Financial monetary economy
Zeinab Shabani Koshalshahi; Mohammad Taher Ahmadi Shadmehri; Ali Akbar Naji Meidani; Mohammad Ali Falahi
Abstract
This paper tried to study the effect of credit crunch on the stagnation of industrial sector and their bilateral relationship. In addition, the role of good governance on the intensity of the relationship between these two will be examined. For this purpose, the MS-IVAR model is used. The credit crunch ...
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This paper tried to study the effect of credit crunch on the stagnation of industrial sector and their bilateral relationship. In addition, the role of good governance on the intensity of the relationship between these two will be examined. For this purpose, the MS-IVAR model is used. The credit crunch index is calculated based on the maximum available information and its main determinants. Data were collected with annual frequency (1996- 2020) from the most recent statistics published by the Central Bank of the Islamic Republic of Iran and World Bank website. The results showed that credit crunch had a positive significant effect on the stagnation of industrial sector. In addition, there is an intensified relationship between these variables. However, good governance index influence can significantly reduce the severity of effect of credit crunch, as demonstrated through interactive analysis. Therefore, promoting good governance can be mentioned as a solution to compensate for the negative effect of credit crunch on the stagnation of industrial sector
fereshteh jandaghi meybodi; Mohammad Ali falahi; Mahdi feizi
Abstract
The purpose of this study is to determine the preferences of the central bank of Iran and the optimal monetary policy rule using the optimal control method. so, we assumed that monetary authorities solving an optimization problem in backward looking expectation framework with regard to the constraints ...
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The purpose of this study is to determine the preferences of the central bank of Iran and the optimal monetary policy rule using the optimal control method. so, we assumed that monetary authorities solving an optimization problem in backward looking expectation framework with regard to the constraints of the economic structure, which includes four equations of aggregate supply, aggregate demand, money demand and government expenditures. using Ordinary Least Squares (OLS) and Seemingly Unrelated Regression Method (SUR), for the period of 1979-1397, the preferences of the monetary authorities that minimize the amount of Social welfare losses, were selected. The results indicate that the central bank should consider the deviation of monetary growth rate and then the output gap. Also, the optimal rule of monetary policy derived from the optimal preferences indicates that the central bank must react simultaneously to the changes in inflation, output gap, real exchange rates, government expenditure growth, oil and tax revenues growth.
Mohammad Ali falahi; mostafa salimifar; fateme mardani
Abstract
Introduction
One of the advantages of Friedman’s theory for committing to a monetary policy is that firms, workers and consumers would be able to form their expectations about the future policies implemented by the central bank and monetary authorities. The intuition of the time inconsistency concept, ...
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Introduction
One of the advantages of Friedman’s theory for committing to a monetary policy is that firms, workers and consumers would be able to form their expectations about the future policies implemented by the central bank and monetary authorities. The intuition of the time inconsistency concept, introduced by Kydland and Prescott (1977) who won the Nobel Prize in Economics, is about a situation in which “being optimal in past” is different from “being optimal in future”. This problem arises, because the preferences of individuals would change during the time of making decisions until the time of implementing the chosen policy. If private sector knows and believes that the central bank is committed to a certain inflation target, then, the economic performance will improve by lower inflation expectation and lower inflation rate at a given rate of unemployment. But sometimes when the announced policy is believed by private sector, the authorities get incentives to change the policy in order to lower unemployment by making an unexpected inflation. Therefore, the unemployment would be lower than natural rate and the production level would rise more than full employment level.
In this study, the existence of time inconsistency in Iran’s economy is examined in both the long-run and short-run terms based on Ireland model (1999). For the long-run, the existence of cointegration between quarterly variables of inflation and unemployment time series is tested for 1990:5 to 2015:5 and 2002:4 through 2015:5 in short-run in order to explain the dynamics and co-movement of inflation and unemployment including unobserved shocks, state space equations and Kalman filter approach are used.
Theoretical Framework
Time inconsistency concept can help to understand the incentives of policymakers to change a policy during time. If policymakers can surprise the private sector, they will attain their goals at a lower cost. But, due to rational expectations, the incentives according to time inconsistent behavior can lead to an inflationary orientation in monetary policy. The inflationary bias as described by Kydland and Prescott (1977) comes from the inability of monetary authority to commit to a low-inflation policy.
Methodology
In this study the Ireland (1999) model is applied, which is based on Barro-Gordon’s model (1983). Barro-Gordon model explains the behavior of unemployment rate based on Philips Curve and introduces an objective function for the central bank with two variables, namely, inflation and unemployment rate.
Ireland describes a more general autoregressive process for unemployment rate which contains a unit root and presents a control error term for inflation. As a result, Ireland explores long-run and short-run relationships between these two variables. If both variables have a unit root, then, one can examine the cointegration relationship between them which is confirming the existence of time inconsistency problem in the economy for the long-run term. For the short-run relationship, state-space model and Kalman filter approach are used. This study examines both terms in Iran’s economy for two quarterly times series variables 1990:5 to 2015:5 and 2002:4 to 2015:5.
Results and Discussion
For the first part, testing the cointegration constraint, Augmented Dickey-Fuller test is applied to check for the unit roots in the two series. The results show the process for unemployment contains a unit root in either sample period. The Johansen test and the likelihood ratio statistic are used to test the null hypothesis of no cointegration. The result of Johansen test rejects the null hypothesis of no cointegration between inflation and unemployment at the 0.01 significance level for the full sample and at the 0.1 significance level for the post-2002 sample. Thus, as predicted by the model, the two variables are cointegrated.
To understand the theory's implications for the short-run behavior of inflation and unemployment, the maximum likelihood estimates of the model's parameters are obtained by mapping the constrained ARMA model into the state-space form and using the Kalman filter to evaluate the likelihood function, as suggested by Hamilton (1994). At 0.01 critical value for a chi-square random variable with 10 degrees of freedom, based on model’s structure, the likelihood ratio tests do not reject the model's short-run restrictions.
Conclusions and Suggestions
Does the time-consistency problem explain the behavior of inflation in Iran? Barro and Gordon's (1983) model of time-consistent monetary policy implies that long-run trend in the natural rate of unemployment will introduce similar trend into the inflation rate when the central bank cannot commit to a monetary policy rule. Tests of the model's short-run restrictions, indicate that the model is also successful at accounting for the dynamic, quarter-to-quarter co-movement of inflation and unemployment in Iran.
The results can potentially explain the persistent inflation in Iran’s economy. In other words, in Iran’s economy which the policymaker’s decision often related to short-run term and their decisions are variable and unstable, the consideration of the outcomes of time inconsistency behavior could be useful. However, because of the major role of oil income in the economy, there are a lot of unexpected shocks which can limit the government to commit to a rule. Thus, considering not an optimal amount but an optimal range of discretionary behavior would be desirable.
narges salehnia; Ahmad Seifi; Mohammad Ali Falahi; Mohammad hossein Mahdavi Adeli
Abstract
Introduction
Economic growth has been tied to the growth of fuels consumption like natural gas. The inherent features of natural gas market like its dependence on wellhead price, long-distance transportation costs, gas pipeline systems, economies of scale, non-existence of monopoly market for the end ...
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Introduction
Economic growth has been tied to the growth of fuels consumption like natural gas. The inherent features of natural gas market like its dependence on wellhead price, long-distance transportation costs, gas pipeline systems, economies of scale, non-existence of monopoly market for the end user, large proportion of fixed costs compared to variable costs, relatively low income elasticities, etc., have created different market structures which affect the price (Khaleghi, 2010; Whitesitt, 2005; Mansour Kiaei, 2008). Moreover, extensive governmental interventions in gas pricing, have led to the adoption of diversified pricing systems so that there is not any global gas price (Jensen, 2011; Vafee Najjar, 2008).
The gas market has experienced dramatic changes that began with the liberalization process of the market in the 1980s, the result of which was the creation of a spot market (Jafari Samimi et al., 2007; Manzoor & Niakan, 2011; Apergis, Bowden, & Payne, 2015). This market determines the opportunities offered by firms and investors, especially the opportunity cost of stagnant assets by price detecting. Hence, spot prices estimation that uses behavioral characteristics like mean reversion can be useful in future prices evolution (Hull, 2000).
In financial economics literature, it is thought that mean reversion is a sign of inefficient market, and it runs counter to the assumption of random walk. Exley, Mehta, & Smith (2004) state that mean reversion is not necessarily a sign of inefficiency in the market. They believe that it could be due to risk aversion or return distribution over time. Since the world's most mobile gas market, which determines the basic price of the gas exchanges in other countries, including Iran, is located in the U.S. Henry Hub, this hub is being mentioned here.
Methodology
Departures from normal price spreads are possible in the short run under abnormal market conditions, but in the long run, supply will be adjusted and the prices will move to the level dictated by the marginal cost of production. The basic theory of microeconomics states that in the long run, the price of an energy commodity must be related to its long-run marginal cost (Begg & Smith, 2007; Rahimi, 2008). In this paper, we analyze mean reversion, which was first described by Vasicek (1977) and was subsequently widely adapted.
Mean reversion is a normal logarithmic diffusion process, but its variance is not proportional to the incremental time intervals. The variance initially grows and then stabilizes in a certain amount (Geman, 2005; Wittig, 2007). This process has contains two components: the first one indicates drift with rate of mean reversion speed and equilibrium long run mean, and the second component of this process is diffusion term and shows its randomness.
Results and Discussion
This paper aims at mean reversion verification, estimating Ornstein-Uhlenbeck Mean Reverting Model (OUMRM) and forecasting gas daily prices based on Henry Hub data (07/01/1997-20/03/2012). Using different mean-reverting statistics like Unit-Root, autocorrelation coefficients reveal that price returns of natural gas prices do not follow a random walk process. Therefore, there can be a sign of mean reversion. The non-decreasing gradual correlation coefficients of returns indicate that the historical information available in long-term lags can be effective in determining future prices like information in the short-term lags.
The results show the existence of mean reversion using the methods of linear regression and maximum likelihood. The long-run mean price is 4.16 $/mmBtu and it takes the market around 48 weeks to remove daily price shocks. Finally, it is observed that performance evaluation criteria are highly dependent on the number of random simulation paths and the best performances are satisfied with 1000 simulation paths mean.
Conclusion
Energy price changes and volatilities have led to an increase in the uncertainty and potential value of predicted prices. Hence, providing models for accurate prediction of natural gas prices with regard to its characteristics like mean reversion is important because it can be applied to determine a wide range of regulatory decisions both on the supply and demand sides of the market. The results of this study is similar to Geman (2007), Skorodumov (2008), Cheong (2009), and Chikibvou and Chinhamu’s (2013) studies and reveas that the existence of the mean reversion phenomenon varies depending on the length of the study period.
Moreover, because of the mobility and transparency of information in gas markets in recent years, as returning to the recent periods, the mean reversion speed becomes higher. It shows higher adjusting speed of mean reversion and faster removal of price distortion caused by shocks. In addition, the more we approach to the recent years, the more long-run mean price is. This implies that investors and traders are expecting a surge in prices and the price volatility in the prices above long-run mean is higher than the prices below it. Therefore, these achievements in determining the behavior of this commodity can lead to a reduction in risk and a great help in predicting the path of the price of long-term contracts.
behnam elyaspour; mohammadtaher ahmadi shadmehri; mohammadreza lotfalipour; mohammadali falahi
Abstract
The exchange rate has always been a fundamental issue in the economic literature because of its significant effect on economic performance. Iran is a country that earns important part of its income from foreign exchange earnings by selling mineral materials. This study, therefore, investigates the effect ...
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The exchange rate has always been a fundamental issue in the economic literature because of its significant effect on economic performance. Iran is a country that earns important part of its income from foreign exchange earnings by selling mineral materials. This study, therefore, investigates the effect of exchange rate uncertainty on Iran’s non-oil trade balance for the period 1989-2015. Stochastic volatility model is used for calculating uncertainty index of exchange rate. Then, the effect of exchange rate uncertainty on Iran’s Non-Oil trade balance is estimated by using Rose and Yellen (1989) model and Johansen and Juselius (1990) cointegration procedure. The results indicate that real exchange rate and its uncertainty have a negative effect on Iran’s non-oil trade balance in long-run. Therefore, the Marshall-Lerner condition is not met. In addition, J-Curve is rejected due to impulse response functions.
Keyword: Real Exchange Rate, Non-Oil Trade Balance, Uncertainty, Stochastic Volatility Model, Cointegration
JEL Classification: C32, D80, F10, F31
Introduction
Since the advent of the current float in 1973, most countries have been concerned about the uncertainty that floating exchange rates have introduced into world markets. Most European countries have tried to avoid this uncertainty by joining the Euro zone and adopting a common currency, which has flavors of a fixed exchange-rate system. However, most other countries still have to deal with the side effects of exchange rate uncertainty since their exchange rates float.
There are several channels through which exchange rate volatility could affect the trade flows. First, if traders are risk averse, they could reduce their activities due to exchange rate uncertainty in order to avoid any loss. Second, exchange rate uncertainty could directly affect the trade volume by making prices and profits uncertain, especially in countries where forward markets do not exist such as the developing world. Even if forward markets do exist in some industrial countries, some studies indicate that forward markets are not very effective in completely eliminating exchange rate uncertainty. Third, if exchange rate volatility persists over a longer period of time, it could induce domestic producers to switch buying from foreign sources to domestic sources, reducing the volume of trade, especially traded inputs. Finally, exchange rate uncertainty could also affect direct foreign investment decisions which in turn could lower the volume of trade. To reduce the price fluctuation due to exchange rate volatility, production facilities would be located near final markets, leading to change in pattern of trade.
Considering the numerous economic changes affecting the exchange rate in the studied period (1989-2015) in Iran, like the oil price shocks, the change of commercial policies, and changing foreign exchange policies and economic sanctions, studying the effect of exchange rate fluctuations on the non-oil trade balance is essential.
Theoretical Framework
The relationship of exchange rate and trade balance is explained by various theoretical approaches like the elasticity approach, absorption approach, Marshall-Lerner Condition, J-Curve approach, monetary approach and the two countries imperfect substitution model approach.
Of these, the two countries imperfect substitution model of the Rose and Yellen (1989) is used in this paper to model the relationship between exchange rate and trade balance. This approach shows the nature of the relationship of real exchange rate on trade balance in both short and long run. It stipulates that depreciation of the real exchange rate improves trade balance. Besides, the model assumes that there are no perfect substitutes in the imports and exports for the locally produced goods and services.
Rose and Yellen (1989) start with a specification of the import demand equations. As in Marshallian demand analysis, the volume of imported goods demanded by the home (foreign) country is determined by real domestic (foreign) income and the relative price of imported goods. Clearly, real income has a positive impact on the volume of import demand, and the relative price of imported goods has a negative relationship
Methodology
This study, investigates the effect of exchange rate uncertainty on Iran’s non-oil trade balance for the period 1989-2015. Stochastic volatility model (SV) is used for calculating uncertainty index of exchange rate. Then, the effect of exchange rate uncertainty on Iran’s non-oil trade balance is estimated using Rose and Yellen (1989)’s model and Johansen and Juselius (1990)’s cointegration procedure.
An alternative to GARCH-type models is the class of stochastic volatility models, which postulate that volatility is driven by its own stochastic process. Estimation and inference of SV models are more complicated than for GARCH models. On the other hand, SV models have some advantages compared with GARCH models. For example, SV models offering a natural economic interpretation of volatility are easier to connect with continuous-time diffusion models with SV, and are often found to be more flexible in the modeling of financial returns. A variety of estimation methods have been proposed to estimate the SV models, in this paper MCMC methods are used to estimate of SV model.
Results and Discussion
The results show that all variables in trade balance model are integrated of first order or in short hand are I(1) and cointegration test suggests one cointegrating vector for this variables.
Briefly, the results of estimate vector show that real exchange rate, volatility of real exchange rate and GDP of Iran have negative effect on non-oil trade balance and GDP of the world has positive effect on Non-Oil trade balance.
Conclusions and Suggestions
The results of estimating trade balance in long-run show that real exchange rate has negative effect on non-oil trade balance; therefore, the Marshall-Lerner condition is not met. In addition to, J-Curve is rejected due to impulse response functions. Also, uncertainty of the real exchange rate has negative effect on non-oil trade balance; therefore, policy makers must adopt policies to help stabilize the real exchange rate.
Farzaneh Ahmadian Yazdi; Masoud Homayouni Far; Mohammad Hosein Mahdavi Adeli; Mohammad Ali Falahi; Seyyed Mohammad Hoseini
Abstract
Introduction
Financial system is fundamental for economic growth in most of countries. Based on vast studies done on the determinants of economic growth, financial development leads to economic growth in many countries in long time (Rousseau & Wachtel, 2002). It is worth noting that the importance of ...
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Introduction
Financial system is fundamental for economic growth in most of countries. Based on vast studies done on the determinants of economic growth, financial development leads to economic growth in many countries in long time (Rousseau & Wachtel, 2002). It is worth noting that the importance of financial system in economic growth has been notified for many years (e.g., Bagehot, 1873; Hicks, 1969; McKinnon & Shaw, 1973; King & Levin, 1993; Levin, 1997, 2002; Beck, Demirguc-Kunt & Levine 2000; Aizenman, 2015).
Although there is a vast literature about the importance of financial development, most of them have investigated the direct impact of financial development on economic growth. In this case it is important to know that there are four main channels that contribute to the relationship between financial development and overall economic output that are foreign capital, physical capital, human capital, and social capital. Based on World Bank’s analysis (2012), these five kinds of capital form national wealth in all economies. Meanwhile natural capital has the main role in resource-rich countries.
There is an expanding literature that shows the effects on natural resource rents on economic growth in resource-rich countries. Gylfason (2001) introduced four main channels that consist of four kinds of capital mentioned above to show how resource rents affect economic growth.
One of the important issues that have been neglected in this concept is how resource-rich countries can reverse the negative effects or improve the positive effects of resource rents on capital accumulation. There are few studies that argue financial development is an effective solution for that aim.
2) Theoretical Framework
Four kinds of capital that contribute to the relationship between resource rents and economic growth are foreign capital, physical capital, human capital and social capital. In fact natural capital will affect them in all resource-rich countries. Hence, the first step is to investigate the simultaneous effects of natural capital on other kinds of capital.
The conceptual model of this paper is that financial development is an infrastructure that has potential in improving the positive (or reducing negative) impact of natural resources on all kinds of capital accumulation. Therefore, the second step of this study is investigating the role of financial development on the effects of natural resources on accumulation of this kind of capital.
In this paper, we will show that financial development could absorb resource rents in order to allocate resources and invest them in most optimal projects. For more details it would be necessary to say that the debate about the influence of financial development on economic growth has been ongoing for more than a century. Since Schumpeter (1912) believed that financial development affects economic activity and hence economic growth. In fact, financial development has emerged as one of the policy levers central banks and governments use to target economic growth.
In fact, financial development is based on the financial development index which provides a measure for the breadth, depth and efficiency of financial systems. Generally, financial development is the factors, policies and institutions that lead to effective financial intermediation and markets, as well as deep and broad access to capital and financial services. To achieve a coherent view about financial development it would be necessary to know the main financial system functions. These are:
Facilitating the trading, hedging, diversifying and pooling of the risks;
Allocating financial resources;
Monitoring managers and exerting corporate control;
Mobilizing savings;
Facilitating the exchange of goods and services (Levine, 1997).
Governments in developing resource-rich countries in order to achieve the optimal use of resource rents could stimulate financial development through some macroeconomic policies (Huang, 2010). One of the probable results of financial development is to smooth consumption of below-ground wealth across generations. Other consequence of financial development will be seen in isolating government budgets from volatile resource prices, allowing the budgetary process to be conducted with more certainty.
Methodology
This paper provides a model for investigating the simultaneous effects of natural resource rents on four kinds of capital accumulation using SUR model. In second step, for investigating the role of financial development index on the effects of natural resource rents on all kinds of capital, we have utilized Rolling Regression technique. This method is suitable for testing the effects of one variable on two other variables in a model. Also, it is worth noting that the multi-dimension financial development index that consists of 8 main financial indices in banking sector is made by PCA method.
Results and Discussion
Based on the results of SUR estimator, resource rent has positive effect on foreign and social capital but it has negative effect on physical capital. There are various effects from resource rents on human capital accumulation; sometimes, it has positive and sometimes it has negative effect. It shows that natural resource rents have different effect on each kinds of capital accumulation in Iran during 15 rolling regression (fixed) windows that have 30 observations for each variable in one window. As is evident in this paper, the total natural resource rents itself is not a curse for the economy, but it could be a blessing. One of the important reasons for the negative effect of resources on physical capital is more governmental investments in this sector and there are some rent-seeking activities that prevent resources from mobilizing to productive projects.
The results of rolling regression show that the development of financial banking system can improve the effects of resource rents on physical and social capital in Iran. But we do not get the same results for foreign capital and human capital. In foreign capital sector, ignoring the development of external dimension of financial banking system that may be seen as financial liberalization is one of the main reasons for this event.
The reason for undesirable effect of financial development in human capital sector relates to low level of financial innovation in banking sector and high level of risks that banks are faced with. Consequently, many innovative projects from people who have high level of human capital accumulation will not be considered in Iran.
Conclusion and Suggestions
Natural resource management is one of the important issues in resource-rich countries. Based on the results, financial development can mitigate the negative effect or improve the positive effects of these rents on capital accumulation. The results show that financial development would be beneficial for this aim in physical and social capital sector in Iran. But it cannot improve the effects of resource rents on foreign and human capital accumulation.
Based on the results, we could suggest that considering development of financial system is a necessity in resource-rich countries such as Iran. Meanwhile the important issue is focusing on all financial development channels that lead to balanced development in financial system. Also, it is worth noting that policy makers should avoid financial repression because this would prevent it from imposing positive effects on the economy. At the end, we could say that paying attention to all kinds of capital would lead to sustainable economic growth when it is accompanied by stable financial development.
nahid rajabzadeh moghani; mohamad ali falahi; mehdi khodaparast mashhadi
Abstract
One of the effective factors on economic growth and development is financial development. Indeed, today the level of economic development is determined by the level of financial development in the countries. Hence, many studies try to identify effective factors in financial development. Natural resource ...
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One of the effective factors on economic growth and development is financial development. Indeed, today the level of economic development is determined by the level of financial development in the countries. Hence, many studies try to identify effective factors in financial development. Natural resource abundance is one of the factors that has effect on financial development of countries. From the 1980s, most studies have only investigated the relationship between natural resource abundance and economic growth. They only try to explain the reason of the resource curse. In these studies the effect of resource abundance on financial development is neglected. But it is claimed that one of the reasons of slow economic growth in resource abundant countries is the low level of financial development.
There are five mechanisms through which resource abundance can impact financial development. The first mechanism is the Dutch disease. The exploitation of natural resources tends to shift factors of production away from the manufacturing sector. Thus, resource abundance tends to shrink the traded sector. But trade is found to play an important role in financial development. Therefore, resource abundance which weakens the traded sector may have a negative impact on financial development. Second, governments’ access to huge amounts of oil rents reduces the governments' need for financing through taxes. In these circumstances a government has no obligation against people and the people have also less demand for accountability in order to define and guarantee property rights and economic security. Weak property rights leads to poor business environment. As a result, investment incentives are reduced. Secure property rights increase the incentives of innovations and creativity. Since entrepreneurs are the main demanders of credit in financial markets, undermining property rights leads to weaken financial markets. Third, economic rent of resource abundance increase opportunities for rent-seeking and corruption. Rent seeking can cause corruption in government, business of people and distortion in allocation of recourse. Corruption may induce a lack of confidence in the government and hence undermine its policy credibility. Because of low policy credibility, it will be difficult for the government to implement some financial reforms. In addition, rent seeking leads to reduced incentives of creativity and innovations. In these conditions, economic creators prefer to gain high rent by abusing weak institutions. Since entrepreneurs are potential promoters of financial development, if the number of entrepreneurs is reduced by resource booms, financial development may also slow down because the demand for it is weakened. Forth, resource abundance tends to weaken private and public incentives to accumulate human capital. Empirical studies show that there is a negative link between human capital and natural resource abundance. Since human and physical capital complement each other in firms, weakening human capital reduce physical capital and investment. In addition, resource abundance reduces social capital. Since social capital determines the level of trust in society and trust is the basis of the financial contracts, resource abundance reduces the level of financial development. Fifth, establishment of democracy is not easily possible in resource abundant countries and power is only in the hands of particular groups and rent seekers. There are lots of scholars like Clague, Keefer, Knack and Olson (1996) and Olsson (1993) that examined the relationship between democracy and financial development. They show that democratic regimes provide better field of protection of property rights, contract enforcement and encourage more investment than authoritarian regimes. Thus, democracy promotes financial developments.
Beside above mechanisms it should be emphasized that environmental factors can have impact on the relationship between natural resource abundance and financial development. It is expected that resource abundance reduce financial development in the countries with weak institutional quality. In contrast, mentioned mechanisms do not work in the countries with high level of institutional quality. In other words, resource abundance cannot have a negative impact on financial development in the countries with good institutional quality. World Bank introduces governance indicators to show institutional quality of countries. Three researchers named Kufmann, Kraay and Lobaton (1999) create these indicators. They combined the results of various international institutions such as EIU, ICRG, Heritage Foundation and Freedom House about economic, political and social situations and then introduced new indicators as governance indicators. These indicators include voice and accountability, political stability, control of corruption, regulatory quality, government effectiveness and rule of law.
In this paper, countries with respect to good governance indicators are categorized into three groups. They include countries with high, medium, and low institutional quality. In this study, using the panel data method for 22 selected oil exporting countries over 1996-2009, the effect of resource abundance on two financial development index (i.e., private credit by deposit money banks and other financial institutions/ GDP and M2/GDP) is examined. Among 22 countries, 5 of them have weak institutional quality, 8 of them have medium institutional quality, and 9 of them have high institutional quality.
The results indicate that the relationship between resource abundance and two financial development indices is positive and significant in countries with high governance, but negative in countries with low and weak governance. The results also indicate that there is no significant relationship between resource abundance and financial development in countries with the average level of governance. Therefore improving institutional quality seems necessary to enhance financial development in oil economies.
Mahdi Khodaparast Mashhadi; Mohammad Ali Falahi; nahid rajabzadeh moghani
Abstract
One of the effective factors in economic growth and development is financial development. Indeed, today, the level of economic development is determined by the level of financial development in the countries. Economists emphasize on the importance of financial market and its key role in economic development ...
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One of the effective factors in economic growth and development is financial development. Indeed, today, the level of economic development is determined by the level of financial development in the countries. Economists emphasize on the importance of financial market and its key role in economic development (e.g., Schumpeter, 1912; Hicks, 1969; McKinnon, 1973; King, 1993; Beck & Levine, 2003). Therefore, identifying the determinant factors of financial development is really crucial. Many studies have been done to identify effective factors in financial development. However, most of them focus on the role of economic factors in financial development. Among all effective factors in financial development in countries, less attention has been given to the role of institutional quality. Hence, the aim of this paper is to study the effect of institutional quality on financial development with emphasis on banking sector in selected countries of Organization of Islamic Cooperation (OIC).
There are two popular theories that explain the role of institutions in financial development. According to Law and Finance Theory introduced by Laporta, Lopez-de-silabes, Shleifer, and Vishny (1997; 1998), differences in the legal protections of investor and creditors and the quality of contract enforcement can explain the different level of financial development between countries. Endowment Theory introduced by Acemoglu, Johnson, and Robinson (2001) explains the relationship between different formation of colonization and institutions during 17-19 centuries. Acemoglu et al. (2001) found that the origin of colonization has a permanent effect on formation of institutions. Beck & Levine (2003) apply both theories for explanting financial development and found that legal origin matters for financial development because legal traditions differ in their ability to adapt efficiently to evolving economic conditions. In addition, some other studies have been done on political economics of financial development (e.g., Pagano & Volpin, 2000; Rajan & Zingales, 2003; Girma & shortland, 2008; Singh, Kpodar & Chura, 2009; Anayitos & Toroyan, 2009; Hung, 2010). All studies in this area have found that quality of institutions play a key role in financial development.
In this study, using panel data method for selected countries of the Organization of Islamic Cooperation (OIC) over 1996-2010, the effect of institutional quality on financial development is examined. This paper investigates the effect of seven institutional quality indicators (i.e., voice & accountability, control of corruption, political stability, rule of law, government effectiveness, regulatory quality and weighed average of six institutional quality indicators) on two financial development indicators, namely, private credit by deposit money banks and other financial institutions/GDP. Information of governance indicators has taken from World Governance Indicators. Based on World Bank definitions, voice & accountability reflects perceptions of the extent to which a country's citizens are able to participate in selecting their government as well as freedom of expression, freedom of association, and a free media. Control of corruption reflects perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption as well as capturing of the state by elites and private interests. Political Stability measures perceptions of the likelihood of political instability and politically-motivated violence, including terrorism. Rule of law reflects perceptions of the extent to which agents have confidence in and abide by the rules of society, and, in particular, the quality of contract enforcement, property rights, the police, and the courts as well as the likelihood of crime and violence. Government effectiveness reflects perceptions of the quality of public services, the quality of the civil service, and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies. Regulatory quality reflects perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development.
Data of two financial development indicators have been taken from World Bank and International Financial Statistics dataset. In this study, the overall governance indicator (weighed average of six institutional quality indicators) is calculated by principal component analysis approach. The results of poolabilty test and Chaw test indicate that panel approach should be applied in all models. In addition, the results obtained from Breusch-Pagn and Hausman tests show that using fixed effect model is appropriate for all seven models.
Among these seven models whose dependent variables are Private credit by deposit money banks and other financial institutions/GDP, two models are selected based on , namely, Akaike Info Criterion and Schwarz Criterion. The results of estimation suggest that overall governance indicators (weighted average of six indicators of institutional quality) and control of corruption have a significant and positive effect on Private credit by deposit money banks and other financial institutions/GDP. From these seven models whose dependent variable is M2/GDP, one model is selected based on related criteria, as the best model. In this model, government effectiveness indicator has a significant and positive effect on M2/GDP. Hence, improving institutional quality is a necessary and essential factor for enhancing financial development and policymakers should apply appropriate policies to improve governments' position in these countries. Through this way, one of the barriers of economic development would be removed.
Shahab Matin; Mohammad Taher Ahmadi Shadmehri; Mohammad Ali falahi
Abstract
One of the major economists’ interests in the recent decades has been oil and its causes. Oil is one of the key strategic commodities in the world that plays a major role in setting the political and economic relations among countries. The economic structure of the petroleum exporting countries' dependency ...
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One of the major economists’ interests in the recent decades has been oil and its causes. Oil is one of the key strategic commodities in the world that plays a major role in setting the political and economic relations among countries. The economic structure of the petroleum exporting countries' dependency on oil revenues causes the affection of global economy in recession boom to economy of such countries. In most oil-exporting countries (e.g. Iran), oil revenues are the government's and state-owned. As the recipient of oil revenues, leads the current and development budgets of these revenues to different economic sectors. To make a good decision and to improve their societies, the governments need to design the budget. To do its functions, a government uses budget as a planning and financial tool. Accordingly, oil price fluctuations have a major influence on the government's spending of oil revenues as a major source for financing different expenditure categories. Iran has a history of more than a century in the exploration and production of oil; the first successful well exploration was Masjid Suleiman on May 26, 1908. Since then, based on the latest oil and gas reports, 145 hydrocarbon fields and 297 oil and gas reservoirs have been discovered in Iran, with many fields having multiple pay zones. Proved oil reserves in Iran, according to the government, ranks as the fifth largest one in the world at approximately 150 billion barrels as in 2014, although it ranks as the third country if Canadian reserves of unconventional oil be excluded. This is roughly 10% of the world's total proven petroleum reserves.
Oil sector in most of the oil exporting countries (such as Iran) is a state-run sector and oil revenues belong to government. Iran is an energy superpower in which the petroleum industry plays an important part. In 2004, Iran produced 5.1 percent of the world’s total crude oil (3.9 million barrels per day), which generated revenues of US$25 billion to US$30 billion and was the country’s primary source of foreign currency. In 2006 levels of production, oil proceeds represented about 18.7 percent of gross domestic product (GDP). However, the importance of the hydrocarbon sector to Iran’s economy has been far greater. The oil and gas industry has been the engine of economic growth, directly affecting public development projects, the government’s annual budget, and most foreign exchange sources. In 2009, the sector accounted for 60 percent of total government revenues and 80 percent of the total annual value of both exports and foreign currency earnings. Oil and gas revenues are affected by the value of crude oil on the international market. It has been estimated that at the Organization of the Petroleum Exporting Countries (OPEC) quota level (December 2004), a one-dollar change in the price of crude oil on the international market would alter Iran’s oil revenues by US$1 billion. In 2006, exports of crude oil totaled 2.5 million bpd, or about 62.5 percent of the country’s crude oil production. The direction of crude oil exports changed after the Revolution because of the U.S. trade embargo on Iran and the marketing strategy of the NIOC. Initially, Iran’s post-revolutionary crude oil export policy was based on foreign currency requirements and the need for long-term preservation of the natural resources. In addition, the government expanded oil trade with other developing countries. While the shares of Europe, Japan, and the United States declined from an average of 87 percent of oil exports before the Revolution to 52 percent in the early 2000s, the share of exports to East Asia (excluding Japan) increased significantly. In addition to crude oil exports, Iran exports oil products. In 2006, it exported 282,000 barrels of oil products, or about 21 percent of its total oil product output. Iran plans to invest a total of $500 billion in the oil sector before 2025. In 2010, Iran, which exports around 2.6 million barrels of crude oil a day, was the second-largest exporter among the Organization of Petroleum Exporting Countries. Several major emerging economies depend on Iranian oil: 10% of South Korea’s, 9% of India’s and 6% of China's oil imports come from Iran. Moreover, Iranian oil makes up 7% of Japan’s and 30% of all Greek oil imports. Iran is also a major oil supplier to Spain and Italy. This study investigates the asymmetric effects of oil price fluctuation on government expenditure based on Mork's (1989) and Hamilton's (1996) definitions. In order that, To this end, the oil prices, total government expenditure, current and development expenditures of the government, per capita total expenditure, per capita current and development expenditures and the deviation of the real exchange rate during the period of 1965 to 2011 have been used within the framework of the vector autoregressive model.
The results indicated that fluctuations in oil prices have asymmetric effects on government expenditure. According to both definitions, oil prices increase relative to oil prices decrease has a greater effect on government spending; however, the effect of oil prices decrease on government spending is more sustainable than oil prices increase. Also, such changes in oil prices rise or fall have more impact on construction costs compared to current expenditures that verifies the stickiness of current expenditures.
sayyed mohamad mirhashemi dehnavi; Mostafa Salimifar; Mohammad Ali Falahi
Abstract
Iran’s economy and also stock market can affected by oil price shocks. With regarding importance of oil price changes on Iran economy, the aim of this study is to investigate the asymmetric impacts of oil price shocks on Tehran Exchange Price Index (TEPIX).
In this study, the relationship between ...
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Iran’s economy and also stock market can affected by oil price shocks. With regarding importance of oil price changes on Iran economy, the aim of this study is to investigate the asymmetric impacts of oil price shocks on Tehran Exchange Price Index (TEPIX).
In this study, the relationship between oil price shocks and TEPIX from 2000:6 to 2010:11 have been investigated. For this aim, the mothod of vector autoregressive regression (VAR), impulse response function and variance decomposition with three control variables of liquidity, constraction price index and gold price have been used.
The investigation of the asymmetric effects of oil price shocks on TEPIX by Mork (1989) and Hamilton’s approach revealed that oil price shocks have asymmetric impacts on TEPIX and in both approaches, oil price decrease has greater share in explanation of forcasting error variance of TEPIX respect to oil price increase.
sayedeh zahra shakeri; Masoud Homayounifar; Mohammad Ali Falahi; Saeed
Abstract
Introduction
The savings becomes to invest in the capital market and then import into the production cycle and helps to the development and growth of countries. However, inefficient capital markets, cause savings to flow into real assets. Gold is a real asset, liquidity with high strength, and a suitable ...
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Introduction
The savings becomes to invest in the capital market and then import into the production cycle and helps to the development and growth of countries. However, inefficient capital markets, cause savings to flow into real assets. Gold is a real asset, liquidity with high strength, and a suitable replacement for money. This wealth is a booming market in Iran. Fluctuations in the price of gold in addition to the influence of other markets can also affect other markets. Therefore, it is important for the state and the people to understand the trend in the price of gold and gold coins. The gold price forecast will help policymakers to make the right decisions. On the other hand, it is difficult and complicated to accurately predict the real variables. We need to recognize the structural nature is predictable pattern. In this article, chaos theory was used to identify the structural nature of the time series of Bahar Azadi gold coin.
Theoretical Framework
Chaos theory analysis of the systems that have non-linear relationships and irregular time series. Economic time series variables follow a stochastic process and thus are not predictable. However, the series are not random, and are expected in the short term. There are tests for chaos in time series, such as correlation dimension, BDS, and Lyapunov exponent maximum test. Results of the study by Kim et al. (2003) showed that the BDS test is more efficient than other tests.
Methodology
For the purpose of this study, the non-linearity of the BDS test, and the Lyapunov exponent maximum test of the chaotic time series were used. BDS test was conducted in three stages: the original data, the residual of ARIMA, and the residual of GARCH. To determine the structure of time series of Bahar Azadi gold coin, 1670 observation was divided into 8 groups of the two hundred. Null hypothesis test is the IID and independent data. The Lyapunov exponent maximum test check on all data. Positive values of the statistics indicated the existence of chaos in the system. R and MATLAB software were used for data analysis.
Results
First, the stationary data were checked. Dickey-Fuller test the null hypothesis is accepted, which implies the existence of a unit root. The first stage of BDS test was performed on the original data in the dimensions inscribed. The results showed that the null hypothesis was rejected, except the first group. As a result, the original data were not IID, and linear or non-linear dependence exists between them. Before the second phase of the test, the appropriate ARIMA model was selected. The unit root test was performed on the residual of ARIMA, and the null hypothesis was rejected. As a result, BDS test was conducted on the residual ARIMA. In the third stage, first the variance heterogeneity was checked, white test the null hypothesis is rejected, thus confirming the heterogeneity of variance. Then, the existence of ARCH effect was checked. ARCH effect in the first five groups, GARCH effect in the next three tests by Ljung-Box and LM-ARCH was confirmed. According to the BDS test conducted on the residual of GARCH, the null hypothesis was rejected, which residual IID, and linear and nonlinear dependence does not exist, thus confirming the process of chaotic time series data structure of Bahar Azadi gold coin. Wolfe algorithm was used in this study to calculate the Lyapunov exponent maximum test. The results showed that the Lyapunov exponent was small and positive for all aspects and intervals.
Conclusion
As a result, time series of Bahar Azadi gold coin is possessed of a chaotic process. So we can predict future prices with the non-linear model in this series.
Mohammad Ali Aboutorabi; Mohammad ali Falahi
Abstract
According to the relationship between financial development and economic growth, the question is whether the type of financial structure (bank-based or market-based financial system) can affect the economic growth? This paper attempts to find an answer to the above mentioned question by surviving the ...
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According to the relationship between financial development and economic growth, the question is whether the type of financial structure (bank-based or market-based financial system) can affect the economic growth? This paper attempts to find an answer to the above mentioned question by surviving the effect of financial development of banks and stock markets in some MENA countries.
The Principal components analysis is used to derive a multilateral index for financial development. Moreover, using panel data econometrics, the role of banking system and stock market in encouraging economic growth in the studied countries is investigated.
The results indicate that the effect of banking system development on the economic growth in these countries is significantly negative while the effect of stock market development in spite of being positive is not statistically significant. These results are contrary to the observed empirical evidences in developed countries which are due to the specific and different characteristics of financial markets in developing countries. Therefore, in the case of these countries, it seems that the planning for “financial development” is essential before any controversy over the type of “financial structure”.
Mahindokht Kazemi; Mohammad Ali Falahi; Akram Zeynaliyan
Abstract
This study, using ARDL model, examines the relationship between carbon dioxide emissions and indicators of financial development with variables such as real per capita non-oil income, per capita energy consumption and ratio of import and export to GDP in Iran during the period 1352-1390.
The results ...
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This study, using ARDL model, examines the relationship between carbon dioxide emissions and indicators of financial development with variables such as real per capita non-oil income, per capita energy consumption and ratio of import and export to GDP in Iran during the period 1352-1390.
The results show that long-run elasticity of carbon dioxide emissions with respect to real per capita income, per capita energy consumption and export in Iran are positive and with respect to import is negative. According to the results, the ratio of liquid liabilities to GDP and private sector debt to the banking system to GDP have positive and significant effect on carbon dioxide emissions in the long run, (0.257) and (0.304) and in the short run (0.175) and (0.233) in Iran respectively. In addition, the effect of the ratio of commercial bank domestic assets to central bank and total assets of banking system on CO2 emissions in Iran in the long run is non-significant and in the short run is estimated at 90% significance level and about (-0.205). The Causality test results show that there is a short run one-way causal relationship of the three indicators of financial development on emissions of carbon dioxide in Iran.
