Econometric Analyses Based on Cross-Country Data · NOR SWECHE CAN JPN FIN GRC IRL PRT ESP AUS NZL...
Transcript of Econometric Analyses Based on Cross-Country Data · NOR SWECHE CAN JPN FIN GRC IRL PRT ESP AUS NZL...
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Impact of National Financial Regulation on
Macroeconomic and Fiscal Performance
after the 2007 Financial Shock
‒ Econometric Analyses Based
on Cross-Country Dataon Cross-Country Data
Tobias Hagen
1
IWH/INFER-Workshop on
Applied Economics and Economic Policy
22-04-2013
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Introduction • Cross-country heterogeneity of the “Great Recession”
– intensity and duration of the crises.
– rich countries more affected than poor countries.
• “… a unique opportunity to identify the link between the
structural characteristics of economic and institutional
systems before the crisis and their resilience with respect to
the global recessionary shock.” (Giannone et al., 2011).
1. Introduction
the global recessionary shock.” (Giannone et al., 2011).
• Role of financial market (de-)regulation before 2007?
Financial liberalization = “…reduction in the role of
government, and an increase in the role of the market, in
allocating credit” (Abiad et al., 2008).
• „New Database of Financial Reforms“ by Abiad et al. (2008)
– indicator for financial liberalization (FRI).
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Introduction: Related Research• Cross-country studies by Giannone et al. (2011), Masciandaro et al. (2011),
Rosea and Spiegel (2011): Liberalization in financial (credit) markets or looser
credit market regulations ⇒ deeper recessions in 2008-2009.
• Panel country study by the IMF (2012): “…..a domestic financial system that is
dominated by some types of nontraditional bank intermediation has in some
cases been associated with adverse economic outcomes.”
• Historical time series by Reinhart and Rogoff (2011): „…banking crises […]
often precede or accompany sovereign debt crises; we find they help predict
1. Introduction
3
often precede or accompany sovereign debt crises; we find they help predict
them.”
• Based on the FRI used here and panel data for 5 emerging markets Abiad et
al. (2008) find “… strong evidence that financial liberalization, rather than
financial deepening, improves allocative efficiency”
• Based on the FRI used here and panel data for 1974-2004 Christiansen et al.
(2009) find that „… financial reforms, …, are robustly associated with
economic growth, but only in middle-income countries. …. the effect … is
explained by improvements in measured aggregate TFP growth, not by higher
aggregate investment. “
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Introduction1. Introduction
What‘s new in this paper?
• Builds on Giannone et al. (2011)
• Outcome variables:
− GDP growth rates (2008-2011),
− Employment growth rates (2008-2010)
− Average budget deficits (2008-2010).
4
− Average budget deficits (2008-2010).
• Methodological difficulties are taken into account:
− outliers,
− functional form assumptions,
− model uncertainty with regard to explanatory variables
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Table of Contents
1. Introduction
2. Dataset and Correlation Analyses
3. Methodology
5
4. Results
4.1 GDP Growth Rate Models
4.2 Deficit Rate Models
4.3 Employment Growth Rate Models
5. Summary and Conclusions
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Dataset and Correlation Analyses
„Financial Reform Index“ (FRI) by IWF / Abiad et al. (2008): indicator for
financial liberalization:
• 91 economies (here: 88)
• annual, time-varying, 1973-2005
• seven aspects of financial sector policy aggregated to one indicator
• values between 0 (=fully repressed) and 21 (=fully liberalized)
• average 2001-2005 (more variance than if only 2005 is used)
2. Dataset and Correlation Analyses
6
World Bank Development Indicator: GDP, Employment, Deficit….)
World Bank Financial Structure Dataset: Variables measuring the size of
the financial market (financial deepening)
“Economic Freedom Dataset” of the Fraser-Institute: “Labour Market
Freedom Index” (control variable)…
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Financial reform index (FRI)(i) reduction of credit controls and excessively high reserve requirements ,
(1) Are reserve requirements restrictive? (2) Are there minimum amounts of credit that must be
channeled to certain sectors? Are there ceilings on credit to other sectors? (3) Are there any credits
supplied to certain sectors at subsidized rates?
(ii) reduction of interest rate controls , (1) Are interest rates subject to ceilings/floors or determined by the central bank? (2) Are interest rates
allowed to float within a band or are partially liberalized? (3) Are interest rates determined at market
rates?
(iii) reduction of entry barriers, (1) To what extent does the government allow foreign banks to enter into a domestic market? (2) Does
the government allow the entry of new domestic banks (3) has the government eased branching
restrictions? (4) Does the government allow banks to engage in a wider range of activities?
2. Dataset and Correlation Analyses
7
restrictions? (4) Does the government allow banks to engage in a wider range of activities?
(iv) reduction of state ownership in the banking sector,This variable is based on the percentage of the state ownership of banks.
(v) reduction of capital account restrictions, (1) Is the exchange rate system unified? (2) Does a country set restrictions on capital inflow? (3) Does a
country set restrictions on capital outflow?
(vi) enhancement of prudential regulations and supervision of the banking sector(1) Has a country adopted a capital adequacy ratio based on the Basle standard? (2) Is a banking
supervisory agency independent from the executives’ influence? (3) Does a banking supervisory agency
conduct effective supervisions through on-site and off-site examinations?
(vii) liberalization of securities market policy (1) Has a country taken measures to develop security market? (2) Is a country’s equity market open to
foreign investors?
Abiad et al. (2008).
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Advanced
Economies
(N=22)
Australia (AUS), Austria (AUT), Belgium (BEL), Canada (CAN), Denmark (DNK), Finland (FIN),
France (FRA), Germany (DEU), Greece (GRC), Ireland (IRL), Israel (ISR), Italy (ITA), Japan (JPN),
Netherlands (NLD), New Zealand (NZL), Norway (NOR), Portugal (PRT), Spain (ESP), Sweden
(SWE), Switzerland (CHE), United Kingdom (GBR), United States (USA)
Emerging and
Developing
Asia (N=12)
Bangladesh (BGD), Hong Kong (HKG), China (CHN), India (IND), Indonesia (IDN), Korea (KOR),
Malaysia (MYS), Nepal (NPL), Philippines (PHL), Singapore (SGP), Sri Lanka (LKA), Thailand (THA)
Latin America
and Caribbean
(N=17)
Argentina (ARG), Bolivia (BOL), Brazil (BRA), Chile (CHL), Colombia (COL), Costa Rica (CRI),
Dominican Republic (DOM), Ecuador (ECU), El Salvador (SLV), Guatemala (GTM), Mexico (MEX),
Nicaragua (NIC), Paraguay (PRY), Peru (PER), Uruguay (URY), Venezuela (VEN)
Sub-Saharan
Africa
Burkina Faso (BFA), Cameroon (CMR), Cote d'Ivoire (CIV), Ethiopia (ETH), Ghana (GHA), Kenya
(KEN), Madagascar (MDG), Mozambique (MOZ), Nigeria (NIG), Senegal (SEN), South Africa (ZAF),
List of Countries2. Dataset and Correlation Analyses
8
Africa
(N=14)
(KEN), Madagascar (MDG), Mozambique (MOZ), Nigeria (NIG), Senegal (SEN), South Africa (ZAF),
Tanzania (TZA), Uganda (UGA), Zimbabwe (ZWE)
Transition
Economies
(N=17)
Albania (ALB), Azerbaijan (AZE), Belarus (BLR), Bulgaria (BGR), Czech Republic (CZE), Estonia (EST),
Georgia (GEO), Hungary (HUN), Kazakhstan (KAZ), Kyrgyz (KGZ), Latvia (LVA), Lithuania (LTU),
Poland (POL), Russian Federation (RUS), Ukraine (UKR), Uzbekistan (UZB), Vietnam (VNM)
Middle East
and Northern
Africa (N=7)
Algeria (DZA), Egypt (EGY), Jordan (JOR), Morocco (MAR), Pakistan (PAK), Tunisia (TUN), Turkey
(TUR)
Members of
the Euro Area
(N=11)
Austria (AUT), Belgium (BEL), Estonia (EST), Finland (FIN), France (FRA), Germany (DEU), Greece
(GRC), Ireland (IRL), Italy (ITA), Netherlands (NLD), Portugal (PRT), Spain (ESP)
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2. Dataset and Correlation Analyses
FRI OF THE ADVANCED ECONOMIES, AVERAGE 2001–2005
10
15
20
Fin
an
cia
l R
efo
rm I
nd
ex,
Ave
rag
e 2
00
1 t
o 2
00
5
9
05
Fin
an
cia
l R
efo
rm I
nd
ex,
Ave
rag
e 2
00
1 t
o 2
00
5
Fin
lan
d
Po
rtu
ga
l
Gre
ece
Ja
pa
n
No
rwa
y
Isra
el
Ge
rma
ny
Au
str
ia
Ita
ly
Ne
w Z
ea
lan
d
Sw
ed
en
Sw
itze
rla
nd
Be
lgiu
m
Ne
the
rla
nd
s
Au
str
alia
Ca
na
da
De
nm
ark
Fra
nce
Ire
lan
d
Sp
ain
Un
ite
d K
ing
do
m
Un
ite
d S
tate
s
Observation No. 1: Advanced countries have a higher FRI
Observation No. 2: The variation of FRI within the Advanced countries is rather low
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10
15
20
Fin
ancia
l R
efo
rm Index, A
vera
ge 2
001 to 2
005
FRI OF DEVELOPING AND TRANSITION ECONOMIES, AVERAGE 2001–2005
2. Dataset and Correlation Analyses
10
05
Fin
ancia
l R
efo
rm Index, A
vera
ge 2
001 to 2
005
Eth
iopia
Chin
aV
ietn
am
Nepal
Uzbekis
tan
Bangla
desh
Bela
rus
Costa
Ric
aG
hana
Alg
eria
Pakis
tan
Bra
zil
Zim
babw
eIn
dia
Burk
ina F
aso
Cam
ero
on
Thaila
nd
Dom
inic
an R
epublic
Azerb
aija
nIn
donesia
Kazakhsta
nC
ote
d'Ivoire
Moro
cco
Sri L
anka
Ukra
ine
Senegal
Tunis
iaA
rgentina
Ecuador
Egypt, A
rab R
ep.
Jam
aic
aK
enya
Uganda
Colo
mbia
Kore
a, R
ep.
Mozam
biq
ue
Uru
guay
Nic
ara
gua
Alb
ania
Turk
ey
Guate
mala
Kyrg
yz R
epublic
Mala
ysia
Madagascar
Phili
ppin
es
Para
guay
Russia
n F
edera
tion
Tanzania
El S
alv
ador
Nig
eria
Bulg
aria
Venezuela
, R
BP
ola
nd
South
Afric
aB
oliv
iaC
hile
Peru
Georg
iaLithuania
Czech R
epublic
Jord
an
Hong K
ong S
AR
, C
hin
aM
exic
oS
ingapore
Hungary
Esto
nia
Latv
ia
Observation No. 3: A liberalized financial market is not a pre-condition for
economic development
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FRI by country groups, 1973–2005 2. Dataset and Correlation Analyses
11
Source: Abiad et al. (2008, p 27).
Observation No. 4: Worldwide trend towards liberalization, especially in the first part of
the 1990s
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DEU
TUR
ZAF
ARG
BOLBRA CHLCOL
CRI
DOM
ECU
NIC
PRY
PERURY
ISRJOR
EGY
BGDLKA
HKG
IND
IDN
KORMYS
NPL
PAK
PHL
SGPTHA
VNM
DZACMR
ETH
GHA
KEN
MAR
MOZ NGA
TZA
TUN
UGA
BFA
AZE
BLR
ALB
GEO
KAZ KGZ
BGRRUS
CHN
UZB
POL
20
40
Gro
wth
Rate
of R
eal G
DP
per
Capita in U
SD
2008-2
011
FRI (AVERAGE 2001–2005) AND CUMULATED GROWTH RATE OF GDP PER CAPITA
IN USD 2008–2011
2. Dataset and Correlation Analyses
USAGBR
AUTBEL
DNK
FRA
DEU
ITA
NLD
NOR
SWECHECAN
JPNFIN
GRC
IRL
PRTESP
AUS
NZL
ZAFCRI
SLVGTM
MEX
NIC
VEN
PAKDZACMR
CIV
KEN
MDG
ZWE SEN
TUN
UKR
CZE
EST
LVA
HUNLTU
-20
0
Gro
wth
Rate
of R
eal G
DP
per
Capita in U
SD
2008-2
011
5 10 15 20Financial Reform Index, Average 2001 to 2005
12
Bravais-Pearson Spearman
All Countries, N=88 -0.6501 (0.0000) 0.6366 (0.0000)
Only Advanced, N=22 0.0849 (0.7070) 0.0849 (0.7070)
Advanced + Asia, N=51 -0.8032 (0.0000) -0.7512 (0.0000)
Observation No. 5: Negative correlation
between post-2007 GDP growth and FRI.
However, not for the sample restricted
to advanced countries.
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TUR
ARG
BOL BRA CHLCOL
DOM
ECUPRY
PERURY
ISRJOR
EGY
BGDLKA
HKG
IND
IDN
KORMYS
NPLPHL
SGPTHA
VNM
ETH
GHA
MAR
MOZNGA
TZAUGA
BFA
AZE
BLR
ALB
GEO
KAZKGZ
RUS
CHN
UZB
POL
20
40
Gro
wth
Ra
te o
f R
ea
l G
DP
per
Ca
pita in U
SD
200
8-2
011
NATURAL LOG OF GDP PER CAPITA IN USD IN 2006 AND
CUMULATED GDP GROWTH 2008-2011
Bravais-Pearson: -0.5224 (0.0000)
Spearman: -0.5445 (0.0000)
N = 88
2. Dataset and Correlation Analyses
USAGBR
AUTBEL
DNK
FRA
DEU
ITA
NLD
NOR
SWECHECAN
JPNFIN
GRC
IRL
PRTESP
AUS
NZL
ZAFCRI
SLVGTM
MEX
NIC
VEN
ISRPAK
SGPTHADZA
CMR
CIV
KEN
MDG
ZWESEN
TUNBGRRUS
UKR
CZE
EST
LVA
HUNLTU
-20
0G
row
th R
ate
of R
ea
l G
DP
per
Ca
pita in U
SD
200
8-2
011
4 6 8 10 12Log real GDP per Capita in USD in 2006
13
Observation No. 6: Rich countries were hit harder by the recession
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Econometric Model1. GDP Growth Rate Model Based on the “Finance and Growth research” (Levine, 2005)
2011,iy = real GDP per capita in USD in 2011
ui = i.i.d. error term
FRI = Financial Regulation Index
X = Matrix of control variables
α, β1, β2, γ parameters to be estimated
2. Average Budget Deficit Model Based on Bohn (1998)
i=1,...,N countries; N=88
B = Budget balance in current
( ) iii
i
iiuXFRIy
y
yy++++=
−γββα 22006,1
2007,
2007,2011,ln
∑2010
3. Methodology
3. Employment Growth Rate ModelE = Employment per Population ≥15
B = Budget balance in current
local currency
Y = GDP in current local currency
D = Stock of government debt in
% of GDP
14
average deficit ratio 2008 - 2010
( ) iii
t ti
t tiuXFRID
Y
B++++=
∑∑
=
= γββα 22006,12010
2008 ,
2010
2008 ,ln
( ) iii
i
iiuXFRIE
E
EE++++=
−γββα 22006,1
2007,
2007,2010,ln
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Econometric Problems1. Large heterogeneity of the countries
• always hard to handle in cross-sectional studies (without panel data)
• different samples
• include a lot of control variables, for example:
− GDP growth rate 2002-2006,
− Population in 2006
− Dummies for country groups: advanced countries, emerging Asia, transition countries,
Sub-Saharan Africa, Latin America, Middle East and North Africa, Euro
− Openess (EX + IM / GDP) in 2006
3. Methodology
15
− Openess (EX + IM / GDP) in 2006
− Size of financial sector (“financial deepening”): Financial system deposits to GDP, Stock
market capitalization to GDP…
2. Outliers
• for example: China, Norway, Ireland
• different samples
• median regression (quantile regression)
• robust regression (MM-estimator; Yohai 1987; Jann 2010)
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3. Non-linear Effects
• Specify FRI as 4 Dummies
• Use Robinson's (1988) semiparametric regression estimator
4. Low variance of the FRI variable – most advanced countries have
FRI=21
• Average of 2001 to 2005
• Sample without FRI = 21 countries
( ) ( ) iii
i
iiuXFRIfy
y
yy+++=
−γβ 2006,1
2007,
2007,2011,ln
Econometric Problems3. Methodology
• Sample without FRI = 21 countries
5. Endogeneity of FRI with respect to the outcome variables?
6. Model uncertainty about the choice of explanatory variables (see
Magnus et al. 2010)• An approach to deal with this difficulty is the “Bayesian model
averaging” technique within a linear regression model (Magnus et al.
2010, and De Luca and Magnus 2011).
16
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Results Growth Regression: Basic (1)
OLS
FRIi -1.585***
(-3.63)
( )2006,ln iy -0.905
(-0.98)
ln (popi,2006) 1.228*
(1.67) Country groups (base: emerging Asia) i,2006
advanced
transition
Sub-Saharan Africa
Latin America
4. Results
17
Middle East
and North Africa
Euro member
openness i,2006
( ) 2002,2002,2006, iii yyy −
Constant α̂ 19.54
(1.39)
N 88
adj. R2
/ §pseudo R
2 0.429
Mean (median) dependent
variable 7.2 (5.2)
mean FRIi 16.2
Notes: t statistics based on robust standard errors in parentheses; * p < 0.10, ** p < 0.05, *** p < 0.01
Heterogeneity of the countries?
Omitted variable bias?
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Results Growth Regression: Heterogeneity? (1) (2) (3)
OLS OLS OLS
FRIi -1.585*** -1.333*** -1.235***
(-3.63) (-2.90) (-2.89)
( )2006,ln iy -0.905 -0.523 -1.685
(-0.98) (-0.44) (-1.30)
ln (popi,2006) 1.228* 1.296* 1.527*
(1.67) (1.73) (1.72) Country groups (base: emerging Asia) i,2006
advanced -6.654** 0.412
(-2.23) (0.09)
transition -2.473 -4.639
(-0.78) (-1.25)
Sub-Saharan Africa -6.044 -3.930
(-1.56) (-1.12)
Latin America -1.456 2.046
(-0.45) (0.56) Middle East -6.899** -4.854
4. Results
18
Middle East
and North Africa
-6.899** -4.854
(-2.01) (-1.31)
Euro member -4.161** -4.786**
(-2.13) (-2.36)
openness i,2006 0.0208
(1.19)
( ) 2002,2002,2006, iii yyy − 0.213***
(3.03)
Constant α̂ 19.54 15.70 11.59
(1.39) (0.94) (0.68)
N 88 88 88
adj. R2
/ §pseudo R
2 0.429 0.476 0.520
Mean (median) dependent
variable 7.2 (5.2) 7.2 (5.2) 7.2 (5.2)
mean FRIi 16.2 16.2 16.2
Notes: t statistics based on robust standard errors in parentheses; * p < 0.10, ** p < 0.05, *** p < 0.01
Outliers?
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Results Growth Regression: Outliers? (1) (2) (3) (5)
OLS OLS OLS MM
FRIi -1.585*** -1.333*** -1.235*** -0.972*
(-3.63) (-2.90) (-2.89) (-1.95)
( )2006,ln iy -0.905 -0.523 -1.685 -3.086*
(-0.98) (-0.44) (-1.30) (-1.88)
ln (popi,2006) 1.228* 1.296* 1.527* 1.931**
(1.67) (1.73) (1.72) (2.01) Country groups (base: emerging Asia) i,2006
advanced -6.654** 0.412 4.417
(-2.23) (0.09) (0.70)
transition -2.473 -4.639 -3.901
(-0.78) (-1.25) (-0.95)
Sub-Saharan Africa -6.044 -3.930 -3.762
(-1.56) (-1.12) (-0.99)
Latin America -1.456 2.046 1.950
(-0.45) (0.56) (0.48)
4. Results
19
Latin America (-0.45) (0.56) (0.48)
Middle East
and North Africa
-6.899** -4.854 -3.065
(-2.01) (-1.31) (-0.66)
Euro member -4.161** -4.786** -4.603***
(-2.13) (-2.36) (-2.58)
openness i,2006 0.0208 0.0329
(1.19) (1.53)
( ) 2002,2002,2006, iii yyy − 0.213*** 0.257*
(3.03) (1.91)
Constant α̂ 19.54 15.70 11.59 8.855
(1.39) (0.94) (0.68) (0.49)
N 88 88 88 88
adj. R2 / §pseudo R2 0.429 0.476 0.520
Mean (median) dependent variable 7.2 (5.2) 7.2 (5.2) 7.2 (5.2) 7.2 (5.2)
mean FRIi 16.2 16.2 16.2 16.2
Notes: t statistics based on robust standard errors in parentheses; * p < 0.10, ** p < 0.05, *** p < 0.01
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(1) (2) (3) (5) (8)
OLS OLS OLS MM OLS
FRIi -1.585*** -1.333*** -1.235*** -0.972* -0.942**
(-3.63) (-2.90) (-2.89) (-1.95) (-2.34)
( )2006,ln iy -0.905 -0.523 -1.685 -3.086* -1.515
(-0.98) (-0.44) (-1.30) (-1.88) (-1.11)
ln (popi,2006) 1.228* 1.296* 1.527* 1.931** 0.743
(1.67) (1.73) (1.72) (2.01) (0.78) Country groups (base: emerging Asia) i,2006
advanced -6.654** 0.412 4.417 -2.150
(-2.23) (0.09) (0.70) (-0.34)
transition -2.473 -4.639 -3.901 -4.218
(-0.78) (-1.25) (-0.95) (-1.11)
Sub-Saharan Africa -6.044 -3.930 -3.762 -3.961
(-1.56) (-1.12) (-0.99) (-1.01)
Latin America -1.456 2.046 1.950 0.734
(-0.45) (0.56) (0.48) (0.18)
4. Results
Results Growth Regression: Outliers?
Linearity
assumption?
20
(-0.45) (0.56) (0.48) (0.18) Middle East
and North Africa
-6.899** -4.854 -3.065 -4.971
(-2.01) (-1.31) (-0.66) (-1.22)
Euro member -4.161** -4.786** -4.603*** -3.937
(-2.13) (-2.36) (-2.58) (-0.92)
openness i,2006 0.0208 0.0329 0.00993
(1.19) (1.53) (0.45)
( ) 2002,2002,2006, iii yyy − 0.213*** 0.257* 0.218***
(3.03) (1.91) (2.82)
Constant α̂ 19.54 15.70 11.59 8.855 20.51
(1.39) (0.94) (0.68) (0.49) (1.06)
N 88 88 88 88 77
adj. R2 / §pseudo R2 0.429 0.476 0.520 0.395
Mean (median) dependent variable 7.2 (5.2) 7.2 (5.2) 7.2 (5.2) 7.2 (5.2) 8.4 (7.8)
mean FRIi 16.2 16.2 16.2 16.2 15.7
Notes: t statistics based on robust standard errors in parentheses;
* p < 0.10, ** p < 0.05, *** p < 0.01
without
FRIi = 21 countries
and China
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4. Results
Results Growth Regression: Linearity Assumption?
FRI dummies (base: [0 –13.5]) OLS
[13.6–16.0] -2.860
(-0.98)
[16.1–19.05] -6.670** (-2.05)
[19.1–21.0] -10.06** (-2.53)
20
Gro
wth
Ra
te o
f R
eal G
SP
per
Capita in U
SD
in 2
00
8-2
011
Non-parametric fit of f(FRIi) in the GDP Growth Rate Model
Dummy Specification of FRIi (excerpt)
21
-30
-20
-10
010
Gro
wth
Ra
te o
f R
eal G
SP
per
Capita in U
SD
in 2
00
8-2
011
5 10 15 20Financial Reform Index, Average 2001 to 2005
Statistical test
H0: Linear specification and
non-parametric fit is not different
� p-value: 0.202
� H0 is not rejected:
� linearity assumption seems
appropriate
Robinson (1988) semiparametric regression estimator
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Is it the regulation or
the size of the financial sector (financial deepening)?
World Bank Financial Structure Dataset: measured in 2006
Liquid
liabilities to
GDP
Financial
system
deposits to
GDP
Private credit
by deposits
money banks
to GDP
Stock market
capitalization
to GDP
Stock market
total value
traded to GDP
Liquid liabilities to GDP1.000
Correlation matrix (p-values)
4. Results
22
Liquid liabilities to GDP
Financial system deposits to
GDP
0.9477 1.000
(0.0000)
Private credit by deposits
money banks to GDP
0.7530 0.7860 10.000
(0.0000) (0.0000)
Stock market capitalization
to GDP
0.7070 0.7464 0.6033 10.000
(0.0000) (0.0000) (0.0000)
Stock market total value
traded to GDP
0.6310 0.6594 0.7204 0.7508 10.000
(0.0000) (0.0000) (0.0000) (0.0000)
FRI0.3384 0.4747 0.5743 0.3491 0.4231
(0.0013) (0.0000) (0.0000) (0.0021) (0.0002)
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4. Results
Results Growth Regression: Regulation and/or size? (6) (7)
OLS OLS
FRIi -1.112** -0.750*
(-2.45) (-1.69)
( )2006,ln iy -1.767 -2.808*
(-1.36) (-1.90)
ln (popi,2006) 1.450 1.387
(1.56) (1.48)
Country groups (base: emerging Asia) i,2006
advanced -0.355 0.272
(-0.07) (0.05)
transition -5.702 -8.447**
(-1.44) (-2.12)
Sub-Saharan Africa -3.788 -3.557
(-1.07) (-0.89)
Latin America 1.973 2.739
23
Latin America 1.973 2.739
(0.55) (0.71) Middle East
and North Africa
-4.970 -4.486
(-1.37) (-1.21)
Euro member -4.620** -4.193*
(-2.24) (-1.96)
openness i,2006 0.0173 0.0155
(0.86) (0.86)
( ) 2002,2002,2006, iii yyy − 0.230*** 0.263**
(2.69) (2.13)
Fin.system deposits in % of GDP i,2006 0.0076
(0.33)
Stock market capitalization in % of GDP i,2006 0.0094
(0.75)
Constant α̂ 11.39 14.70
(0.62) (0.77)
N 86 74
adj. R2
/ §pseudo R
2 0.506 0.533
Mean (median) dependent variable 7.2 (5.2) 6.3 (4.7)
mean FRIi 16.4 16.8
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Summary
An increase in the FRI by one unit, leads to
• a loss of GDP growth of approx. 1 percentage-points between
end of 2007 and end of 2011, that is, an annual loss of
approx. ¼ percentage points GDP growth.
• an increase in the annual deficit ratio by 0.4 percentage
points.
5. Conclusions
24
points.
• an employment growth loss of approx. 0.7. percentage-points
between end of 2007 and end of 2010, that is, an annual loss
of approx. 0.2 percentage points employment growth, if
only countries with FRIi > 13 are included.
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5. Conclusions
Conclusions: Experiencing a déjà vu?
“It has become increasingly clear that financial and
capital market liberalization (...) was at the core of the
problem. It is no accident that the two large developing
countries that survived the crisis – and continued with
remarkably strong growth in spite of a difficult global
economic environment – were India and China, both
25
economic environment – were India and China, both
countries with strong controls on these capital flows.”
Stiglitz (2000, P. 1075) about the East Asian Crisis 1997-1998
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DEU
TUR
ZAF
ARG
BOLBRA CHLCOL
CRI
DOM
ECU
NIC
PRY
PERURY
ISRJOR
EGY
BGDLKA
HKG
IND
IDN
KORMYS
NPL
PAK
PHL
SGPTHA
VNM
DZACMR
ETH
GHA
KEN
MAR
MOZ NGA
TZA
TUN
UGA
BFA
AZE
BLR
ALB
GEO
KAZ KGZ
BGRRUS
CHN
UZB
POL
20
40
Gro
wth
Rate
of R
eal G
DP
per
Capita in U
SD
2008-2
011
FRI (AVERAGE 2001–2005) AND CUMULATED GROWTH RATE OF GDP PER CAPITA
IN USD 2008–2011
2. Dataset and Correlation Analyses
USAGBR
AUTBEL
DNK
FRA
DEU
ITA
NLD
NOR
SWECHECAN
JPNFIN
GRC
IRL
PRTESP
AUS
NZL
ZAFCRI
SLVGTM
MEX
NIC
VEN
PAKDZACMR
CIV
KEN
MDG
ZWE SEN
TUN
UKR
CZE
EST
LVA
HUNLTU
-20
0
Gro
wth
Rate
of R
eal G
DP
per
Capita in U
SD
2008-2
011
5 10 15 20Financial Reform Index, Average 2001 to 2005
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Conclusions / Future Research
5. Conclusions
What are the channels?
� Asset prices? (see, e.g., Favara and Imbs, 2011)
Which components of financial deregulation?
27
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Thank you very much
for your attentionQuestions? Questions?
Comments?
28
Paper: Hagen, Tobias (2013). Impact of National Financial Regulation on
Macroeconomic and Fiscal Performance after the 2007 Financial Shock – Econometric
Analyses Based on Cross-Country Data. Economics Discussion Papers, No
2013-26, Kiel Institute for the World Economy.
http://www.economics-ejournal.org/economics/discussionpapers/2013-26
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APPENDIX
Appendix
29
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-50
5G
row
th R
ate
of re
al G
DP
per
cap
ita
20
08
-20
11
in
%
Percentage change of real GDP per capita from 2007 to 2011 Appendix
-15
-10
Gro
wth
Ra
te o
f re
al G
DP
per
cap
ita
20
08
-20
11
in
%
Gre
ece
Irela
nd
Italy
Den
ma
rk
Spa
in
United
Kin
gd
om
New
Ze
ala
nd
Norw
ay
Fin
land
Port
uga
l
Ja
pa
n
United
Sta
tes
Fra
nce
Neth
erl
an
ds
Belg
ium
Can
ad
a
Sw
itzerl
an
d
Austr
ia
Sw
ed
en
Austr
alia
Ge
rma
ny
Isra
el
30
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020
40
Gro
wth
Rate
of re
al G
DP
per capita 2
008-2
011 in %
Percentage change of real GDP per capita from 2007 to 2011 Appendix
-20
Gro
wth
Rate
of re
al G
DP
per capita 2
008-2
011 in %
Latv
iaE
sto
nia
Madagascar
Cote
d'Ivoire
Ukra
ine
Hungary
Venezuela
, R
BE
l S
alv
ador
Lithuania
Mexic
oG
uate
mala
Czech R
epublic
Senegal
Zim
babw
eC
am
ero
on
South
Afric
aK
enya
Nic
ara
gua
Pakis
tan
Tunis
iaC
osta
Ric
aA
lgeria
Bulg
aria
Thaila
nd
Russia
n F
edera
tion
Sin
gapore
Turk
ey
Burk
ina F
aso
Jord
an
Mala
ysia
Hong K
ong S
AR
, C
hin
aG
eorg
iaC
olo
mbia
Phili
ppin
es
Kore
a, R
ep.
Chile
Bra
zil
Egypt, A
rab R
ep.
Kyrg
yz R
epublic
Nepal
Boliv
iaK
azakhsta
nE
cuador
Para
guay
Moro
cco
Tanzania
Pola
nd
Uganda
Dom
inic
an R
epublic
Alb
ania
Mozam
biq
ue
Nig
eria
Azerb
aija
nIn
donesia
Vie
tnam
Bangla
desh
Sri L
anka
Peru
Arg
entina
India
Uru
guay
Ghana
Uzbekis
tan
Bela
rus
Eth
iopia
Chin
a
31
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-50
5G
row
th R
ate
of E
mp
loym
ent-
Po
pu
latio
n R
atio
20
08
-20
11 in %
Percentage change of employment-population ratio from 2007 to 2011 Appendix
32
-15
-10
Gro
wth
Ra
te o
f E
mp
loym
ent-
Po
pu
latio
n R
atio
20
08
-20
11 in %
Irela
nd
Spa
in
United
Sta
tes
Den
ma
rk
Port
uga
l
Fin
land
New
Ze
ala
nd
Italy
Gre
ece
Sw
ed
en
United
Kin
gd
om
Can
ad
a
Neth
erl
an
ds
Norw
ay
Ja
pa
n
Fra
nce
Austr
alia
Sw
itzerl
an
d
Belg
ium
Austr
ia
Ge
rma
ny
Isra
el
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Percentage change of employment-population ratio 2007 to 2011
-50
5G
row
th R
ate
of E
mp
loym
ent-
Po
pu
latio
n R
atio
20
08
-20
11 in in %
Appendix
33
-15
-10
Gro
wth
Ra
te o
f E
mp
loym
ent-
Po
pu
latio
n R
atio
20
08
-20
11 in in %
Latv
iaE
sto
nia
Lithu
an
iaJam
aic
aS
outh
Afr
ica
India
Bulg
aria
Hun
ga
ryH
ong
Kon
g S
AR
, C
hin
aC
ze
ch R
epub
licE
cua
do
rG
eo
rgia
Mo
rocco
Kore
a, R
ep.
Mexic
oT
ha
iland
Mala
ysia
Ch
ina
Sri
La
nka
Alb
an
iaC
osta
Ric
aA
rge
ntina
Uga
nd
aU
kra
ine
Ru
ssia
n F
ed
era
tion
Mozam
biq
ue
Eth
iop
iaS
ing
ap
ore
Bela
rus
Ta
nza
nia
Mad
ag
asca
rV
ietn
am
Zim
bab
we
Jord
an
Burk
ina F
aso
Kyrg
yz R
ep
ub
licB
an
gla
desh
Cote
d'Ivo
ire
Pakis
tan
Sen
eg
al
Ne
pa
lG
han
aG
uate
mala
Eg
ypt,
Ara
b R
ep.
El S
alv
ado
rN
ige
ria
Boliv
iaC
am
ero
on
Dom
inic
an
Rep
ub
licU
zb
ekis
tan
Ve
ne
zue
la,
RB
Nic
ara
gua
Tun
isia
Aze
rbaija
nK
enya
Bra
zil
Phili
pp
ine
sIn
don
esia
Peru
Pa
ragu
ay
Co
lom
bia
Turk
ey
Ka
zakh
sta
nP
ola
nd
Uru
gu
ay
Alg
eria
Ch
ile
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010
20
Deficit R
atio in %
, A
ve
rag
e 2
008
to 2
01
0
Average budget deficit 2008-2010Appendix
-20
-10
Deficit R
atio in %
, A
ve
rag
e 2
008
to 2
01
0
Irela
nd
Gre
ece
United
Sta
tes
United
Kin
gd
om
Port
uga
l
Ja
pa
n
Fra
nce
Spa
in
Isra
el
Italy
Belg
ium
Neth
erl
an
ds
Austr
ia
Ge
rma
ny
Austr
alia
Can
ad
a
Den
ma
rk
New
Ze
ala
nd
Fin
land
Sw
ed
en
Norw
ay
34
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-50
5D
eficit R
atio in %
, A
ve
rag
e 2
008
to 2
01
0
Average budget deficit 2008-2010Appendix
-10
-5D
eficit R
atio in %
, A
ve
rag
e 2
008
to 2
01
0
Sri
Lan
ka
Eg
ypt, A
rab R
ep.
Gha
na
Lithu
ania
Jo
rdan
Pa
kis
tan
Po
lan
d
Ma
laysia
Ken
ya
Latv
ia
Co
lom
bia
Ge
org
ia
Ukra
ine
India
Burk
ina
Fa
so
Eth
iopia
Cze
ch
Re
pub
lic
Hun
gary
Sou
th A
fric
a
Turk
ey
Ph
ilipp
ines
Gu
ate
mala
El S
alv
ado
r
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sta
Ric
a
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an
da
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yz R
epu
blic
Bra
zil
Esto
nia
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isia
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ara
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a
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gua
y
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aila
nd
Ind
on
esia
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te d
'Ivoir
e
Bulg
ari
a
Russia
n F
ede
ratio
n
Ch
ile
Aze
rba
ijan
Mo
rocco
Be
laru
s
Peru
Kazakhsta
n
Kore
a,
Rep
.
Para
gua
y
Hong
Kon
g S
AR
, C
hin
a
Sin
ga
pore
35
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GBR
AUTBEL
DNK
FRA
DEU
ITANLD
NOR
SWE
CHE
CAN
JPN
FINGRCPRT
TUR
AUS
NZL
ZAF
ARG
BOLBRA
CHL
COL
CRI
DOM
ECU
SLVGTM
MEX
NIC
PRY PER
URY
VEN
ISR
JOREGY
BGD
LKA
HKG
IND
IDN
KOR
MYS
NPL PAK
PHL
SGP
THA
VNM
DZA
CMR
ETH
GHA CIV
KEN
MDG
MAR
MOZ
NGA
ZWESEN
TZA
TUN
UGA
BFA
AZE
BLRALB
GEO
KAZ
KGZ
BGR
RUS
CHNUKR
UZB
CZEHUN
POL
-50
5G
row
th R
ate
of
the
Em
plo
ym
ent-
to-P
op
ula
tion
Ra
tio
200
8-2
010
FINANCIAL REFORM INDEX (AVERAGE 2001–2005) AND
CUMULATED GROWTH RATE OF THE EMPLOYMENT TO POPULATION RATIO 2008–2010
Appendix
USA
IRL
ESP
JAM
EST
LVA
LTU
-15
-10
Gro
wth
Ra
te o
f th
e E
mp
loym
ent-
to-P
op
ula
tion
Ra
tio
200
8-2
010
5 10 15 20Financial Reform Index, Average 2001 to 2005
36
Pearson Spearman
All Countries, N=88 -0.4165 (0.0000 -0.4389 (0.0000
Only Advanced, N=22 -0.3288 (0.1352) -0.2207 (0.3237)
Advanced + Asia, N=51 -0.4508 (0.0009) 0.5228 (0.0001)
Negative correlation between
post-2007 employment growth
and FRI
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FIGURE 8: FINANCIAL REFORM INDEX (AVERAGE 2001–2005)
AND AVERAGE DEFICIT RATIO 2008–2010
AZEBLR BGRCAN
CHLCIV DNKEST
FIN
HKG
IDNKAZ
KORMAR NZL
NIC
NOR
PRYPERRUS
SGP
SWETHA TUNURY
010
20
Deficit R
atio, A
vera
ge
20
08-2
01
0
Bravais-Pearson: -0.0527 (0.6717)
Spearman: -0.0976 (0.4319)
N=67
Appendix
37
AUSAUT
AZE
BELBRA
BGR
BFA
CANCHL
COL
CRI
CIV
CZE
DNK
EGY
SLVEST
ETH
FIN
FRAGEO
DEU
GHA
GRC
GTMHUN
IND
IDN
IRL
ISRITA
JPN JORKEN
KGZ
LVALTU
MYS
MAR
NLD
NZLNIC
PAK
PHL
POL
PRT
RUS
ZAF
ESP
LKA
THA TUN
TURUGA
UKR
GBRUSA
URY
-20
-10Deficit R
atio, A
vera
ge
20
08-2
01
0
5 10 15 20Financial Reform Index, Average 2001 to 2005
No correlation between post-2007 budget deficits and FRI
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Results Deficit Regression I (1) (2) (3) (4) (5) (8)
OLS OLS OLS Median MM OLS
FRIi -0.456** -0.352 -0.428*** -0.465** -0.393*** -0.301*
(-2.23) (-1.56) (-3.06) (-2.13) (-2.66) (-1.97)
( )2006,ln iD -0.543 -0.417 1.172 -0.0953 0.198 0.425
(-0.98) (-0.69) (1.56) (-0.15) (0.41) (0.86)
( )2006,ln iy 0.792 1.021** 0.885** 0.621 0.614** 0.664**
(1.47) (2.04) (2.18) (0.93) (2.04) (2.06)
ln (popi,2006) -0.713* -0.884* -0.354 -0.584 -0.423 0.0938
(-1.74) (-1.81) (-1.05) (-1.41) (-1.55) (0.31)
Country groups (base: emerging Asia) i,2006
Advanced -2.464 -3.362* -2.402 -2.075 0.0804
(-1.21) (-1.76) (-1.15) (-1.52) (0.06)
Transition -2.712* 1.000 -0.501 -0.736 0.676
(-1.75) (0.64) (-0.17) (-0.59) (0.41)
Sub-Saharan Africa -2.112 -0.774 -0.802 -1.060 0.293
(-1.49) (-0.53) (-0.23) (-0.63) (0.19)
Latin America -1.920 0.0780 -0.654 0.0833 1.721
Appendix
38
Latin America -1.920 0.0780 -0.654 0.0833 1.721
(-1.33) (0.05) (-0.26) (0.05) (1.18)
Middle East and North Africa -2.885** -0.831 -2.169 -1.106 0.299
(-2.16) (-0.58) (-0.66) (-0.59) (0.20)
Euro member -3.438 -2.129 -1.373 -0.597 -2.462**
(-1.59) (-1.44) (-1.20) (-0.73) (-2.26)
openness i,2006 0.00464 0.0128* 0.010*** 0.0142**
(0.59) (1.86) (2.66) (2.54)
∑∑ ==
2006
2002 ,
2006
2002 , t tit ti YB
0.932*** 0.605*** 0.681*** 0.746*** (7.23) (4.03) (4.78) (5.41)
( ) 2002,2002,2006, iii yyy − -0.100* -0.0914 -0.0561 -0.0601
(-1.93) (-1.00) (-0.80) (-0.87)
Constant α̂ 12.23** 13.69 2.471 12.62 7.212 -5.597
(2.08) (1.34) (0.29) (1.06) (0.72) (-0.70)
N 66 66 58 58 58 47
adj. R2
/ §pseudo R
2 0.044 0.111 0.546 0.469 0.722
Mean (median) dependent variable -2.8
(-2.6)
-2.8
(-2.6)
-2.8
(-2.7)
-2.8
(-2.7)
-2.8
(-2.7)
-2.7
(-2.7)
without FRIi = 21
countries,
China and Norway Notes: t statistics based on robust standard errors in parentheses; * p < 0.10, ** p < 0.05, *** p < 0.01
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FRI dummies (base: [0 –13.5]) OLS
[13.6–16.0] -1.501
(-1.27)
[16.1–19.05] -2.283
(-1.54)
[19.1–21.0] -2.915*
(-1.83)
Results Deficit Regression II5
Figure 10: Non-parametric fit of f(FRIi) in the Deficit Ratio Model
Dummy Specification of FRIi (excerpt)
Statistical test
Appendix
39
-20
-15
-10
-50
De
ficit
Ra
tio
, A
ve
rag
e 2
00
8-2
01
0
5 10 15 20Financial Reform Index, Average 2001 to 2005
Statistical test
H0: The linear specification and the
non-parametric fit is not different
• Standardized Test statistic T: 1.455
• Critical value (95%): 1.96
• Approximate P-value: 0.15
���� H0 is not rejected: linearity
assumption seems (barely)
appropriate
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Appendix
Results Employment Growth Regression I (1) (2) (3) (4) (5) (8)
OLS OLS OLS Median MM OLS
FRIi -0.386*** -0.345** -0.433** -0.254 -0.121 -0.185
(-2.78) (-2.25) (-2.53) (-1.40) (-0.93) (-1.32)
( )2006,ln iE -2.170 -4.727 -8.243** -5.630 -3.585 -1.453
(-1.33) (-1.29) (-2.56) (-1.23) (-0.50) (-0.49)
( )2006,ln iy -0.214 -0.504 -0.884* -0.762 -0.666 -0.388
(-0.82) (-1.10) (-1.83) (-1.12) (-1.32) (-0.78)
ln (popi,2006) 0.188 0.0591 0.291 0.0886 -0.000593 0.197
(0.53) (0.19) (0.89) (0.29) (-0.00) (0.56)
Labour market freedom index -0.192 -0.335 -0.186 -0.239 -0.0206
(-0.73) (-1.32) (-0.57) (-0.71) (-0.09) Country groups (base: emerging Asia) i,2006
advanced 2.243 4.887** 2.611 1.431 2.068
(1.44) (2.50) (1.00) (0.81) (0.91)
transition -1.420 0.729 -0.620 -0.758 0.483
(-0.92) (0.46) (-0.69) (-0.59) (0.37)
Sub-Saharan Africa 0.286 1.331 0.901 0.455 0.732
40without FRIi = 21
countriesNotes: t statistics based on robust standard errors in parentheses; * p < 0.10, ** p < 0.05, *** p < 0.01
Sub-Saharan Africa 0.286 1.331 0.901 0.455 0.732
(0.21) (1.11) (0.69) (0.39) (0.68)
Latin America 2.585** 4.694*** 2.970*** 2.464* 3.384***
(2.30) (3.63) (2.83) (1.93) (2.86)
Middle East and North Africa -0.00176 0.506 0.327 0.754 2.187
(-0.00) (0.28) (0.16) (0.23) (1.25)
Euro member -3.152* -3.600*** -2.890 -0.909 -1.102
(-1.88) (-2.65) (-1.11) (-0.40) (-0.74)
Openess i,2006 0.0163** 0.00843 0.00543 0.00549
(2.27) (0.85) (0.93) (0.82)
( ) 2002,2002,2006, iii EEE − -0.281*** -0.171 -0.110 -0.102
(-3.14) (-1.42) (-0.85) (-1.45)
( ) 2002,2002,2006, iii yyy −
-0.0304 -0.0270 0.00740 -0.00805
(-0.78) (-0.60) (0.28) (-0.28)
Constant α̂ 12.48 27.50 41.46*** 30.83 21.65 6.739
(1.35) (1.62) (2.68) (1.28) (0.77) (0.47)
N 88 85 85 85 85 74
adj. R2
/ §pseudo R
2 0.164 0.269 0.373
§0.275 0.078
Mean (median) dependent variable -1.2 (-0.5) -1.2 (-0.5) -1.2 (-0.5) -1.2 (-0.5) -1.2 (-0.5) -0.4 (-0.1)
mean FRIi 16.2 16.2 16.2 16.2 16.2 15.8
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Appendix
Results Employment Growth Regression IIDummy Specification of FRIi (excerpt)FRI dummies (base: [0 –13.5]) OLS
[13.6–16.0] 0.306
(0.33)
[16.1–19.05] -0.624
(-0.64)
[19.1–21.0] -3.689***
(-2.82)
10
Gro
wth
Ra
te o
f E
mp
loym
en
t to
Po
pu
lation
Ra
tio
20
08-2
010
Figure 11: Non-parametric fit of f(FRIi) in the Employment Growth Model
Statistical test
41
-10
-50
5G
row
th R
ate
of E
mp
loym
en
t to
Po
pu
lation
Ra
tio
20
08-2
010
5 10 15 20Financial Reform Index, Average 2001 to 2005
Statistical test
H0: The linear specification and the
non-parametric fit is not different
• Standardized Test statistic T: 3.405
• Critical value (95%): 1.96
• Approximate P-value: 0.00
���� H0 is rejected: linearity
assumption not appropriate
However, (linear) negative
relationship for FRIi > 13 ?
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Results Employment Growth Regression III
Reduced sample of 71 countries with FRIi > 13, assuming linearity (excerpt)
(12) (13) (14)
OLS Median MM
FRIi -0.707*** -0.545** -0.521*
(-2.96) (-2.11) (-1.87)
N 71 71 71
adj. R2
/ §pseudo R
2 0.4817
§0.3471
Mean (median) dependent variable -1.4 (-0.7) -1.4 (-0.7) -1.4 (-0.7)
mean FRIi 17.5 17.5 17.5
Appendix
42