Post-financial Reforms Research Articles

Money Demand Function: A Not-So-Fond Farewell in the Light of Financial Development

This study investigates the stability issues of real money balances considering financial development. We estimate real narrow (M1) and broad (M3) money demand in India during the post-financial reform, from 1996:Q2 to 2016:Q3. To check the short- and long-run relationships, this study uses the autoregressive distributed lag model of cointegration and other various time series techniques. After incorporating financial development into money demand, we determined short- and long-run relationships and a well-defined open-economy stable money demand specification (M1 and M3) in India. Having established money demand function, the policymaker and central bankers can use monetary aggregates as an indicator or information variable to predict output gaps and inflationary expectations under the inflation-targeting framework.

Business Group Affiliation and Firm Performance—Evidence from Pakistani Listed Firms

This study analyses the financial performance of business group affiliated firms relative to stand-alone firms in Pakistan. The investigations are done across the sample period of 1993-2012. The study employs ‘Chop shop’ methodology to construct the excess values (performance measure); in order to compare the results with earlier well documented studies of both developed and emerging countries. Both univariate and regression analyses clearly demonstrate that group affiliated firms are trading at discount (underperform relative to stand-alone firms) during the sample period. Despite the historical success in the past, the findings suggest that business groups evolve differently in the post financial reforms and privatisation programs era. The findings are consistent with the market failure argument and agency theory. However, the study finds a little evidence of efficient internal markets of Pakistani business groups. Keywords: Business Groups, Group Affiliation, Excess Value, Market Failure Theory, Agency Theory, Chop Shop Methodology

Financial Deepening and the Performance of Manufacturing Firms in Nigeria

This study investigated the effect of financial deepening on the performance of manufacturing firms in Nigeria from 1970 to 2016. The data were sourced from the Central Bank of Nigeria Statistical Bulletin and the National Bureau of Statistics. The model was specified, and the hypotheses were tested with the Autoregressive Distributed Lag model and Mann-Whitney U Test test. The Augmented Dickey-Fuller, Phillips-Perron and Breusch-Pagan-Godfrey tests were carried out to ensure robust regression results. Results obtained from the study revealed that broad money supply has direct and significant impact on index of manufacturing production (p-value= 0.0039) in Nigeria, credit to private sector has indirect and insignificant impact on index of manufacturing production (p-value= 0.1167) in Nigeria and market capitalization has an indirect and significant impact on index of manufacturing production (p-value= 0.0051) in the long-run and a direct and insignificant impact (p-value= 0.1596) in the short-run. The study also discovered that financial deepening impacted more on the manufacturing sector performance in the post-financial reforms period. The study therefore recommended that government should launch new financial reforms capable of enhancing the accessibility of manufacturing sector to credit and ensure adequate implementation and monitoring of the existing policies on financial reforms in Nigeria with a view to deepening the Nigerian financial system and thereby promoting manufacturing firms’ performance in Nigeria.

Impact of Credit Constraints on Firms Growth: A Case Study of Manufacturing Sector of Pakistan

This study explores the impact of credit constraint on growth by using firm level data of manufacturing sector of Pakistan for the period of 1974-2010 analyzing via Generalized Method of Moments (1991) one step and two step estimation technique. Result of full sample shows that the firms in manufacturing sector for the period from 1974-2010 are not facing external financial constraints and the effect of sale to capital ratio indicates the availability of investment opportunities for the firms in the manufacturing sector of Pakistan. The results for pre and post financial sector reform era shows that firms are facing tight external financial constraints in pre financial reform era as compared to post financial reform era. Results show that growth of firms having small assets is constrained by internal finance whereas firms having medium and large assets are not constrained by internal finance. Similarly, firms’ growth that is less dependent on debt finance is constrained by internal finance whereas results for the firms that are moderately and highly aggressive in financing with debt indicate that the growth of firms belonging to these groups is not constrained by internal finance. Similarly, low dividend paying firms growth is constrained by internal finance whereas high dividend paying firms’ growth is not constrained by internal finance.

Financial Inclusion, Productivity Shocks, and Consumption Volatility in Emerging Economies

How does access to finance impact consumption volatility? Theory and evidence from advanced economies suggests that greater household access to finance smooths consumption. Evidence from emerging markets, where consumption is usually more volatile than income, indicates that financial reform further increases the volatility of consumption relative to output. This puzzle is addressed in the framework of an emerging economy model in which households face shocks to trend growth rate, and a fraction of them are financially constrained, with no access to financial services. Unconstrained households can respond to shocks to trend growth by raising current consumption more than the rise in current income. Financial reform increases the share of such households, leading to greater relative consumption volatility. Calibration of the model for pre- and post–financial reform in India provides support for the model's key predictions.

Credit Constraints, Productivity Shocks and Consumption Volatility in Emerging Economies

How does access to credit impact consumption volatility? Theory and evidence from advanced economies suggests that greater household access to finance smooths consumption. Evidence from emerging markets, where consumption is usually more volatile than income, indicates that financial reform further increases the volatility of consumption relative to output. We address this puzzle in the framework of an emerging economy model in which households face shocks to trend growth rate, and a fraction of them are credit constrained. Unconstrained households can respond to shocks to trend growth by raising current consumption more than rise in current income. Financial reform increases the share of such households, leading to greater relative consumption volatility. Calibration of the model for pre and post financial reform in India provides support for the model's key predictions.

Credit Constraints, Productivity Shocks and Consumption Volatility in Emerging Economies

How does access to credit impact consumption volatility? Theory and evidence from advanced economies suggests that greater household access to finance smooths consumption. Evidence from emerging markets, where consumption is usually more volatile than income, indicates that financial reform further increases the volatility of consumption relative to output. We address this puzzle in the framework of an emerging economy model in which households face shocks to trend growth rate, and a fraction of them are credit constrained. Unconstrained households can respond to shocks to trend growth by raising current consumption more than rise in current income. Financial reform increases the share of such households, leading to greater relative consumption volatility. Calibration of the model for pre and post financial reform in India provides support for the model's key predictions.

MetaRegulation of OTC Derivatives Contracts Post Reform

This paper examines the possible regulatory arrangements for the over-the-counter derivatives market post financial reforms in the US and Europe. The interaction of the industry and the agencies since the passage of legislation points to a probable “meta-regulation” for the bilateral derivative contracts market. This type of process-oriented regulation relies on enforced industry self-regulation, and participant organizations are expected to identify and control risks with the support and evaluation of outside monitors. The paper highlights an instance of coordination between regulators and the swaps industry by examining the “confirmations backlogs” issue in the OTC market that occurred before the financial crisis. The paper fills a gap in the literature about non-traditional governance structures for the derivatives markets following the financial crisis.

Other financial institutions' portfolio behaviour and policy implications: A study of India

Applied literature has largely neglected the asset decision of other financial institutions (OFIs), though it may possess important policy implications. In this paper, portfolio behaviour of OFIs in India is modelled by using the annual flow of funds data for 1951/52 to 1993/94. The long-run model of the Almost Ideal Demand System and the allied concepts of cointegration generated economically and statistically plausible results. We find a strong influence of interest rates on portfolio behavior, thereby the role of interest rates on resource allocation. The paper concludes that the macroeconomic management through monetary policy actions may not be unnecessarily limited through the channel of OFIs in the post-financial reform regime in India.