Financial Intermediary Development Research Articles

Money, Liquidity and Welfare

This paper develops an analytically tractable Bewley model of money demand to shed light on some important questions in monetary theory, such as the welfare cost of inflation. It is shown that when money is a vital form of liquidity to meet uncertain consumption needs, the welfare costs of inflation can be extremely large. With log utility and parameter values that best match both the aggregate money demand curve suggested by Lucas (2000) and the variance of household consumption, agents in our model are willing to reduce consumption by 3% ~ 4% to avoid 10% annual inflation. The astonishingly large welfare costs of inflation arise because inflation increases consumption risk by eroding the buffer-stock-insurance value of money, thus hindering consumption smoothing at the household level. Such an inflation-induced increase in consumption risk at the micro level cannot be captured by representative-agent models or the Bailey triangle. Although the development of financial intermediation can mitigate the problem, with realistic credit limits the welfare loss of moderate inflation still remains several times larger than estimations based on the Bailey triangle. Our findings provide not only a justification for adopting a low inflation target by central banks, but also a plausible explanation for the robust positive relationship between moderate inflation and social unrest in developing countries where money is the major form of household financial wealth.

Real and monetary policy convergence: EMU crisis to the CFA zone

PurposeA major lesson of the European Monetary Union (EMU) crisis is that serious disequilibria result from regional monetary arrangements not designed to be robust to a variety of shocks. The purpose of this paper is to assess these disequilibria within the Economic and Monetary Community of Central Africa (CEMAC), West African Economic and Monetary Union (UEMOA) and Financial Community of Africa (CFA) zones.Design/methodology/approachIn the assessments, monetary policy targets inflation and financial dynamics of depth, efficiency, activity and size while real sector policy targets economic performance in terms of GDP growth. The author also provides the speed of convergence and time required to achieve a 100 percent convergence.FindingsBut for financial intermediary size within the CFA zone, findings, for the most part, support only unconditional convergence. There is no form of convergence within the CEMAC zone.Practical implicationsThe broad insignificance of conditional convergence results has substantial policy implications. Monetary and real policies, which are often homogenous for member states, are thwarted by heterogeneous structural and institutional characteristics, which give rise to different levels and patterns of financial intermediary development. Therefore, member states should work towards harmonizing cross‐country differences in structural and institutional characteristics that hamper the effectiveness of monetary policies.Originality/valueThe paper provides warning signs to the CFA zone in the heat of the Euro zone crises.

Firm Investment, Liquidity, and Bank Health: A Panel Study of Asian Firms in the 2000s

The purpose of this study is to investigate how firms responded to the deterioration of bank health during the financially turbulent periods in the 2000s in making investment decisions and in meeting demand for liquidity. A rise in uncertainty regarding the ability to obtain external funds may have induced firms to rely on internal funds to finance investment activities. Therefore, we shed light on the cash flow sensitivity of investment and cash holdings by estimating firmlevel investment and cash holdings equations using panel data for Asian firms in the 2000s. Our sample firms are from countries at different stages of financial development. The sample enables us to analyze the different roles played by internal funds in the financial and investment policy of firms in a financialenvironment with different stages of development. We find that the cash flow sensitivity of investment and cash holdings rises as bank health deteriorates. Moreover, the impact of non-performing loans on the cash flow sensitivity of investment and cash holdings is more prevalent across firms, irrespective of firm age, in countries with a higher level of financial intermediary development. Our findings suggest that as financial intermediaries develop, firms become more dependent on bank credit so that bank-dependent firms are more vulnerable to external shocks that hit the financial system. Therefore, when bank health is impaired, bank-dependent firms increase their reliance on internal funds and raise their propensity to save cash flow to materialize potentially profitable investment opportunities in the future.

Enhancing Financial Deepening as a Factor of Reducing the Inflationary Pressure in Post-Soviet Economies

The article considers the issues of inflationary monetization in post-soviet countries and how the deepening of financial intermediation could overcome this. It analyses the current situation of financial intermediation in mentioned countries and finds the institutional obstacles for its further development taking into account the consequences of recent global financial crisis. This implies the reconsideration of some basic concepts of financial intermediation development in post-soviet countries and the model of its regulation and supervision as well.

A Critical Appraisal of India and Pakistan’s Monetary Policy

Monetary Policy is the process by which the central bank of a country controls the supply, availability and cost of money. It is often contrasted with fiscal policy, which is associated with changes in government expenditure and taxation. In the context of Pakistan and India, the central banks of both the countries, i.e. Reserve Bank of India (RBI) and State Bank of Pakistan (SBP) are empowered to conduct and implement monetary policy of their respective countries. The central banks use various instruments of Monetary Policy like Open Market Operations, Bank Rate Policy, Variation in Reserve Ratios and other credit controls to achieve economic stability.In the backdrop of severe energy shortages and dismal law and order conditions, Pakistan’s economy is currently facing persistence of double digit inflation, falling private investment, low growth, and rising total debt. The Indian economy has oriented itself towards market forces, with a healthy rate of GDP growth and a modest rate of inflation. The SBP, dominated by the Ministry of Finance, has pursued a tight monetary policy with ad-hoc and frequent corrective changes in policy instruments. This, coupled with an expansionary fiscal policy has diluted the impact if tight monetary policy. Private consumption has grown faster than economy itself. The policy has failed to curb inflation and resulted in collapse of investment and economic growth leading to unemployment and poverty. It has also worsened the country’s fiscal balance with increased domestic borrowing. In contrast to this ‘knee-jerk’ approach, the RBI has pursued a more ‘gradual’ monetary policy approach.Policymakers in India had been engaged in the development of sound and efficient financial intermediaries and markets. The adoption of an augmented multiple indicators approach, combined with sound fiscal, administrative policies have resulted in success. Learning from the Indian experience, instead of tightening monetary policy, the Government of Pakistan needs to address supply-side causes of inflation. There is a need for restricting government borrowing from SBP, increasing financial depth and ensuring quality and timely assimilation of economic data followed by a well coordinated policy response by the stakeholders to changing macroeconomic conditions.

New Indicators for the Mobile Banking Nexus

Purpose: We make available new critical macroeconomic financial indicators to the research community. Nothing is more powerful than a phenomenon whose time has come. What is the macroeconomic empirical context of growing mobile banking? Perhaps one of the deepest empirical hollows in the financial development literature has been the equation of financial depth in the perspective of money supply to liquid liabilities. This equation has put on the margin, a burgeoning phenomenon whose time has come: mobile banking. Design/Methodology: We decompose financial depth into formal, semi-formal and informal sectors and then assess the incidence of mobile banking on each constituent. Thus the IFS (2008) definition of the financial system is extended to incorporate an informal financial sector in line with Asongu(2011). Three hypotheses based on eight propositions are tested using a plethora of endogeneity-robust and HAC standard errors estimation techniques. Findings: The informal financial sector (a previously missing component in the definition of money supply: M2) is positively affected by mobile banking, while the incidence of mobile banking is negative on formal and semi-formal financial intermediary development. The paper contributes at the same time to the macroeconomic literature on measuring financial development and responds to the growing field of economic development by means of informal financial sector promotion, microfinance and mobile banking. It suggests a practicable way to disentangle the effects of mobile banking on various financial sectors. Research implications: Since empirical research on the phenomenon has been hampered by lack of data, we make available macroeconomic financial indicators to the research community. The present paper is also in response to the numerous calls on the research gap in the literature that emphasize the need for research on mobile banking. The mobile-finance nexus is gaining momentum, yet relatively little scholarly research explores the incidence of these m-banking/m-payment (systems) on financial development. Practical implications: (1) There is a burgeoning role of informal finance in developing countries. (2) The incidence of the growing phenomenon of mobile banking cannot be effectively assessed at a macroeconomic level by traditional financial development indicators. (3) It is a wake-up call for scholarly research on informal financial intermediary development indicators which will guide monetary policy; since a great chunk of the monetary base (M0) in less developed countries is now captured by mobile banking. Originality/value: New financial indicators for mobile banking assessment based on insufficiencies in the financial development literature: liquid liabilities as applied to developing countries is misleading because a great chunk of the monetary base does not transit through the banking system but via informal networks like the growing phenomenon of mobile banking.

Are Proposed African Monetary Unions Optimal Currency Areas? Real, Monetary and Fiscal Policy Convergence Analysis

Purpose – A spectre is hunting embryonic African monetary zones: the EMU crisis. This paper assesses real, monetary and fiscal policy convergence within the proposed WAM and EAM zones. The introduction of common currencies in West and East Africa is facing stiff challenges in the timing of monetary convergence, the imperative of central bankers to apply common modeling and forecasting methods of monetary policy transmission, as well as the requirements of common structural and institutional characteristics among candidate states.Design/Methodology/Approach – In the analysis: monetary policy targets inflation and financial dynamics of depth, efficiency, activity and size; real sector policy targets economic performance in terms of GDP growth at macro and micro levels; while, fiscal policy targets debt-to-GDP and deficit-to-GDP ratios. A dynamic panel GMM estimation with data from different non-overlapping intervals is employed. The implied rate of convergence and the time required to achieve full (100%) convergence are then computed from the estimations. Findings – Findings suggest overwhelming lack of convergence: (1) initial conditions for financial development are different across countries; (2) fundamental characteristics as common monetary policy initiatives and IMF backed financial reform programs are implemented differently across countries; (3) there is remarkable evidence of cross-country variations in structural characteristics of macroeconomic performance; (4) institutional cross-country differences could also be responsible for the deficiency in convergence within the potential monetary zones; (5) absence of fiscal policy convergence and no potential for eliminating idiosyncratic fiscal shocks due to business cycle incoherence.Practical Implications – As a policy implication, heterogeneous structural and institutional characteristics across countries are giving rise to different levels and patterns of financial intermediary development. Thus, member states should work towards harmonizing cross-country differences in structural and institutional characteristics that hamper the effectiveness of convergence in monetary, real and fiscal policies. This could be done by stringently monitoring the implementation of existing common initiatives and/or the adoption of new reforms programs. Originality/Value – It is one of the few attempts to investigate the issue of convergence within the proposed WAM and EAM unions.

Real and Monetary Policy Convergence: EMU Crisis to the CFA Zone

Purpose – A major lesson of the EMU crisis is that serious disequilibria result from regional monetary arrangements not designed to be robust to a variety of shocks. The purpose of this paper is to assess these disequilibria within the CEMAC, UEMOA and CFA zones.Design/methodology/approach – In the assessments, monetary policy targets inflation and financial dynamics of depth, efficiency, activity and size while real sector policy targets economic performance in terms of GDP growth. We also provide the speed of convergence and time required to achieve a 100% convergence.Findings – But for financial intermediary size within the CFA zone, findings for the most part support only unconditional convergence. There is no form of convergence within the CEMAC zone.Practical implications – The broad insignificance of conditional convergence results have substantial policy implications. Monetary and real policies which are often homogenous for member states are thwarted by heterogeneous structural and institutional characteristics which give rise to different levels and patterns of financial intermediary development. Therefore member states should work towards harmonizing cross-country differences in structural and institutional characteristics that hamper the effectiveness of monetary policies.Originality/value – The paper provides warning signs to the CFA zone in the heat of the Euro zone crises.

Can Dynamic Panel Data Explain the Finance-Growth Link? An Empirical Likelihood Approach

The short run effect of the financial intermediary development on economic growth is analyzed using an unbalanced panel of 77 countries covering 35 years. Empirical Likelihood (EL) estimation is used and compared to more conventional GMM methods that weight moment conditions equally over the sample. However, if a part of the data is associated with only weak instruments, GMM estimators are subject to considerable small sample bias. EL appropriately re-weights the moment restrictions to deal with that problem. Using EL, we obtain more robust estimates of the effect of financial intermediation on economic growth than GMM.

The effectiveness of corporate governance policy in Greece

PurposeThe effectiveness of corporate governance enforcement is a complex issue requiring the understanding of the role of institutional factors. The latter may or may not converge towards best practices, depending upon the extent to which history and politics matter more than purely economic or efficiency‐related considerations for convergence. The appropriateness and effectiveness of corporate governance enforcement mechanisms differ among market economies and cannot be attributed to one single factor nor does any such factor have the same significance in all countries as it depends on the relative state of development of financial intermediation. This paper aims to address these issues.Design/methodology/approachA critique is launched on the hypothesis of legal conformity used to explain the deviation of corporate governance practices and enforcement efficiency from is considered as best practice. The critique follows an historical development approach and is substantiated with some new empirical evidence of ownership structures and market views.FindingsEmpirical evidence on ownership structures and on the market views regarding the effectiveness of corporate governance legislation shows that for an understanding of the relationship between financial intermediation and corporate governance broader institutional influences must be taken into consideration.Research limitations/implicationsThe analysis of empirical evidence needs detailed expansion and proper association with institutional elements to provide a more comprehensive understanding of corporate governance enforcement efficiency.Practical implicationsThe exercise of corporate governance enforcement is an interactive process that goes beyond the role of legal rules and must combine an optimal set of private and public mechanisms properly tailored to each corporate governance regime.Originality/valueNew empirical evidence is provided on ownership structures and on the market view regarding the effectiveness of corporate governance legislation and a broader account is provided on institutional setting for understanding corporate governance policy.

Financial Intermediation Development and Total Factor Productivity Growth: Evidence from Chinese Mainland Provincial Panel Data

Modern financial development theories suggest that, financial development can promote technological progress and long-term economic growth. Based on the Chinese mainland provincial panel data, the paper tests empirically the relationship between financial intermediation development and total factor productivity growth. In terms of the degree-of-freedom of bank loan decision-making, the ratio of loans of private enterprises and individuals to total loans is used to measure the development of Chinese financial intermediation. This paper finds that financial intermediation development significantly promotes total factor productivity growth when controlling for other variables, such as capital formation rate, foreign direct investment, government intervention and the urbanization level.

Financial liberalization, financial development and growth linkages in Sub‐Saharan African countries

PurposeThe purpose of this paper is to use the recent development in unit root tests and cointegration as applied to panel data and dynamic time series, to estimate the relationship between financial liberalization, financial development and growth.Design/methodology/approachThe paper assesses the dynamics of the relationship between financial development, financial liberalization and growth using the latest dynamic panel data framework and time series analyses comprising up to 15 Sub‐Saharan African countries with annual observations over the period of 1976‐2005. The research uses various measures of, or proxies for, financial intermediary development, including ratio of private sector credit and share of domestic credit to income.FindingsThe results obtained from a heterogenous panel investigation and time series methodology such as Granger causality, indicate a long‐run equilibrium relationship between financial development and economic growth. This is consistent with the view that financial development can act as an “engine of growth” and plays a crucial role in the process of economic development. However, there is little evidence to support the hypothesis that financial liberalization directly “leads” growth.Originality/valueGroup mean panel fully modified ordinary least squares (FMOLS) and country‐by‐country time series investigations show evidence of causality running from financial development to growth. The analysis yielded limited evidence of financial liberalization Granger‐causing economic growth. However, this is not to say that financial liberalization does not promote growth, as it could do so indirectly through fostering financial development.

Financial Intermediation Development and Economic Growth: Does the Chinese Counterexample Exist?

AbstractIn terms of the degree‐of‐freedom of bank loan decision‐making, the ratio of loans of private enterprises and individuals to total loans is used to measure the development of China's financial intermediation. Applying generalized method of moments estimation developed for dynamic panel data models, the present paper finds that the effect of financial intermediation development on economic growth is positive and statistically significant when controlling for other variables, such as human capital, foreign direct investment, securitization and foreign trade. The empirical results indicate that the concept of the so‐called Chinese counterexample in financial development is questionable. Financial system reforms, including encouraging banks to operate independently, reducing or eliminating mandatory loans, and making financial decision‐making more market‐oriented, are important for China's economic growth.

FINANCIAL DEVELOPMENT ON GROWTH CONVERGENCE

This paper investigates whether the impacts of financial development on growth convergence vary with the stage of real development. We implement this analysis through the instrumental variable threshold regression approach proposed by Caner and Hansen. Our empirical evidence shows that financial intermediary development leads to long-run convergence in growth of both economic activity and productivity. Moreover, such convergence-enhancing effects of financial intermediation are stronger for less-developed countries than for the more industrialized. In addition, the data reveal that stock market development assists growth convergence only in low-income countries.

Financial intermediation and macroeconomic efficiency

This article evaluates whether financial intermediary development explains cross-country differences in macroeconomic efficiency. Stochastic frontier approach is applied at the aggregate level to estimate efficiency on a panel of 41 countries for the period 1991 to 1995. Generalized Method of Moments (GMM) dynamic panel techniques are then adopted to control for potential endogeneity of the regressors. We find evidence of a positive role of financial intermediary development on efficiency, with differences in terms of robustness according to the measure of financial intermediary development.

Finance and Income Inequality: Test of Alternative Theories

Although theoretical models make distinct predictions about the relation between finance and income inequality, little empirical research has been conducted to compare their relative explanatory power. We examine the relation between financial intermediary development and income inequality in a panel data set of 91 countries for the period of 1960-95. Our results provide reasonably strong evidence that inequality decreases as economies develop their financial intermediaries, consistent with Galor and Zeira (1993) and Banerjee and Newman (1993). Moreover, consistent with the insight of Kuznets, the relation between the Gini coefficient and financial intermediary development depends on the sectoral structure of the economy: a larger modern sector is associated with a smaller drop in the Gini coefficient for the same level of financial intermediary development. However, there is no evidence of an inverted-U shaped relation between financial sector development and income inequality, as suggested by Greenwood and Jovanovic (1990). The results are robust to controlling for biases introduced by simultaneity.

Development of Financial Intermediation and the Dynamics of Urban–Rural Disparity in China, 1978–1998

Chen Y. P., Liu M. and Zhang Q. Development of financial intermediation and the dynamics of urban–rural disparity in China, 1978–1998, Regional Studies. This paper focuses on the impacts of financial intermediation development on the urban–rural income disparity (URID) in China. Using a twenty-year province-level panel data set from 1978 to 1998, it is found that the change of URID may be explained by fiscal policy during the early reform period (1978–1989) and financial intermediates during the later reform period (1990–1998). In addition, it is shown that the direction the Kuznets effect, an inverted ‘U’-shaped relationship between per-capita gross domestic product and URID, is sensitive to changes in government development policies. This study adds to the spatial economic inequality literature by clarifying the effects of urban-biased financial intermediation policy on the underlying dynamics of convergent and divergent effects on urban–rural inequality. Chen Y. P., Liu M. et Zhang Q. Le développement de l'intermédiation financière et la dynamique des écarts des revenus urbano-ruraux en Chine entre 1978 et 1998, Regional Studies. Cet article porte sur l'impact du développement de l'intermédiation financière sur l'URID (Urban–Rural Income Disparity – les écarts des revenus urbano-ruraux) en Chine. A partir d'une enquête à échantillon constant auprès des provinces et conduite sur une période de vingt années, à savoir de 1978 jusqu'à 1998, il s'avère que le changement de l'URID pourrait s'expliquer par la politique fiscale menée pendant la première période de réforme (entre 1978 et 1989) et par les intermédiaires financiers pendant la dernière période de réforme (entre 1990 et 1998). Qui plus est, on montre que le chemin de l'effet Kuznets, un rapport en forme de U renversée entre le PIB par tête et l'URID, est sensible aux modifications de la politique de développement du gouvernement. Cette étude cherche à contribuer à la documentation au sujet des inégalités économiques géographiques en éclaircissant l'impact des politiques en faveur du développement de l'intermédiation financière au niveau urbain sur la dynamique sous-jacente des effets de convergence et de divergence sur l'inégalité urbano-rurale. Intermédiaires financiers Inégalité urbano-rurale Effet Kuznets Politique de développement Chine Chen Y. P., Liu M. und Zhang Q. Entwicklung eines Finanzausgleichs und Dynamik der Disparität der Einkommen in Stadt und Land in China, 1978–1998, Regional Studies. Im Mittelpunkt dieses Beitrags stehen die Auswirkungen der Entwicklung eines Finanzausgleichs auf die Disparität der Einkommen in Stadt und Land in China. Anhand eines 20-jährigen Datensatzes auf Provinzebene für den Zeitraum von 1978 bis 1998 stellen wir fest, dass sich die Veränderungen in der Disparität der Einkommen in Stadt und Land während der frühen Reformperiode (1978–1989) durch die Fiskalpolitik und während der späteren Reformperiode (1990–1998) durch Finanzausgleiche erklären lassen. Darüber hinaus weisen wir nach, dass die Richtung des Kuznets-Effekts – des Verhältnisses zwischen dem Pro-Kopf-BIP und der Disparität der Einkommen in Stadt und Land in Form eines umgekehrten U – auf Änderungen in der staatlichen Entwicklungspolitik reagiert. Als Beitrag zur Literatur über räumliche wirtschaftliche Ungleichheit werden in dieser Studie die Auswirkungen einer einseitig urban gewichteten Finanzausgleichspolitik auf die zugrundeliegende Dynamik der konvergenten und divergenten Auswirkungen auf die Ungleichheit von Stadt und Land geklärt. Finanzausgleich Ungleichheit von Stadt und Land Kuznets-Effekt Entwicklungspolitik China Chen Y. P., Liu M. y Zhang Q. Desarrollo de la intermediación financiera y las dinámicas de la desigualdad urbana-rural en China, 1978–1998, Regional Studies. El tema central de este artículo son las repercusiones del desarrollo de intermediación financiera en la desigualdad de ingresos urbanos-rurales en China. Usando un grupo de datos de panel a nivel de provincias durante un periodo de 20 años, 1978–1998, observamos que el cambio en la desigualdad de ingresos urbanos-rurales podría explicarse por la política fiscal durante el periodo inicial de reformas (1978–1989) y los intermedarios financieros durante el periodo posterior de reformas (1990–1998). Además, mostramos que la dirección del efecto Kuznets, una relación en forma de U invertida entre el PIB per-capita y la desigualdad de ingresos urbanos-rurales, es sensible a cambios en las políticas gubernamentales de desarrollo. Como aportación a la literatura sobre desigualdades económicas y espaciales, en este estudio describimos los efectos de la política de intermediación financiera con sesgo urbano en cuanto a las dinámicas subyacentes de los efectos convergentes y divergentes de las desigualdades urbana-rurales. Intermediación financiera Desigualdad urbana-rural Efecto Kuznets Política de desarrollo China

Development of Financial Intermediation and Economic Growth in Chinese Provinces

Development of Financial Intermediation and Economic Growth in Chinese Provinces

Does financial intermediation matter for macroeconomic performance?

Abstract This paper investigates whether financial intermediary development influences macroeconomic technical efficiency on a sample of 47 countries, both developed and developing, over 1980–1995. We do so by applying Battese and Coelli (1995)'s method at the aggregate level. It is found that financial intermediary development, except financial depth, is on average associated with more efficiency. However we find strong evidence that this relationship is conditional on the level of economic development. The lower the economic development the weaker is the impact of financial development on efficiency. That impact can even become negative in the poorest countries.

Does Financial Intermediation Development Increase Per Capita Income in Rural China?

AbstractThis paper investigates the impacts of financial intermediary (or banking) development on village‐level per capita income using a Chinese dataset for selected years between 1993 and 2006. The empirical results from a random effect regression model indicate that mean per capita income in rural villages follows an inverted U‐shaped path as financial intermediation develops. However, using a pooled quantile regression approach, we find that median per capita income in rural villages follows a positive linear path, rather than an inverted U‐shaped path, as financial intermediation develops. The positive linear effect of financial intermediary development is observed at the lower and higher ends of the conditional per capita income distribution. This suggests that development of financial intermediation in China might not have statistically significant differential effects in low‐income or high‐income rural villages.