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Comments on: Financial Development, Financial Fragility, and Growth by Norman Loayza and Romain Ranciere

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Comments on: Financial Development, Financial Fragility, and Growth by Norman Loayza and Romain Ranciere Graciela L. Kaminsky George Washington University – PowerPoint PPT presentation

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Title: Comments on: Financial Development, Financial Fragility, and Growth by Norman Loayza and Romain Ranciere


1
Comments on Financial Development, Financial
Fragility, and Growth by Norman Loayza and Romain
Ranciere
  • Graciela L. Kaminsky
  • George Washington University
  • Second Workshop of the Latin American Finance
    Network
  • Cartagena, Colombia
  • December 3, 2004

2
Motivation
  • Financial development triggers growth
  • The endogenous growth literature claims this
    link. For example, Ross Levine (2004) reports
    that increasing financial deepening from the mean
    of the lowest quartile to the mean of the upper
    quartile (of the distribution of domestic
    credit/GDP) increases growth by 1 percentage
    point.
  • Bekaert, Campbell and Lundblad ( 2001) results
    indicate that liberalization promotes growth,
    with growth rates increasing 1 percentage point
    following liberalization.
  • Financial liberalization harms growth
  • The international finance literature suggests
    that financial liberalization triggers excesses
    with booms and busts in financial markets and a
    collapse in economic activity.
  • Kaminsky and Reinhart (1999) results indicate
    that the probabilities of a banking crisis
    increase by 40 percent following financial
    liberalization. See also, Detragiache and
    Demirguc-Kunt (1999).
  • These opposite results have coexisted without any
    explanation.

3
Goals of the Paper
  • This paper tries to explain the apparently
    contradictory results of the literature.
  • In particular, the authors try to untangle the
    short-run and long-run effects of financial
    deepening on output growth.
  • Short-run pain, long-run gain?
  • Possible explanations.

4
The Estimations
  • y GDP per capita growth rate
  • X control variables including
  • financial depth
  • initial level of GDP
  • government consumption/GDP
  • volume of trade/GDP
  • inflation rate.

5
The Data
  • Between 66 and 82 developing and developed
    countries, depending on data availability.
  • Sample 1960-2000.

6
The Results
  • The Long Run A 1 percent increase in the ratio
    of private credit to GDP leads to a rise of 0.7
    percentage points in the growth rate of per
    capital GDP.
  • The Short Run The average response of the growth
    rate to an increase in the growth rate of private
    credit/GDP is -6.
  • Interpretation Boom-bust cycles in credit lead
    to a temporary output collapse, still permanent
    financial deepening promotes growth.

7
The Short-Run
  • Can the short-run adverse effect of credit on
    growth be explained by
  • Banking crises? (number of years of systemic
    banking crises in the 1960-2000 period)
  • Financial volatility? (standard deviation of the
    growth rate of the private credit to GDP ratio
    over the period 1960-2000).
  • Yes

8
More Results
  • Typical growth equations with a pooled
    (cross-country, time-series) data set.
  • Eighty two countries.
  • For each country, 8 non-overlapping five-year
    periods over 1960-2000.
  • Financial deepening has a positive effect on
    growth but
  • Banking crises and financial volatility harm
    growth.

9
Supporting Evidence on Short- Run Pain,
Long-Run Gain
  • Source Short-Run Pain, Long-Run Gain The
    Effects of Financial Liberalization Graciela
    Kaminsky and Sergio Schmukler, NBER Working
    Paper 9787, June 2003.

10
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11
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12
Comments
  • Findings from the stock market responses to
    liberalization and the stories that the authors
    tell in the theoretical section of the paper
    suggest that
  • Threshold levels may matter in the relationship
    between financial development and growth. Booms
    in credit may not trigger collapses in economic
    activity in mature financial markets.
  • Do institutions matter when examining the
    short-run effect of financial development?
    Perhaps interaction terms?
  • Also, is there a linear relationship between
    financial deepening and growth? Isnt
    0.7 too big? Does financial depth affect the
    steady state growth rate?

13
More Comments
  • In the long run, financial depth fuels growth but
    in the short run it harms growth. What are the
    channels?
  • Do short-run booms hurt capital accumulation? or
    productivity?
  • Similarly, for the long-run relationship Is it
    capital accumulation or productivity?
  • Financial development goes hand in hand with
    financial liberalization (and integration with
    world capital markets). But here Norman and
    Romain just look at domestic financing not world
    financing. Physical location may not matter as
    much with financial globalization. Bias???
  • Report in a graph the short-run responses by
    country (organized by size) with the country
    names.

14
Last and Very Important Comment
  • Kaminsky in the abstract of the paper should be
    written with a final Y not i.

15
Conclusions
  • Very interesting paper, a must-read.
  • Very careful estimations.
  • The first paper to look jointly at the short- and
    long-run effects of financial deepening on
    growth. I like that section very much. The
    authors should expand this part of the paper.
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