Does Financial Structure Matter?

We address the issue of whether financial structure influences economic growth. Three competing views of financial structure exist in the literature: the bank-based, the market-based and the financial services view. Recent empirical studies examine their relevance by utilizing panel and cross-section approaches. This paper, for the first time ever, utilizes time series data and methods, along with the Dynamic Heterogeneous Panel approach, on developing countries. We find significant cross-country heterogeneity in the dynamics of financial structure and economic growth, and conclude that it is invalid to pool data across our sample countries. We find significant effects of financial structure on real per capita output, which is in sharp contrast to some recent findings. Panel estimates, in most cases, do not correspond to country-specific estimates, and hence may proffer incorrect inferences for several countries of the panel.Financial Structure, Economic Development, Vector Error- Correction Model, Dynamic Heterogeneous Panels

Examining Private Investment Heterogeneity: Evidence from a Dynamic Panel

domestic private investment, public investment, dynamic heterogeneity, endogeneity, Generalised Method of Moments

Financial Restraints in the South Korean Miracle

We provide novel empirical evidence on the effects of financial restraints on South Korean financial development. The evidence is linked to a simple model of the Korean banking system that encapsulates its cartelised nature, which predicts a positive association between financial development and (i) the degree of state control over the banking system, (ii) mild repression of lending rates. The model also predicts that in the presence of lending rate controls, increases in the level of the administered deposit rate are unlikely to influence financial deepening. We test the model empirically by constructing individual and summary measures of financial restraints. Our empirical findings are consistent with our theoretical predictions but contrast sharply with the predictions of earlier literature that postulates that interest rate ceilings and other financial restraints constitute sources of ‘financial repression’.Financial deepening; financial restraints

Government Solvency: Revisiting some EMU Countries

Corsetti and Roubini (1991) reported that the government finances of Greece, Ireland, Italy and the Netherlands (now all EMU countries) did not satisfy the intertemporal budget constraint (IBC). We re-examine this issue by utilizing a new empirical approach and extended data set. Structural shifts, an issue which Corsetti and Roubini were unable to address due to the lack of suitable econometric methods, are tackled. We find that: (i) multiple structural shifts, most of which correspond to important policy changes, did occur in the fiscal path of these countries; (ii) the effect of the majority of structural shifts has been to strengthen the evidence supporting IBC; and (iii) government finances of all four countries satisfy the IBC and this finding is robust to different time horizons. We also find a clear positive Maastricht effect on IBC for all countries.intertemporal budget constraints, strong and weak form sustainability, structural breaks

Ideas production in emerging economies

We model 'new ideas' production in a panel of 17 emerging countries. Our results reveal: (i) ideas production is duplicative, (ii) externality associated with domestic knowledge stocks is of above unit factor proportionality, (iii) OECD countries raise the innovation-bar for emerging countries, (iv) there is no significant knowledge diffusion across emerging countries, and (v) growth in emerging countries appear far from a balanced growth path

Testing weak exogeneity in multiplicative error models

Empirical market microstructure literature widely employs the non-linear and non-Gaussian Multiplicative Error Class of Models (MEMs) in modelling the dynamics of trading duration and financial marks. It routinely maintains the weak exogeneity of duration vis-à-vis marks in estimations. However, microstructure theory states that trade duration, volume and transaction prices are simultaneously determined. We propose Lagrange-multiplier (LM) tests for weak exogeneity for the MEMs. Our LM tests are extensions of the weak exogeneity tests applicable to VAR or VECM models with Gaussian distribution. Empirical assessments show that (i) weak exogeneity is widely rejected by the data in the MEMs and (ii) the failure of weak exogeneity seriously biases parameter estimates. We hope our tests will be of interest in future empirical applications

Examining private investment heterogeneity: Evidence from a dynamic panel

We investigate domestic private investment behaviour in a panel of 24 low-income and middle-income countries spanning a period of 1981-2000. The paper rigorously addresses (i) the cross-country heterogeneity in private investment behaviour, and (ii) endogeneity. Indicators of financial sector development and other standard macroeconomic determinants of private investment appear significant in explaining private investment behaviour in our sample; however, the estimated parameters and adjustment dynamics exhibit important cross-country differences. The empirical findings of the paper have important implications namely that first, cross-country heterogeneity needs to be addressed while modelling the private investment behaviour, and second, at the policy level, the country-specific approach appears potentially more effective than the one-size-fits-all approach for boosting private investment

Private information in executives' option trades: Evidence from the UK

UK executives' stock option exercises and associated sell decisions are motivated by private, inside, information. Executives use their inside information to lock in short-term gains, and to sell stock acquired prior to negative abnormal stock returns. This informed trading is robust to the alternative factors that might motivate the exercise of executive stock options, including option moneyness and value of exercise. We suggest that the disparity in informed trading between US and UK executives' option trades is related to important differences in the proportion of executive remuneration linked to options, the regulation of options, and the taxation of option gains. Copyright (c) The London School of Economics and Political Science 2009

Reforms, Incentives and Banking Sector Productivity: A Case of Nepal

We model banks as profit-cum-utility maximizing firms and study, inter alia, bankers' incentives (optimal effort) and incentive driven productivity following deregulations. Our model puts to test a panel of Nepalese commercial banks which went through deep financial reforms in the recent past. We find that (i) bankers' efforts and productivity have notably improved in Nepal, (ii) bankers' efforts significantly explain the banking sector's productivity, (iii) the proportion of non-performing loans has considerably declined, and (iv) banking services have become costly, although the bank spread has moderately declined. Our approach is different from the widely used data envelopment analysis (DEA) of bank productivity, hence complements the literature. It also informs the current policy debate in Nepal where the Central Bank is seen to be geared towards regulating the financial system and micro-managing the banking institutions

The impact of the 2008 crisis on UK prices: what we can learn from the CPI microdata

This paper takes the locally collected price-quotes used to construct the CPI index in the UK for the period 1996-2013 to explore the impact of the crisis on the pricing behavior of firms. We develop a time-series framework which is able to capture the link between macro- economic variables (in?ation and output) and the behavior of prices in terms of the frequency of price change, the dispersion of price levels and the dispersion of price-growth. Whilst these effects are present, they are small and do not have significant effects for monetary policy