6
-0.0068 0.0025
response of dinst to dy1 shocks
(p 5) dy1 dy1
(p 95) dy1
0 6
-0.0036 0.0083
response of dinst to dgb shocks
(p 5) dgb dgb
(p 95) dgb
0 6
-0.0064 0.0051
response of dinst to dinst shocks
(p 5) dinst dinst
(p 95) dinst
0 6
-0.0055 0.0640
Impulse-responses for 1 lag VAR of dvt dy1 dgb dinst
Errors are 5% on each side generated by Monte-Carlo with 500 reps
response of dvt to dvt shock s
response of dvt to dy1 shock s
response of dvt to dgb shock s
response of dvt to dinst shock s
response of dy1 to dvt shocks
(p 5) dvt dvt
(p 95) dvt
0 6
-0.0483 0.0281
response of dy1 to dy1 shocks
(p 5) dy1 dy1
(p 95) dy1
0 6
-0.0096 0.0359
response of dy1 to dgb shocks
(p 5) dgb dgb
(p 95) dgb
0 6
-0.0052 0.0019
response of dy1 to dinst shocks
(p 5) dinst dinst
(p 95) dinst
0 6
-0.0027 0.0073
response of dgb to dvt shocks
(p 5) dvt dvt
(p 95) dvt
0 6
-0.2801 0.5908
response of dgb to dy1 shocks
(p 5) dy1 dy1
(p 95) dy1
0 6
-0.3315 0.3119
response of dgb to dgb shocks
(p 5) dgb dgb
(p 95) dgb
0 6
-0.0947 1.9079
response of dgb to dinst shocks
(p 5) dinst dinst
(p 95) dinst
0 6
-0.1973 0.1096
response of dinst to dvt shock s
response of dinst to dy1 shock s
response of dinst to dgb shock s
response of dinst to dinst shock s
30 This paper investigates the relationship between financial development and globalization, incorporating economic growth and institutions using data of 32 countries (developed and developing) over the period of 1989-2012. Panel unit root tests, panel cointegration, panel vector auto regression methodology (PVAR) have been applied for empirical purposes. Our empirical evidence illustrates that there is no cointegration between financial development, globalization, economic growth and institutions, attesting to heterogeneity in the developments of these variables over time across the sample of countries under investigation. Furthermore, financial development has a positive impact on economic growth and economic growth also leads financial development, i.e., financial development and economic growth have complementary relationship that supports their positive effects over time. Financial development affects globalization but globalization impedes financial development. One possible explanation is that globalization may relax constraints on external financing, reducing incentives for financial development. Finally, financial development leads quality institutions because it encourages incentives to mobilize efforts in support of quality of institutions.
From a policy perspective, the general results of the study suggest that policy efforts should be focused on financial sector development; promoting financial integration; minimizing government intervention in financial sector; facilitating the establishment of financial institutions for increasing credit delivery to the private sector; creating the enabling legal environment for the efficient allocation of credit to private sector; creating reforms to strengthen creditors’ rights and strengthening the operation of stock markets. All these factors help financial sector development and enhance the efficiency of resource allocation, enabling a better function of medium and long term finance for investment. Further, to take advantage of the positive
31 interaction between financial development and economic growth, countries should liberalize the economy, enhance quality institutions and reduce impediments to further global integration. In addition, institutional quality is essential to accelerate globalization and financial development, further increasing the premium on financial sector development to that end, policies should aim at offering a better protection of property rights, achieving political stability, reduction in government corruption, strong law enforcement system, better quality of financial information, enhanced supervision of the banking system, more stable macro-economic environment, and sound management of ethnic conflict with a goal to promote globalization and financial development in support of sustained economic growth over time.
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Appendix: List of Countries
Canada Kenya Cyprus Japan
Korea, Rep. Singapore Sweden Switzerland
Trinidad and Tobago United States Saudi Arabia Oman
Italy Germany Argentina Cote d'Ivoire
India Iran, Islamic Rep. Jordan Mauritius
Morocco Nigeria Pakistan Papua New Guinea
Peru Philippines South Africa Sri Lanka
Tunisia Kuwait Tanzania Zimbabwe
Definition of Variables and Data Source
Variables Definition Sources
Private Sector Credit (% of GDP)
Private sector credit refers transfer of financial resources to private sector through loan, purchases of non-equity securities, and trade credits and other accounts receivable, that establish a claim for repayment.
Domestic credit provided by banking sector includes all credit to various sectors on gross basis.
The banking sector include monetary authorities and deposit money bank as well as other banking institutions where data are available.
World Development currency and deposit in the central bank (M0), plus transferable deposit and electronic currency (M1) plus time and savings deposits, foreign currency transferable deposits, certificates of deposit, and securities repurchase agreements (M2), plus
World Development Indicators (WB, CD-ROM,2013)
34 travelers checks, foreign currency time deposits,
commercial paper, and shares of mutual funds or market funds held by residents.
Stock Market Capitalization (%
of GDP)
Stock market capitalization is equal to share price times the number of share outstanding
World Bank
Stock traded refers to the total value of shares traded during the period
World Bank Financial Structure Database (2013) Institutions Civil liberties and political rights indices are used
to measure institutions. Civil liberties index includes freedom of press and speech, self-governing judicial body, freedom of political associations and assembly, and also no restriction on travel inside and outside the country. Political rights index include individual involvement in political process and participation of elected representative in community matters.
Freedom Hause (2013)
Globalization Globalization is a composite index comprisesthree dimensions; economic globalization, political globalization and social globalization
The KOF Index of Globalization (2012)