università degli studi di torino
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Università degli Studi di Torino
Whence Policy?Government Policies, Finance,
and Economic Integration
Giuseppe Bertola ; Anna Lo Prete Università di Torino and CEPR; Università di Torino
Economic integration
Finance
Government policies
MORE
MORE
LESS
1980s – early 2000s :
…aftermath of 2008-09 crisis ?
Panel OECD, 1980-2007,5-year averages of standard country-level data:
TRENDS
Financial Development Openness ?
050
100
150
200
Financial Developm
ent
0 50 100 150 200O penness
Levels
-100-50
050
100
Financial Developm
ent
- 40 -20 0 20 40O penness
Deviat ions f rom count r y means
050
100
150
200
Financial Developm
ent
0 5 10 15 20Financial St ruct ure
Levels
-100-50
050
100
Financial Developm
ent
- 10 -5 0 5 10Financial St ruct ure
Deviat ions f rom count r y means
050
100
150
200
Financial Developm
ent
0 50 100 150 200O penness
Levels
-100-50
050
100
Financial Developm
ent
- 40 -20 0 20 40O penness
Deviat ions f rom count r y means
050
100
150
200
Financial Developm
ent
0 5 10 15 20Financial St r uct ur e
Levels
-100-50
050
100
Financial Developm
ent
- 10 -5 0 5 10Financial St r uct ur e
Deviat ions f rom count r y means
Financial Development Financial Structure ?
FINANCE and OPENNESS
(Tressel Detragiache, 2008)
(Rajan Zingales,2003)(Do Levchenko,2007)(Beck,2002)
Openness Government Size ?
Openness Social Policy ?
GOVERNMENT POLICIES and OPENNESS
510
15
20
25
Governm
ent Size
0 50 100 150 200Openness
Levels
-4
-2
02
4
Governm
ent Size
- 40 -20 0 20 40Openness
Deviat ions f rom count r y means
010
20
30
40
Social Policy
0 50 100 150 200Openness
Levels
-5
05
10
Social Policy
- 40 -20 0 20 40Openness
Deviat ions f rom count r y means
510
15
20
25
Governm
ent Size
0 50 100 150 200Openness
Levels
-4
-2
02
4
Governm
ent Size
- 40 -20 0 20 40Openness
Deviat ions f rom count r y means
010
20
30
40
Social Policy
0 50 100 150 200Openness
Levels
-5
05
10
Social Policy
- 40 -20 0 20 40Openness
Deviat ions f rom count r y means
(Rodrik,1998)
(Agell, 2002)
(Rodrik,1997)(Sinn,2003)(Bertola Lo Prete,2008)
Financial Development Government Size ?
Financial Development Social Policy ?
FINANCE and GOVERNMENT POLICIES
050
100
150
200
Financial Developm
ent
5 10 15 20 25Government Size
Levels
-100-50
050
100
Financial Developm
ent
- 4 -2 0 2 4Government Size
Deviat ions f rom count ry means
050
100
150
200
Financial Developm
ent
0 10 20 30 40Social Policy
Levels
-100-50
050
100
Financial Developm
ent
- 5 0 5 10Social Policy
Deviat ions f rom count ry means0
50
100
150
200
Financial Developm
ent
5 10 15 20 25Government Size
Levels
-100-50
050
100
Financial Developm
ent
- 4 -2 0 2 4Government Size
Deviat ions f rom count r y means
050
100
150
200
Financial Developm
ent
0 10 20 30 40Social Policy
Levels
-100-50
050
100
Financial Developm
ent
- 5 0 5 10Social Policy
Deviat ions f rom count r y means
Substitution(Bertola Koeniger,2007)
Substitution/complement?
A SIMPLE MODEL
Two periods/contingencies:
t
financial transaction unit cost μ? Constraint:
cH = cL = ሺyL + yHሻ/2 perfect financial markets?
full smoothing:
Max log utility:
Can be improved by (costly) redistribution τ:
t
max
With set
Financial market yields welfare
Government redistribution: less needed if smaller μ,
more costly if larger λ (deadweight loss).
Decreasing in λ, and also in μ as long as positive
finance, i.e.
t
yields welfare
If lowering λ and μ is possible but costly (lower output if close the economy,
more instability if spur finance?)do it,
depending on shape of costs and benefits.
THEORETICAL MECHANISMS
Openness, larger mean of market incomes
perhaps larger dispersion
Less government
More private finance
Financial market liberalization: smaller transaction costs
less effective national government policies: larger deadweight losses
Financial market development’s policy roots: Financial structure Openness Government size Social policy
What drives related changes?
Country specific choices,Shaped by exogenous conditions
WHENCE POLICIES?
Country characteristics… …global trends
“Globalization”(it)by legal origin (l)
Natural Openness (i)
Legal Origin (l)Global Trade (t)
Globalization
international trade opportunitiesdiffer across countries/over time:
25
.95
95
71
75
.22
111
7.6
76
34
10
7.0
59
3
2 1 9 .2 0 1 2 2 3 2 3 .2 2 4 7 3 0 .1 3 6 3 1 9 5 8 .6 3 5
French English
German Scandinavian
Op
en
ne
ss
Global izationGraphs by legor
GLOBALIZATION and OPENNESS by Legal Origin
Potentially useful instruments
2.8
21
.15
115
7.5
20
2 1 9 .2 0 1 2 2 3 2 3 .2 2 4 7 3 0 .1 3 6 3 1 9 5 8 .6 3 5
French English
German Scandinavian
Fin
an
cia
l S
tru
ctu
re
Global izationGraphs by legor
GLOBALIZATION and FINANCIAL STRUCTURE by Legal Origin
Potentially useful instruments:correlated with policies,
11.3
39
91
18
.67
99
96
.36
32
88
15
.20
47
5
2 1 9 .2 0 1 2 2 3 2 3 .2 2 4 7 3 0 .1 3 6 3 1 9 5 8 .6 3 5
French English
German Scandinavian
Go
ve
rnm
en
t S
ize
Global izationGraphs by legor
GLOBALIZATION and GOVERNMENT SIZE by Legal Origin
Potentially useful instrumentsdifferently correlated with different policies,
1.9
01
05
63
2.3
34
88
11.2
20
97
27
.19
83
4
2 1 9 .2 0 1 2 2 3 2 3 .2 2 4 7 3 0 .1 3 6 3 1 9 5 8 .6 3 5
French English
German Scandinavian
So
cia
l P
oli
cy
Global izationGraphs by legor
GLOBALIZATION and SOCIAL POLICY by Legal Origin
Potentially useful instrumentsalong with main effects (can’t show).
Potentially useful instruments.
Financial Development,
Determinants of policies:=
Legal Origin (l)Global Trade (t) Globalization (it)
Natural Openness(i)Globalization*Legal Origin (lit)
Not the most important! but: exogenous.
Table 3. OLS regressionsDependent Variable: Financial Development
1 2 3 4
Financial Structure 5.227 5.445 4.965 3.8788.13 7.99 7.75 5.30
Openness -0.106 -0.059 -0.146
-1.01 -0.59 -1.30
Government Size -3.263 -5.000-3.29 -4.93
Social Policy 1.9913.16
Observations 132 132 132 132R2 0.298 0.303 0.367 0.414
insignificant
-100
-500
5010
0Fin
ancia
l Dev
elopm
ent
-40 -20 0 20 40Opennes s
-100
-500
5010
0Fin
ancia
l Dev
elopm
ent
-10 -5 0 5Financ ia l Struc ture
-100
-500
5010
0Fin
ancia
l Dev
elopm
ent
-4 -2 0 2 4Gov ernment Siz e
-100
-500
5010
0Fin
ancia
l Dev
elopm
ent
-5 0 5 10Soc ia l Po l i c y
with country dummies
Table 4. IV regressionsDependent Variable: Financial Development
1 2 3 4 5 6 7 8Endogenous:Financial Structure 7.092 7.598 8.643 10.393 7.643 8.349 7.364 5.936
5.98 5.36 4.81 4.35 7.10 7.31 6.68 5.03Openness -0.097 -0.122 0.041 -0.182 -0.127 -0.334
-0.79 -0.91 0.18 -1.49 -1.08 -2.18Government Size 3.738 6.776 -3.264 -5.795
0.94 1.38 -2.75 -4.98Social Policy -2.599 2.982
-1.02 3.12Exogenous:English 9.609 7.305 8.019 3.239Common Law 1.20 0.81 0.83 0.26German 45.288 43.796 55.347 70.499Commercial Code 5.10 4.78 3.11 2.85Scandinavian 1.690 1.221 -19.060 -14.950Commercial Code 0.17 0.12 -0.75 -0.59Statistics:Over-identifying 3.435 2.429 1.214 0.386 18.549 17.088 14.546 6.452restrictions a (0.633) (0.657) (0.750) (0.824) (0.017) (0.017) (0.024) (0.265)
Specification test b 6.966 9.041 9.638 10.493 14.394 14.902 13.827 14.039(0.008) (0.011) (0.022) (0.033) (0.000) (0.001) (0.003) (0.007)
Relevance of the instruments c
18.261 13.958 3.960 6.232 12.993 10.840 9.088 16.824
Observations 132 132 132 132 132 132 132 132
Similar to OLS but larger and statistically different
Table A.1. ROBUSTNESSDependent Variable: Financial Development
Different Sets of Instrumental Variables Different exogenous time-varying trends
Different dependent
variable
Add per capita
GDP
Add dummy for Advanced
countries
Country dummies instead of
Legal Origin indicators
Shipment Costs
World Trade
Volume
Stock Market Capitalization
Endogenous:Financial Structure 6.121 5.872 6.950 3.079 5.044 7.864
5.22 4.88 6.24 3.51 4.57 5.55Openness -0.372 -0.356 -0.218 -0.388 -0.279 -0.356
-2.69 -2.86 -2.02 -2.48 -1.72 -2.90Government Size -6.112 -6.007 -4.345 -6.608 -6.328 -2.810
-5.10 -5.08 -4.12 -5.43 -4.85 -0.95Social Policy 3.308 3.235 1.659 3.993 2.616 2.588
3.68 4.45 2.28 4.06 2.56 1.55Statistics:Over-identifying 6.479 6.580 49.797 15.132 8.549 4.348restrictions a (0.372) (0.361) (0.001) (0.010) (0.128) (0.500)Specification test b 26.129 29.986 4.132 6.852 10.583 28.593
(0.000) (0.000) (0.388) (0.144) (0.032) (0.000)Relevance of the instruments c
9.780 8.742 5.955 10.738 14.676 16.824
Observations 132 132 132 132 132 132
Structural policy determinants of Financial Development:
Financial Structure 5.936
5.03Openness -0.334
-2.18Govt. Size -5.795
-4.98Social Policy 2.982
3.12
Negative (small),
Indirect effects
through other
policies.
Structural estimates, What if an instrument changes?
10 p.p. decline of Global Trade (…after crisis?)
Countries Predicted change in
(Legal Origin)Financial Structure Openness Government
SizeSocial Policy
Financial Develop.
Portugal -3.36 -10.68 0.70 -1.97 -26.32(French)
United Kingdom -3.12 -11.06 0.97 -1.32 -24.43(English)
Germany -3.05 -9.21 1.15 -1.68 -26.75(German)
Finland -3.02 -7.09 1.86 -0.04 -26.45(Scandinavian)
Causes and effects of policies
We use exogenous “Globalization”to identify roots of Financial Development
in policies.• Can assess implications of any possible
change in policy for Financial Development…instability, fragility…
• Future work: welfare (growth, distribution, …)
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