Generalized Method Of Moments Approach Research Articles

Impact of export diversification on economic growth: a system GMM approach

PurposeThis paper aims to empirically analyze the impact of export diversification on gross domestic product (GDP) per capita growth.Design/methodology/approachUsing system generalized method of moments (GMM), a nonlinear model in a dynamic panel data growth framework for 101 countries between 1995 and 2019 was estimated.FindingsResults evidenced that export concentration, measured by the Herfindahl–Hirschman Index (HHI), is negatively associated with GDP per capita growth after controlling for the effects of other explanatory variables. Further, the squared term of HHI used in the model to measure the nonlinear relationship between export concentration and economic growth indicated that the low-income and lower-middle-income countries benefited from export diversification. At the same time, high-income and upper-middle-income countries perform well with their export specialization. The results of the robustness check validate the findings of nonlinear estimation.Research limitations/implicationsThe findings recommend that low-income and lower-middle-income countries diversify their export basket to improve economic growth by generating stable export earnings. Similarly, high-income and upper-middle-income countries should focus on measures to close the product lines which no longer belong to their factor endowments and rebalance their export basket.Originality/valueThis study contributes to the existing literature by using the system GMM method, which is most appropriate for a dynamic panel data growth framework with up-to-date data. Further, this study segregates a large panel into 43 concentrated and 58 diversified countries to test the robustness of the empirical results.

Effects of Financial Development and Institutions on Firm in Malaysia

This study is motivated to examine if firm growth is dependent on access to external finance but subject to the macroeconomic environment. Using firm-level data from firms listed in Bursa Malaysia for the 2006-2014 period, the study applies dynamic panel system generalized method of moments (GMM) estimation (Blundell & Bond, 1998) to estimate how a country’s embedded financial development and institutional quality impacts the linkage of firms’ external financial dependence and growth opportunities to firm growth. A dynamic system GMM approach is employed to address the endogeneity and serial correlation concern. Firms that have greater growth opportunities actually grow faster with better financial development with embedded good institutions in the case of Malaysia. So findings concluded that firms experience higher growth through better allocation of finance since they have good potential to grow. This has shed important light on policymakers in formulating the design of many financial development policies across a wide set of countries aimed at fostering financial markets and the banking services sector to provide the vital sources of external financing needed by corporations in financing their investments. A well-functioning financial system is a necessary condition for promoting firm growth.

Dynamic linkages between climatic variables and agriculture production in Malaysia: a generalized method of moments approach.

Climate change continues to pose a threat to the agricultural sectors worldwide, jeopardizing food and nutritional security, which is a critical component of the sustainable development agenda. Consequently, this study attempts to examine the impact of climatic variables (CO2 emissions, energy resources, rainfall, temperature, fossil fuel consumption, and humidity) on agricultural production of rice, cereals, vegetables, coffee, and agriculture value added (as a percentage of GDP) in the Malaysian context. To this end, this study applied a generalized method of moments (GMM) estimator on the data obtained from the metrological station Malaysia, Department of Statistics Malaysia and World Development Indicators (WDI) spanning the period 1985-2016. The results revealed that temperature and energy consumption negatively and significantly affect rice and vegetable production, while the negative effect of rainfall, temperature, fossil fuel consumption, and humidity on cereal production is insignificant. The results also confirmed that CO2 emissions have a negative and significant impact on coffee production. Likewise, temperature, energy consumption, and fossil fuel consumption exhibit a negative and significant influence on agriculture value added. These observations evidenced the adverse effect of climate change on various agricultural products in Malaysia. Therefore, in order to ensure robust and sustainable agricultural output in Malaysia, policymakers as well as environmentalists should work together to formulate appropriate adaptation strategies.

What Does Dynamic Panel Analysis Tell Us About Life Satisfaction?

Static fixed effects estimation of life satisfaction often gives rise to serial correlation in the residuals, indicating omitted dynamics. Rather than correcting the standard errors, “to make them robust,” this study explores dynamic panel analysis to incorporate the otherwise omitted dynamics into the estimation of life satisfaction models. The analysis utilizes the System General Method of Moments approach to dynamic analysis. The results indicate that overall life satisfaction is largely (though not wholly) contemporaneous; correspondingly, the persistence of satisfaction from previous periods is limited. This finding is robust to a variety of different specification choices. Accordingly, the issue of omitted dynamics in a life satisfaction context is a minor one. This use of dynamic panel analysis, therefore, offers support for the ongoing use of static models (like fixed effects), even though they omit dynamics. Given the highlighted challenges of dynamic panel analysis, static fixed effects analyses will often be preferred.

Impact of Corporate Social Responsibility on profitability of banks in Pakistan: Application of GMM Approach

The present study investigates the effects of corporate social responsibility (CSR) on financial performance of commercial banks in Pakistan employing the generalized method of moments (GMM) estimator on a panel data. A diverse sample of 25 banks is selected for the analyses for a period of 11 years (2010-2020) based on consistently available data. In addition to the CSR index, some bank-specific and macroeconomic variables are used as control variables to test for the effects of CSR initiatives on profitability of banks in Pakistan. Our findings demonstrate that the CSR drives and commitments on social expectations reward the banks with larger profit margins. Consequently, the results tend to validate the stakeholder theory where socially responsible enterprises lead towards greater financial performance. The control variables like capital intensity, credit risk, bank size, liquidity, age of the bank, proportion of non-executive directors, tangibility and GDP growth divulge mixed results. The diversity in results propose a number of policy and managerial implications both for policy makers and banks managers.

Are importing and exporting complements or substitutes in an emerging economy? The case of Colombia

AbstractThe aim of this paper is to investigate the impact of two trading strategies (exporting and importing) on total factor productivity (TFP) and the potential complementarity/substitutability effects of these strategies. In order to assess these effects, robust estimates of TFP are obtained using a general method of moments approach that explicitly determines the ability of a firm's trading experience to affect productivity. Data from the Annual Manufacturing Survey spanning from 2007 to 2016 is used for Colombian manufacturing firms. Our estimation results suggest that, regardless of the technological intensity of the industry in which the firm operates, active trading strategies (exporting only, importing only, both importing and exporting) pay positive rewards in terms of productivity. Nevertheless, whilst positive (complementary) synergies are found between exporting and importing for firms in med/high‐tech sectors, for firms operating in low‐tech and med/low‐tech sectors, importing and exporting appear to be substitutes.

The impact of stock market development on economic growth: A GMM approach

This study investigated the impact of stock market development (SMD) on economic growth (EG) among emerging markets and developing economies (EMDEs) in Asia. The data sample includes eight Asian EMDEs (China, Indonesia, India, Sri Lanka, Malaysia, the Philippines, Thailand, and Vietnam) from 2008 to 2019. These countries share several similarities, so this ensures reliability of the results. Regarding the analysis, the generalized method of moments (GMM) is used for the estimation. The results show that SMD exerts a positive impact on EG. This finding confirms the importance of SMD in improving efficient capital accumulation and allocation, and also allows investors to reduce risks and increase liquidity, which will boost EG. Further, the significant influence of domestic credit (DC), control of corruption (CC), and inflation (INF) on EG is also highlighted. These findings are valuable empirical evidence that greatly contributes to reinforcing the suitability of classical economic growth theories, especially the theory of endogenous growth. They are also essential to EMDEs in Asia. Accordingly, the EMDEs should develop effective policies to improve the stock market’s scale, which contributes substantially to the development of EG. Moreover, these economies need to pursue many appropriate policies in sync, such as stimulating SMD, improving governance effectiveness and implementing effective macroeconomic policies. Acknowledgment This study was funded by the Industrial University of Ho Chi Minh City (IUH), Vietnam (grant number: 21/1TCNH01).

Macroeconomic Factors and Birth of New Businesses in Developing Countries: Evidence from a Dynamic System GMM Approach

This paper aims to discuss and determine the nature of relationship between the birth of new enterprises and macroeconomic factors in using a panel data of 73 developing countries for the period of 2006-2018. The study used panel corrected standard error approach (PCSE) and system generalized method of moments (GMM) approach. The main conclusions revealed that foremost economic growth, translated in terms of real gross domestic product per capita, and in terms of variation in demand, has proved to be a positive determining factor in the creation of enterprises. Furthermore, the population growth rate and inflation, while contributing positively to the creation of new enterprises, did not produce the effect that would have been expected, given the relatively low elasticity. Addition, the results also indicate that unemployment rate and employment vulnerability have small negative effects on new firms’ creation.

Does the deposit structure affect Islamic bank’s maturity transformation activities? The implications of IFSB liquidity guidelines

Purpose The purpose of this study is to investigate factors influencing the net stable funding ratio (NSFR) in the Islamic banking system. More specifically, the authors analyze the impact of the deposit structure on the liquidity ratio using the two-step generalized method of moments approach during the 2000–2014 period. Design/methodology/approach Based on IFSB-12 and the GN-6, the authors calculated the NSFR for 35 Islamic banks operating in the Middle East and North Africa (MENA) region. Findings The findings of this study show the following: first, ratio of profit-sharing investment accounts have a positive impact on the NSFR, while ratio of non profit-sharing investment accounts increase the maturity transformation risk; second, the results highlight that asset risk, bank capital and the business cycle have a positive impact on the liquidity ratio, while the returns on assets, bank size and market concentration have a negative impact; and third, these results support the IFSB’s efforts in developing guidelines for modifying the NSFR to enhance the liquidity risk management of institutions offering Islamic financial services. Research limitations/implications The most prominent limitation of this research is the availability of data. Practical implications These results will be useful for authorities and policy makers seeking to clarify the implications of adopting the liquidity requirement for banking behavior. Originality/value This study contributes to the knowledge in this area by improving our understanding of liquidity risk management during liquidity stress periods. It analyzes the modified NSFR that was adopted by the IFSB. Besides, this study fills a gap in the literature. Previous studies have used the conventional ratios to determinate the main factors of the maturity transformation risk in a full-fledged Islamic bank based on an early version of NSFR. Finally, most studies focus on the NSFR as proposed by the Basel Committee, whereas the authors investigate the case of the dual-banking system in the emerging economies of seven Arab countries in the MENA region.

Foreign investment and CO2 emissions: do technological innovation and institutional quality matter? Evidence from system GMM approach.

The study examines the moderating role of institutional quality and technological innovation on the empirical relationship between FDI inflows and four indicator variables of CO2emissions in 40 Asian countries for the period 1996-2016, by using generalized method of moment (GMM) estimation. First, from non-interactive regression, FDI inflows have positive impacts on CO2emissions; over all, from our empirical results, we conclude that the moderating role of institutional quality and technological innovation is crucial in the nexus between FDI and carbon CO2emissions and the interaction between institutional quality indicators and FDI inflows significantly reduce the level of CO2emissions. Furthermore, the significant moderating effect of technological innovation is observed on the association between FDI and CO2 emissions. The results are important for policy makers in setting up long- and short-term policy to protect environmental quality.

Effects of Financial Development and Institutions On Firm Growth in Malaysia

This study is motivated by Modigliani and Miller's (1958) financing constraints theory (FCT) and others like Rajan and Zingales (1998), Fisman and Love (2007), and Manganelli and Popov (2013) also sharing similar enthusiasm that firm growth are dependence on access to external finance but subject to macroeconomic environment. Using firm-level data from firms listed in Bursa Malaysia for 2006-2014 period, the study applies dynamic panel system generalized method of moments (GMM) estimation (Blundell and Bond, 1998) to estimate how a country's embedded financial development and institutional quality impacts the linkage of firms' external financial dependence and growth opportunities to firm growth. A dynamic system GMM approach is employed to address the endogeneity and serial correlation concern. Firms which have greater growth opportunities actually grow faster with better financial development with embedded good institutions in the case of Malaysia. So findings concluded that firms experience higher growth through better allocation of finance since they have good potential to grow. This has shed important lights to policymakers in formulating the design of many financial development policies across a wide set of countries aimed at fostering financial markets and banking services sector to provide the vital sources of external financing needed by corporations in financing their investments. A well-functioning financial systems is a necessary condition for promoting firm growth. Keywords:Firm growth; financial development; institutions; external financial dependence; growth opportunities

Monetary Policy Rule and Taylor Principle in Mongolia: GMM and DSGE Approaches

This article aims to examine the monetary policy rule under an inflation targeting in Mongolia with a focus on its conformity to the Taylor principle, through two kinds of approaches: a monetary policy reaction function by the generalized-method-of-moments (GMM) estimation and a New Keynesian dynamic stochastic general equilibrium (DSGE) model with a small open economy version by the Bayesian estimation. The main findings are summarized as follows. First, the GMM estimation identified an inflation-responsive rule fulfilling the Taylor principle in the recent phase of the Mongolian inflation targeting. Second, the DSGE-model estimation endorsed the GMM estimation by producing a consistent outcome on the Mongolian monetary policy rule. Third, the Mongolian rule was estimated to have a weaker response to inflation than the rules of the other emerging Asian adopters of an inflation targeting.

Does taxation on harmful products influence population health? Evidence from Africa using the dynamic panel system GMM approach

Products such as tobacco and alcohol are known to be deleterious to human health. Tobacco use for instance, causes over eight million deaths annually worldwide. This has necessitated the imposition of taxes on such harmful products aimed at reducing their demand and hence ensure enhanced population health. However, while the effects of such taxes on deaths related to the consumption of these products have been given much attention, very little attention has been given to how these taxes enhance overall population health beyond these related deaths. Using tobacco tax as a proxy for taxation on harmful products and life expectancy as a proxy for overall population health, this study, examines the effect of taxing harmful products on population health in 38 African countries from 2008–2018. The system Generalized Methods of Moments (GMM) regression is employed as the empirical estimation technique. The findings of the study show that, taxing harmful products enhances population health both in the short-run and long-run periods. The implication is that, governments, especially those in Africa, can use taxation on harmful products to improve population health even beyond deaths related to the consumption of these products.

Impact of Credit Risk Management on Profitability of Commercial Banks in Bangladesh: An estimation of Dynamic Panel Data Model

This paper attempts to reveal how several credit risk factors are affecting the profitability of commercial banks considering the econometric models estimated with Random effect, Fixed effect, Pooled OLS and Cross-sectional Generalized least square (GLS) method followed by dynamic panel data model estimated with one-step GMM (generalized methods of moments) approach to incorporate the issue of endogeneity, unobserved heterogeneity and profit persistence of data set collected from annual report of banks covering from year 2010 to 2019 in Bangladesh. We have also adopted several diagnostic checks such as Model specification test, test of heteroskedasticty, cross sectional dependence test followed by test of autocorrelation and unit root test to examine the validity of the models selected for this study. The first part of our empirical investigation of the estimated models considering all methods reveals that out of all the independent credit risk factors such as Total loans to total assets ratio, Total loans to equity ratio, NPL to total loans, NPL to Total equity ratio, Provision for loan losses to total equity, total equity to total assets ratio, Total loans to total deposits ratio and provision for loan losses to NPL ratio, only provision for loan losses to NPL ratio is significantly affecting the dependent variable measured with NIM (Net interest margin) ratio of banks under fixed effect method. The next part of our empirical results of estimated models considering same methods divulges that NPL to total loans ratio, NPL to Total equity ratio and Provision for loan losses to total equity are also significantly affecting the dependent variable measured with ROE (Return on equity) of banks. The third segment of our empirical findings of estimated models considering same approaches shows that only NPL to total loans ratio is statistically significant under all methods but the NPL to total equity ratio is significant under fixed effect and GLS method and Provision for loan losses to total equity is significant under GLS method only in explaining the changes in ROA (Return on equity) measuring profitability of banks. Further investigation reveals that the dynamic impact of the said credit risk factors on profitability measured with ROE of banks has been successfully adopted by one-step system GMM approach considering all conditions required for estimation.

Density deconvolution for generalized skew-symmetric distributions

The density deconvolution problem is considered for random variables assumed to belong to the generalized skew-symmetric (GSS) family of distributions. The approach is semiparametric in that the symmetric component of the GSS distribution is assumed known, and the skewing function capturing deviation from the symmetric component is estimated using a deconvolution kernel approach. This requires the specification of a bandwidth parameter. The mean integrated square error (MISE) of the GSS deconvolution estimator is derived, and two bandwidth estimation methods based on approximating the MISE are also proposed. A generalized method of moments approach is also developed for estimation of the underlying GSS location and scale parameters. Simulation study results are presented including a comparing the GSS approach to the nonparametric deconvolution estimator. For most simulation settings considered, the GSS estimator is seen to have performance superior to the nonparametric estimator.

Malaria and Natural Disasters: Evidence Using GMM Approach

Natural disasters not only disrupt accessibility to education, health care, food supplies and clean water, but causes outbreak of diseases. These issues deteriorate the health conditions among the victims of disasters and reduce human capital accumulation that adversely affects the economic development of the country. This paper examines the impact of total disasters and floods on malaria incidences using panel data over the period 2008 to 2014 for 79 countries. For robustness check, we use two measures on each of these natural disasters; the number of occurrences and number of people affected by these disasters. Employing the system Generalized Method of Moment (GMM) model, the findings show that the occurrences and the number of people affected by total disasters and flood, significantly increases cases of malaria. Income and education negatively impact the incidences of malaria whereas urbanization and deforestation increase the rates of malaria cases.

Impact of the institutional quality on NAFTA's international trade: a system GMM approach

PurposeThis paper aims to analyze the impacts of institutional quality on trade flows of NAFTA with a panel data set of 105 countries spanning the period 2006–2017.Design/methodology/approachWe applied the system generalized method of moment (GMM) estimator to investigate the impacts.FindingsThe results show that institutional quality is a positive and significant determinant of international trade flows of the NAFTA bloc and its trading partners. Our results also indicate that the impact of institutional quality depends on the level of economic development of NAFTA's trading partners. Specifically, the trade elasticity of institutional quality is the highest for NAFTA’s trade with middle-income countries and the lowest for NAFTA's trade with low-income countries. In the long run, the trade elasticity of institutional quality increased significantly, with the highest increase in the case of NAFTA's trade with medium-income countries and the lowest increase in the case of NAFTA's trade with low-income countries.Originality/valueThis study contributes to the existing literature in three different ways. First, we examine the differential impact of institutions on NAFTA's trade according to the level of economic development of NAFTA's trading partners. Second, we compare the differential trade elasticity of institutional quality in the long run. Finally, we support our findings through an improved research methodology by using the system GMM estimation. This method allows us to overcome the potential sample bias, omitted variable problems and endogeneity of explanatory variables.

Taylor Principle under Inflation Targeting in Emerging ASEAN Economies: GMM and DSGE Approaches

This paper aims to reassess the performances of inflation targeting adopted by emerging ASEAN countries, Indonesia, the Philippines and Thailand, by examining their monetary policy rules, both through generalized-method-of-moments (GMM) estimations of policy reaction functions and through Bayesian estimations of the New Keynesian dynamic-stochastic-general-equilibrium (DSGE) model. The main findings are summarized as follows. First, the GMM estimations identified inflation-responsive rules fulfilling the Taylor principle, with a forward-looking manner in Indonesia and Thailand and with a contemporaneous way in the Philippines. Second, the Bayesian estimations of the New Keynesian DSGE could reassure the GMM estimation results, as the former estimations produced consistent outcomes with the latter ones on the policy rate reactions to inflation with the Taylor principle.

Estimation in linear errors-in-variables models with unknown error distribution

Summary Parameter estimation in linear errors-in-variables models typically requires that the measurement error distribution be known or estimable from replicate data. A generalized method of moments approach can be used to estimate model parameters in the absence of knowledge of the error distributions, but it requires the existence of a large number of model moments. In this paper, parameter estimation based on the phase function, a normalized version of the characteristic function, is considered. This approach requires the model covariates to have asymmetric distributions, while the error distributions are symmetric. Parameters are estimated by minimizing a distance function between the empirical phase functions of the noisy covariates and the outcome variable. No knowledge of the measurement error distribution is needed to calculate this estimator. Both asymptotic and finite-sample properties of the estimator are studied. The connection between the phase function approach and method of moments is also discussed. The estimation of standard errors is considered and a modified bootstrap algorithm for fast computation is proposed. The newly proposed estimator is competitive with the generalized method of moments, despite making fewer model assumptions about the moment structure of the measurement error. Finally, the proposed method is applied to a real dataset containing measurements of air pollution levels.

Regulation, governance and the role of the informal sector in influencing environmental quality?

We investigate the effect of the informal sector and a range of governance indicators on both global and local pollutants for a panel of 58 countries during 1996–2011. The analysis employs a fixed effects-instrumental variable generalized method of moments approach. We find that the size of the informal sector has a significant impact on environmental quality, which is conditional on the level of economic development. For developing countries, the informal sector has a significant positive impact on local pollutants, whereas for the developed countries the informal sector has a significantly negative effect on global pollutants. The findings also reveal that the impact of governance depends on the type of governance measure, the level of economic development and type of pollutant. Control of corruption emerges as the single most important factor especially in the non-OECD countries in improving environmental quality. We argue that the efficacy of an environmental policy for a country with a large informal sector will be low if the policy measures do not address governance, size of the informal sector and environmental policy targets.