Financial monetary economy
Yaser Moomivand; seyyd mohammadbagher najafi; Kaveh Derakhshani Darabi; jamal fathollahi
Abstract
Monetary policies are one of the most important policy tools for improving economicvariables, including inflation and production. Monetary policy is currently a dynamic andchallenging field of economic sciences, theoretically and empirically. The views on the effectof monetary policy on production vary ...
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Monetary policies are one of the most important policy tools for improving economicvariables, including inflation and production. Monetary policy is currently a dynamic andchallenging field of economic sciences, theoretically and empirically. The views on the effectof monetary policy on production vary from the ineffectiveness and neutrality of money inthe short and long term to the effectiveness of monetary policy and its effect on production inthe long term and even in the short term.2. Review of the literatureInstitutional aspects and their effect on economic variables and the economic performance ofdifferent societies have been attracted by experts in the field since the 1980s and led to thedevelopment and expansion of its literature in the 1990s. Moreover, the valuable works ofNorth and Coase, as well as, winning the Nobel Prize in Economic Sciences for their effortsto introduce institutional analyses put forward institutionalism as one of the leading economictheories. According to this literature, it can be stated that the same impulses and policies canbe followed by different reactions due to temporal and spatial differences in the institutionalenvironment in which they happened (Dehghan Monshadi, 2019).2.1. The effect of governance on the effectiveness of policiesThe new economic literature emphasizes the importance of institutions and governanceconditions in the economic development process and the performance of economic policies.Governance has a long history and has been defined in different ways. It literally meansdomination, ruling, and strategic government, but it means the activity of countrymanagement and control of a company or organization in the Oxford English Dictionary(Gholipoor, 2004).3. Materials and methodsThis research investigated the effect of variables on the effectiveness of monetary policyusing the model introduced by De Mendonça and Nascimento (2018), which is presented asRelation (1).(1)where is the index obtained for the effectiveness of the monetary policy in the i th country inthe t th year, GGI is the index of good governance, and X is other economic variables affectingthe effectiveness of the monetary policy, such as the degree of openness of the economy, thedevelopment of financial markets, and virtual variable of the existence of the inflationtargeting policy in the relevant country. In the years with the inflation targeting policy, thevalue was set to 1, but it was 0 in other years. In addition, the GDP variable was included inthe model to include other variables affecting the effectiveness of monetary policy.4. ResultsThe effectiveness index of monetary policy was calculated for the sample countries beforeestimating the coefficients using the proposed approach. This research calculated theeffectiveness of monetary policy using the approach introduced by Krause and Rioja (2006).In this approach, and were calculated for the selected countries in each year. The inflationdeviation was measured by the deviation of the consumer price index. Analysis of thedescriptive statistics for the research variables demonstrated that this index average for thecountries in the period under study was 2980.43 and the median equaled 1.48. It should benoted that the lower the value of the index, the more effective the policy would be in thereduction of inflation and production fluctuations. The highest and lowest index value was873575.4 and -107.91, respectively. Jarque- Bera statistic and its significance level alsoshowed that the distribution of the variable is not normal.5. ConclusionAs shown by the results of earlier studies and the present research, the process of selection,decision-making, and performance of individuals and societies takes place within theframework of institutions. Thus, their reaction to various phenomena, including economicand monetary policies, depends on institutions. One of the major institutions is thegovernance that affects economic variables with monetary and financial policies. Therefore,the primary objective of this research was to determine the effect of governance quality onthe effectiveness of monetary policy. According to the results, improving the quality ofgovernance significantly reduced production and inflation fluctuations and enhanced theeffectiveness of monetary policy. Hence, it could be concluded that in societies withfavorable governance indicators, better and more complete implementation of laws andregulations could be expected, and formal and informal obstacles to implement economicpolicies are reduced. The results obtained from the estimation of coefficients indicated asignificant relationship between the inflation targeting policy and the increased effectivenessof monetary policy. The existence of inflation-targeting policy and its obligation make thecentral bank focus more on the main goals of monetary policy, which is to maintain the valueof the national currency and increase economic stability. Under such circumstances, thepolicy-maker can have more authority in controlling inflation and production fluctuationsrather than other secondary goals, resulting in more success in controlling inflation andproduction fluctuations.
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.
