Whence Policy? Government Policies, Finance, and Economic Integration
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1 Whence Policy? Government Policies, Finance, and Economic Integration Discussion by John Hassler, IIES, Stockholm University May 2008 iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 1 / 6
2 Purpose of paper Document how globalization pressure drives nancial development. iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 2 / 6
3 Purpose of paper Document how globalization pressure drives nancial development. Go beyond reduced form by focusing on link globalization pressure (GP)-> policy,openness -> nancial development. iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 2 / 6
4 Purpose of paper Document how globalization pressure drives nancial development. Go beyond reduced form by focusing on link globalization pressure (GP)-> policy,openness -> nancial development. GP measured as product of natural openness x global trade volume. iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 2 / 6
5 Purpose of paper Document how globalization pressure drives nancial development. Go beyond reduced form by focusing on link globalization pressure (GP)-> policy,openness -> nancial development. GP measured as product of natural openness x global trade volume. Financial development measured as private domestic credit to GDP ratio. iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 2 / 6
6 Purpose of paper Document how globalization pressure drives nancial development. Go beyond reduced form by focusing on link globalization pressure (GP)-> policy,openness -> nancial development. GP measured as product of natural openness x global trade volume. Financial development measured as private domestic credit to GDP ratio. Idea GP iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 2 / 6
7 Purpose of paper Document how globalization pressure drives nancial development. Go beyond reduced form by focusing on link globalization pressure (GP)-> policy,openness -> nancial development. GP measured as product of natural openness x global trade volume. Financial development measured as private domestic credit to GDP ratio. Idea GP ) nancial liberalization ) nancial development (+) iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 2 / 6
8 Purpose of paper Document how globalization pressure drives nancial development. Go beyond reduced form by focusing on link globalization pressure (GP)-> policy,openness -> nancial development. GP measured as product of natural openness x global trade volume. Financial development measured as private domestic credit to GDP ratio. Idea GP ) nancial liberalization ) nancial development (+) ) actual openness ) nancial development (+) iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 2 / 6
9 Purpose of paper Document how globalization pressure drives nancial development. Go beyond reduced form by focusing on link globalization pressure (GP)-> policy,openness -> nancial development. GP measured as product of natural openness x global trade volume. Financial development measured as private domestic credit to GDP ratio. Idea GP ) nancial liberalization ) nancial development (+) ) actual openness ) nancial development (+) ) smaller (?) size of government ) nancial development (+) iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 2 / 6
10 Purpose of paper Document how globalization pressure drives nancial development. Go beyond reduced form by focusing on link globalization pressure (GP)-> policy,openness -> nancial development. GP measured as product of natural openness x global trade volume. Financial development measured as private domestic credit to GDP ratio. Idea GP ) nancial liberalization ) nancial development (+) ) actual openness ) nancial development (+) ) smaller (?) size of government ) nancial development (+) ) smaller (?) share of social expenditures in GDP) nancial development (+). iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 2 / 6
11 Purpose of paper Document how globalization pressure drives nancial development. Go beyond reduced form by focusing on link globalization pressure (GP)-> policy,openness -> nancial development. GP measured as product of natural openness x global trade volume. Financial development measured as private domestic credit to GDP ratio. Idea GP ) nancial liberalization ) nancial development (+) ) actual openness ) nancial development (+) ) smaller (?) size of government ) nancial development (+) ) smaller (?) share of social expenditures in GDP) nancial development (+). Logic behind latter two is a conjecture that nancial markets and government are substitutes globalization increases relative cost of publicly provided insurance. iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 2 / 6
12 Purpose of paper Document how globalization pressure drives nancial development. Go beyond reduced form by focusing on link globalization pressure (GP)-> policy,openness -> nancial development. GP measured as product of natural openness x global trade volume. Financial development measured as private domestic credit to GDP ratio. Idea GP ) nancial liberalization ) nancial development (+) ) actual openness ) nancial development (+) ) smaller (?) size of government ) nancial development (+) ) smaller (?) share of social expenditures in GDP) nancial development (+). Logic behind latter two is a conjecture that nancial markets and government are substitutes globalization increases relative cost of publicly provided insurance. Allow di erences in GP-> policy,openness depending on legal origin - French, English, German and Scandinavian. Discussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 2 / 6
13 Results 1 GP-> Policies,Openness GP is important and a ects openness positively, but much less so in Scandinavian countries ("more trade-friendly legal systems" elsewhere). iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 3 / 6
14 Results 1 GP-> Policies,Openness GP is important and a ects openness positively, but much less so in Scandinavian countries ("more trade-friendly legal systems" elsewhere). GP a ects index of nancial liberalization positively everywhere. iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 3 / 6
15 Results 1 GP-> Policies,Openness GP is important and a ects openness positively, but much less so in Scandinavian countries ("more trade-friendly legal systems" elsewhere). GP a ects index of nancial liberalization positively everywhere. GP tends to a ect government size negatively much stronger e ect (5 times) in countries with Scandinavian rather than English legal origin. iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 3 / 6
16 Results 1 GP-> Policies,Openness GP is important and a ects openness positively, but much less so in Scandinavian countries ("more trade-friendly legal systems" elsewhere). GP a ects index of nancial liberalization positively everywhere. GP tends to a ect government size negatively much stronger e ect (5 times) in countries with Scandinavian rather than English legal origin. GP tends to a ect social expenditures positively (Rodrick e ect) except in countries with Scandinavian legal origin where it is negative! iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 3 / 6
17 Results 2 - Polices,Openness -> Financial Development Need to control for endogeneity of policy by instrumental variables technique. iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 4 / 6
18 Results 2 - Polices,Openness -> Financial Development Need to control for endogeneity of policy by instrumental variables technique. Key instruments (assumed not directly a ect Financial Development) GP and its components (trade, natural openness). iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 4 / 6
19 Results 2 - Polices,Openness -> Financial Development Need to control for endogeneity of policy by instrumental variables technique. Key instruments (assumed not directly a ect Financial Development) GP and its components (trade, natural openness). Financial reforms always have a positive e ect on nancial development. iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 4 / 6
20 Results 2 - Polices,Openness -> Financial Development Need to control for endogeneity of policy by instrumental variables technique. Key instruments (assumed not directly a ect Financial Development) GP and its components (trade, natural openness). Financial reforms always have a positive e ect on nancial development. If interaction legal origin and GP used as instruments; Discussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 4 / 6
21 Results 2 - Polices,Openness -> Financial Development Need to control for endogeneity of policy by instrumental variables technique. Key instruments (assumed not directly a ect Financial Development) GP and its components (trade, natural openness). Financial reforms always have a positive e ect on nancial development. If interaction legal origin and GP used as instruments; social expenditures strongly increases FD, Discussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 4 / 6
22 Results 2 - Polices,Openness -> Financial Development Need to control for endogeneity of policy by instrumental variables technique. Key instruments (assumed not directly a ect Financial Development) GP and its components (trade, natural openness). Financial reforms always have a positive e ect on nancial development. If interaction legal origin and GP used as instruments; social expenditures strongly increases FD, government size strongly decreases FD. Discussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 4 / 6
23 Results 2 - Polices,Openness -> Financial Development Need to control for endogeneity of policy by instrumental variables technique. Key instruments (assumed not directly a ect Financial Development) GP and its components (trade, natural openness). Financial reforms always have a positive e ect on nancial development. If interaction legal origin and GP used as instruments; social expenditures strongly increases FD, government size strongly decreases FD. openness decreases (weakly) nancial development. Discussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 4 / 6
24 Comments:1 Interesting paper on an interesting topic! iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 5 / 6
25 Comments:1 Interesting paper on an interesting topic! Somewhat worrisome that identi ed e ects so sensitive to adding the interacted instruments. iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 5 / 6
26 Comments:1 Interesting paper on an interesting topic! Somewhat worrisome that identi ed e ects so sensitive to adding the interacted instruments. Identifying assumption that globalization pressure does not a ect nancial development directly passes over-identi cation test but still a little hard to swallow. E.g., lower shipping cost may a ect composition of trade, pushing nancial development. Discussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 5 / 6
27 Comments:2 Key results are surprising given theory!? Discuss! iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 6 / 6
28 Comments:2 Key results are surprising given theory!? Discuss! Actual openness is found to have a direct negative e ect on nancial development. Small, but anyway. iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 6 / 6
29 Comments:2 Key results are surprising given theory!? Discuss! Actual openness is found to have a direct negative e ect on nancial development. Small, but anyway. Larger social expenditures increase nancial developments, complements rather than substitutes? iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 6 / 6
30 Comments:2 Key results are surprising given theory!? Discuss! Actual openness is found to have a direct negative e ect on nancial development. Small, but anyway. Larger social expenditures increase nancial developments, complements rather than substitutes? Should we take the rst step GP x legal origin -> policies, as a causal relationship? Authors argue ndings "broadly conform" to traditional views. What are they?. iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 6 / 6
31 Comments:2 Key results are surprising given theory!? Discuss! Actual openness is found to have a direct negative e ect on nancial development. Small, but anyway. Larger social expenditures increase nancial developments, complements rather than substitutes? Should we take the rst step GP x legal origin -> policies, as a causal relationship? Authors argue ndings "broadly conform" to traditional views. What are they?. Scandinavian model not trade-unfriendly, why small e ect on trade and large negative on govt size and negative on policy?. iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 6 / 6
32 Comments:2 Key results are surprising given theory!? Discuss! Actual openness is found to have a direct negative e ect on nancial development. Small, but anyway. Larger social expenditures increase nancial developments, complements rather than substitutes? Should we take the rst step GP x legal origin -> policies, as a causal relationship? Authors argue ndings "broadly conform" to traditional views. What are they?. Scandinavian model not trade-unfriendly, why small e ect on trade and large negative on govt size and negative on policy?. E ect on policy via openness. iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 6 / 6
33 Comments:2 Key results are surprising given theory!? Discuss! Actual openness is found to have a direct negative e ect on nancial development. Small, but anyway. Larger social expenditures increase nancial developments, complements rather than substitutes? Should we take the rst step GP x legal origin -> policies, as a causal relationship? Authors argue ndings "broadly conform" to traditional views. What are they?. Scandinavian model not trade-unfriendly, why small e ect on trade and large negative on govt size and negative on policy?. E ect on policy via openness. Alternative model globalization drives convergence in policies. Scandinavian countries expanded government and social expenditures early, now bigger need to undo a bit of this. Likewise, they early adopted an export oriented growth policy. Convergence not allowed in the speci cation (would require initial conditions as regressors). iscussion by John Hassler, IIES, Stockholm University Guiseppe () Bertola and Anna Lo Prete 05/27 6 / 6
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