Credit Market Development Research Articles

Trade liberalization and credit constraints: Why opening up may fail to promote convergence

AbstractThis paper examines credit constraints as one channel held responsible for hampering economic convergence between countries. Specifically, we extend a Melitz and Ottaviano type trade model with variable mark‐ups to allow for endogenous technology adoption. We consider a framework with two countries that potentially differ with respect to credit market development. Firms have the option to adopt a more efficient technology by paying some fixed cost that is more costly to finance for financially constrained firms. We find that technology adoption increases in both countries after trade liberalization but more so in the financially more developed country: the productivity gap widens. Simulations show that the welfare gap widens too. Opening up without sufficient access to external funding thus fails to promote convergence.

Financial market and growth: Evidence from post-reforms India

AbstractA significant boom occurred in the Indian financial market and growth in the post-liberalization era. This motivates us to analyze the impact of stock market and credit market (two components of financial market) for the growth of financial market. This paper attempts to show the linkage between stock and credit markets and their impact on the Indian economy taking the period after post-liberalization. The period of analysis is from 1994 to 2010; we identify the three variables as stationary and find a relationship between the financial market and gross domestic product (GDP) and a long-run effect of lagged differences in credit market on GDP. It has been inferred that stock market development has larger and more significant long-run mutual effects on economic growth than credit market development in India.

The effects of financial deepening on income inequality based on grey incidence analysis

Purpose – The purpose of this paper is to clarify the relationship between income inequality and financial deepening. The majority of theoretical studies on the relationship between them argue that financial deepening has a positive effect on the income inequality. This paper aims to study the case of China, and explores whether the effects of financial deepening on income inequality varies between urban residents and rural residents. Design/methodology/approach – Using the grey incidence analysis, this paper first calculates the degree of grey incidence between dependent variables, i.e. per capita disposable income of urban residents, per capita net income of rural residents and overall Theil Inequality Index for China, and independent variables, depth of credit, depth of direct financing and depth of insurance. Next, multiple non-linear regression is introduced to build the model. With the method of unit root test and co-integration test, some equations are given to show the clear relationship among the variables. Findings – The empirical results indicate that the development of credit market does not have a strong relationship both with the growth of income and income inequality. While the development of both the direct financing market and the insurance market is closely related to the growth of income and income inequality. Originality/value – The results of this paper suggest that the protection of the rights and interests of medium-sized investors is the key for the capital market. Meanwhile, the insurance market should be encouraged to expand in both breadth and depth, which helps to take full advantage of its functions. As for the credit market, more resources should be allocated to those who need them most the small- and medium-sized enterprises, which will contribute to the growth of the income for the majority and narrowing the income gap.

Finance and employment: Evidence from U.S. banking reforms

Economic theory offers competing hypotheses about how the cost and availability of finance influence labor market outcomes. Making use of the U.S. banking reforms between the 1970s and the 1990s as a quasi-natural experiment, this paper studies the impact of credit market development on employment. This paper documents the significant effects of these reforms on employment growth. Potential channels between finance and employment are also investigated. Changes in the growth of the number of self-employed individuals, the entry and exit of firms, and investment growth do not explain most of the employment growth following the reforms. The reforms had a substantially higher impact in industries with higher labor intensity, which is consistent with the idea that labor has fixed costs that need to be financed.

The Credit–Growth Nexus: New Evidence from Developing and Developed Countries

The purpose of this paper is to assess the relationship between credit market development and economic growth for a heterogeneous panel of 20 developing and developed countries with varied growth experiences. The empirical study is based on estimations of generalized method of moments (GMM) and pooled mean group (PMG) on heterogeneous panel data model. Difference GMM estimation indicates that credit market development has a negative effect on economic growth. This result is robust for our full sample and for the subsample of non‐OECD countries, but not for the subsample of OECD countries. However, using a PMG model, we provide evidence of a positive impact in the long run between credit market development and economic growth. When considering heterogeneity in the short‐run relationship across countries, our findings suggest that the credit–growth relationship is specific across countries, depending on each country‐specific legal and macroeconomic environment.

Credit Market Development and Investment Efficiency in Nigeria

Stock markets provide important source of investment capital at relatively low cost. A wellfunctioning and liquid stock market helps investors to reduce unsystematic risk and increase the marginal productivity of capital. Developed credit market improves the efficiency of investments and resource use thereby contributing to higher economic growth and development of a nation. Unfortunately foreign private inflows in Nigeria are direct contributions by large parent-multi-national to their subsidiaries that dominate the oil and communication industries. Thus, institutional investors in Nigeria suffer dearth of investible surpluses characterized by inefficient investment and consequently is unable to match her huge export earnings with appreciable level of development. Investment efficiency is necessary for resources to be channeled to core growth activities of the private sector. This paper therefore examines the relationship between credit market development and investment efficiency in Nigeria using standard econometric methods of error correction mechanism. The results show at 5% level of significance that there is inverse and significant relationship between investment efficiency and interest rate in agreement with Keynesian theory of investment and provide evidence for the existence of a negative relationship between investment efficiency and trade openness to credit market development in Nigeria. It is recommended that interest rate management be used to promote investment efficiency, motivate savings and provide credits for investors at a competitive price. Perhaps a re-emphasis on use of cost and social benefit analyses for evaluation of investment will not be out of place. Review Article British Journal of Economics, Management & Trade, 4(7): 1033-1045, 2014 1034

Credit Market and Economic Development in Nigeria

A developed and efficient credit market encourages savings, allocative efficiency of investible funds and promotion of capital accumulation. Countries with deeper credit market face less severe business cycle, output contraction and lower chances of an economic downturn. This will directly or indirectly boost private investment behavior in the economy. However, in Nigeria the objective of improving the level of economic development through the credit market is yet to be achieved. This may be attributed to inability of the investors to channel credit market investible funds to projects that are productive. This study therefore, examines the relationship between credit market and economic development in Nigeria using data between 1970 and 2012. A standard econometric method of error correction mechanism was adopted. Though the result shows a direct and positive relationship credit market and economic development in Nigeria, the effect of the return on investment to economic development is adverse against the Keynesian theory of investment. It is therefore, recommended that investible funds from the credit market should be restricted to viable investments.

Credit Markets Development and Economic Growth: Theory and Evidence

The purpose of this paper is to study jointly the effects of consumer credit market and investment credit market on economic growth. We introduce consumer credit market in Schumpeterian framework. Under credit market imperfections, our model predicts a negative effect of the development of consumer credit market and a positive effect of the development of investment credit market on economic growth. We next confront the model on a panel of 27 European’s countries over the period 1995-2012. Using GMM dynamic panel data estimation, empirical results confirm our theoretical predictions. Credit composition may give explanation of the ambiguous credit-growth nexus and its heterogeneity across country.

Development and Sustainability Risks of Lithuanian Consumer Credit Market

In the paper dynamics of consumer credit market development in Lithuania is being analyzed during the period from 2004 to 2012. Growth of market volume has been analyzed in correlation with macroeconomic indexes of the country as well as earnings of households and the regulations set by the state. Special attention was paid to some aspects, which might cause sustainability problems of this market. Based on uniform approach applied the credit portfolio of households in various credit institutions has been analyzed in detail as well as the dynamics of bad loans. Some predictions and warnings related to potential sustainability threats have been formulated.

The effect of enterprise and household credit on economic growth: New evidence from European union countries

Theories predict a positive effect of enterprise credit market development on economic growth and an ambiguous relationship between household credit market and growth. The purpose of this paper is to assess empirically the effects of enterprise credit market and household credit market on economic growth. The empirical study is based on estimations of OLS and IV regression and GMM dynamic panel data model. Using a sample of 27 European’s countries over the period 1995–2012, empirical results shows that enterprise credit market affects positively economic growth whereas household credit market has a negative effect. Our finding gives an explanation of the negative effect of aggregate credit measures on economic growth in empirical literature as well as the heterogeneity of the credit-growth across country.

Financial Development and Economic Growth: A Revised Empirical Study for Ireland

1. Introduction The issue of causal relationship between financial development and economic growth has been an intensive subject of interest for many theoretical and empirical studies (Thalassinos and Kiriazidis, 2003; Thalassinos and Pociovalisteanu, 2007). The main objective of this study is to investigate the causal relationship between economic growth and financial development taking into account the positive effect of industrial production index. Ireland consists one of the most important developed countries of European Union characterized by a high rate of economic growth, a constant monetary and fiscal economic policy and very low inflation and unemployment rates, and a healthy and competitive economy. The negative effects of financial crisis are obvious in an unstable world financial system, which is mainly characterized by an economic instability, while a possible increase of credit risk causes a highly banking uncertainty (Thalassinos et al., 2010). The remainder of the paper proceeds as follows: Initially the data and the specification of the multivariate VAR model are described. For this purpose stationarity test and Johansen cointegration analysis are examined taking into account the estimation of vector error correction model. Finally, Granger causality test is applied in order to find the direction of causality between the examined variables of the estimated model. The empirical results are presented analytically and some discussion issues resulted from this empirical study are developed shortly, while the final conclusions are summarized relatively. 2. Data and Methodology In this study the method of vector autoregressive model (VAR) is adopted to estimate the effects of stock and credit market development on economic growth through the effect of industrial production. The use of this methodology predicts the cumulative effects taking into account the dynamic response among economic growth and the other examined variables Pereira and Hu (2000). In order to test the causal relationships, the following multivariate model is to be estimated [GDP.sub.t] = f([SM.sub.t], [BC.sub.t], [IND.sub.t]) (1) Where: [GDP.sub.t] is the gross domestic product, [SM.sub.t] is the general stock market index, [BC.sub.t] are the domestic bank credits to private sector, [IND.sub.t] is the industrial production index. Relating to the econometric analysis this paper is based on the empirical studies of Chang (2002), Chang and Caudill (2005), Shan (2005), Vazakidis (2006), Vazakidis and Adamopoulos 2009a,b,c). Therefore, this empirical study based on the previous published version on 2010 tries to fill some possible theoretical and empirical gaps estimating a larger data sample taking into account the negative effects of financial crisis the last years. The used data are annual covering the period 1965-2011 for Ireland, regarding 2005 as a base year. All time series data are expressed in their levels and are obtained from International Financial Statistics, (International Monetary Fund, 2012). The selected linear model has better statistical estimations than a logarithmic one. The tested results of the logarithmic model proved to be statistical inferior. Unit root tests: Augmented Dickey-Fuller (ADF) test involves the estimation one of the following equations respectively, Seddighi et al (2000): [[DELTA]X.sub.t] = [[delta]X.sub.t-1] + [p.summation over (j=1)] [[delta].sub.j][[DELTA]X.sub.t-j] + [[epsilon].sub.t] (2) [[DELTA]X.sub.t] = [[alpha].sub.0] + [[delta]X.sub.t-1] + [p.summation over (j=1)] [[delta].sub.j][[DELTA]X.sub.t-j] + [[epsilon].sub.t] (3) [[DELTA]X.sub.t] = [[alpha].sub.0] + [[alpha].sub.1]t + [[delta]X.sub.t-1] + [p.summation over (j=1)] [[delta].sub.j][[DELTA]X.sub.t-j] + [[epsilon].sub.t] (3) If the calculated ADF statistic is higher than McKinnon's critical values, then the null hypothesis ([H. …

Law, Stock Markets, and Innovation

ABSTRACTWe study a broad sample of firms across 32 countries and find that strong shareholder protections and better access to stock market financing lead to substantially higher long‐run rates of R&D investment, particularly in small firms, but are unimportant for fixed capital investment. Credit market development has a modest impact on fixed investment but no impact on R&D. These findings connect law and stock markets with innovative activities key to economic growth, and show that legal rules and financial developments affecting the availability of external equity financing are particularly important for risky, intangible investments not easily financed with debt.

A NOTE ON CREDIT MARKET DEVELOPMENT AND HUMAN CAPITAL ACCUMULATION

This paper explores the interplay between credit market development and human capital accumulation in a two-period overlapping-generations economy with asymmetric information under the assumption that young lenders channel credits to young borrowers and acquire education. We find that, at the self-selection equilibrium, lenders will allocate more time to acquire education if the cost of screening borrowers falls. Furthermore, a longer duration of lenders' schooling time suppresses borrowers' incentive to cheat thereby enabling lenders to screen less frequently. Our preliminary cross-country empirical analysis appears to support these findings.

BANKING INDUSTRY CONCENTRATION AND NET INTEREST MARGINS (NIMS) IN PAKISTAN

This paper uses bank level data of 26 commercial banks for the period 2001–2010 to explore determinants of net interest margins of commercial banks of Pakistan. Based on results of this study, past net interest margins, bank soundness, operating cost, industry concentration, relative market share, inflation, real depreciation and industrial growth have statistically significant and positive impact while diversification, change in bank size, lagged liquidity, stock market development have dampening effects on net interest margins. However, impact of ownership, GDP and credit market development is statistically insignificant. Our regression results suggest that stock market development as means of alternative source of finance contributes to reduction in net interest margins while the impact of banking sector development on breaking banking cartels and bringing net interest margins down had been insignificant. Exchange rate adjustments, rate of inflation and growth of the industry also cannot be ignored in management of net interest margins. Incentives for bank executives and managers to ensure efficiency in operating costs, reduction in the premium charged for bank soundness, diversification of bank activities and passing on the scale efficiencies to both depositors and borrowers can also play role to bring interest margins down to accelerate investment and growth in the country.

Banking Sector Credit Development and Investment Productivity in Nigeria

In Nigeria, commercial bank credit represent almost 90 percent of the financial system assets and about two-thirds of the total credit is allocated to the private sector. Financing of investments through the credit market system portends that investments are associated with a level of productivity. Thus a developed credit market that efficiently utilizes its resources will contribute optimally to economic development. One will expect that increased earnings will lead to increased availability of credits and therefore a better developed credit market but our experience is to the contrary. In contrast, it is difficult to explain the low rate of development registered in most African countries including Nigeria in comparison to the quantum of export earnings they receive. In particular, Nigeria earned enormous revenue from crude petroleum export during oil boom years yet development in Nigeria crawls. This study therefore examined the relationship between credit market development as measured by bank sector credit ratio to GDP and investment productivity, measured as ratio of GDP to Gross Domestic Investment, GDI in Nigeria using data from 1970-2010 and standard econometric method of error correction mechanism. We observed that the improvement in the banking sector reforms ranging from structural adjustment programme (SAP) to the present consolidation era has not been translated to credit market development. This is attributed to inefficient utilization of credit market funds which results in low level of per capita income, low level of investment and ultimately poorly developed banking credit market in Nigeria. Based on the findings of the study, the following policy implications can be drawn: increase in deposit rate will encourage savings, promote credit market development and increase investment. Similarly; a reduction in lending rate will encourage borrowing for capital project financing that will lead to increased investment productivity, increased output, better use of the bank credit market and hence a better developed credit market. Through this, development in the credit market can contribute significantly to economic development via investment productivity. There is the need to increase per capita income through encouraged participation in credit market investment. Thus returns on investment in the credit market should be improved. At present people prefer to spend their money on consumption goods because of the discouraging low deposit rate in the banks. Improved deposit rate will definitely improve investment productivity and economic development through the multiplier process. Foreign direct investment was found to encourage investment productivity; policy should be geared towards attracting more FDI in Nigeria.

Job Growth and Finance: Are Some Financial Institutions Better Suited to the Early Stages of Development than Others?1

Evidence based on firm-level data from 89 countries with updated country-level data on financial structure suggests that in low-income countries, labor growth is more rapid in countries with a higher level of private credit/GDP. This positive relationship with private credit is especially pronounced in industries that depend heavily on external finance. The results, which are robust to multiple estimation approaches, are consistent with the predictions of new structural economics. In high-income countries, labor growth rates increase with the level of stock market capitalization, consistent with predictions from new structural economics. However, the association disappears when stock market development is treated as an endogenous explanatory variable using instrumental variable regressions. There is no evidence that small-scale firms in low-income countries benefit the most from the development of the private credit market. Rather, the labor growth rates of larger firms increase to a greater extent than others with the level of private credit market development, a finding consistent with the perspective from historical political economy that banking systems in low-income countries serve the interests of the elite rather than providing broad-based access to financial services.

Credit Market Development and Economic Growth an Empirical Analysis for United Kingdom

Problem statement: This study investigated the causal relationship between credit market development and economic growth for UK for the period 1975-2007 using a Vector Error Correction Model (VECM). Questions were raised whether economic growth spurs credit market development taking into account the negative effect of inflation rate on credit market development. This study aimed to investigate the short-run and the long-run relationship between bank lending, gross domestic product and inflation rate applying the Johansen cointegration analysis. Approach: To achieve this objective classical and panel unit root tests were carried out for all time series data in their levels and their first differences. Johansen cointegration analysis was applied to examine whether the variables are cointegrated of the same order taking into account the maximum eigenvalues and trace statistics tests. Finally, a vector error correction model was selected to investigate the long-run relationship between economic growth and credit market development. Results: A short-run increase of economic growth per 1% induces an increase of bank lending 0.006%, while an increase of inflation rate per 1% induces a relative decrease of bank lending per 1.05% in UK. The estimated coefficient of error correction term is statistically significant and has a negative sign, which confirms that there is not any problem in the long-run equilibrium between the examined variables. Conclusion: The empirical results indicated that there is a unidirectional causal relationship between economic growth and credit market development with direction from economic growth to credit market development and a bilateral causality between inflation and credit market development for United Kingdom. Bank development is determined by the size of bank lending directed to private sector at times of low inflation rates leading to higher economic growth rates.

Finance as a Barrier to Employment: Evidence from U.S. Banking Deregulation

Economic theory offers competing hypotheses about how the cost and availability of finance influence labor market outcomes. Making use of the U.S. banking reforms between the 1970s and the 1990s as a quasi-natural experiment, this paper studies the impact of credit market development on employment. This paper documents the significant effects of these reforms on employment growth. Potential channels between finance and employment are also investigated. Changes in the growth of the number of self-employed individuals, the entry and exit of firms, and investment growth do not explain most of the employment growth following the reforms. The reforms had a substantially higher impact in industries with higher labor intensity, which is consistent with the idea that labor has fixed costs that need to be financed.

The politics of financial development: The role of interest groups and government capabilities

Although financial development is good for long-term growth, not all countries pursue policies that render full financial development. This paper builds on an extensive political economy literature to construct a theoretical model showing that the intensity of opposition to financial development by incumbents depends on both their degree of credit dependency and the role of governments in credit markets. Empirical evidence for this claim is provided, and the results suggest that lower opposition to financial development leads to an effective increase in credit markets’ development only in those countries that have high government capabilities. Moreover, improvements in government capabilities have a significant impact on credit market development only in those countries where credit dependency is high (thus, opposition is low). This paper therefore contributes to this rich literature by providing a unified account of credit market development that includes two of its main determinants, traditionally considered in isolation.

TRENDS IN THE DEVELOPMENT OF THE MARKET OF INSURANCE OF MORTGAGING PROPERTY IN THE RUSSIAN FEDERATION

The requirement for insurance protection of property interests of borrowers increases with the development of the credit market. The observed recovery in the credit market was reflected in the market of mortgage insurance. The article considers the key trends, directions and actual problems of the development of the market of insurance of mortgaging property in the postcrisis economy of the Russian Federation.