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Asia-Pacific Financial Markets

Erschienen in:

12.04.2016

Bond Market Development, Economic Growth and Other Macroeconomic Determinants: Panel VAR Evidence

verfasst von: Rudra P. Pradhan, Mak B. Arvin, Sara E. Bennett, Mahendhiran Nair, John H. Hall

Erschienen in: Asia-Pacific Financial Markets | Ausgabe 2/2016

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Abstract

This paper examines causal relationships between bond market development, economic growth and four other macroeconomic variables in 35 countries for the period 1993–2011. Bond market development is defined in terms of the significance and presence of public sector, private sector, and international bond issues. Additional covariates being considered are the inflation rate, the real effective exchange rate, the real interest rate, and a measure of openness to international trade. We use a panel vector auto-regression model to reveal the nature of Granger causality among these variables. Specifically, we find that bond market development and the four macroeconomic covariates may be long-run causative factors for economic growth. Thus, policy makers seeking to foster economic growth are warned to check multi-causal studies involving all these variables before setting their policies.

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Financial development mean the factors, policies, and institutions that lead to effective financial intermediation and markets, and deep and broad access to capital and financial services (Ngare et al. 2014; IMF 2005).

Bond market development represents the intensity of public, private and international bond markets. The research on this area is remained limited in comparison with banks and stock markets (see, for instance, Mu et al. 2013; Sharma 2001).

The deployment of these four macroeconomic variables in the linkage between bond market development and economic growth is on the basis of what other researchers have suggested in recent theoretical and empirical studies (see, for instance, Bhattacharyay 2013; Bittencourt 2012; Carrera and Vergara 2012; Checherita-Westphal and Rother 2012; Kourtellos et al. 2013; Panizza and Presbitero 2014; Arslanalp and Poghosyan 2014; Thumrongvit et al. 2013). To be clear, recent research has identified these variables (separately) as relevant to both economic growth and general financial development, which of course includes bond market development.

Obviously, financial development is a broader concept than bond market development.

This is because bond financing, both domestic (public and private) and international, has become an integral and significant part of countries’ and firms’ financing (see World Bank 2006).

The advantage of this approach is that it exploits individual time series and cross-sectional variations in data. Thus, it avoids biases associated with cross-sectional regressions by taking into account the country-specific fixed effect (Levine 2005).

The estimation of VECM follows the structure of Holtz-Eakin et al. (1988), Arellano and Bond (1991), and Canning and Pedroni (2008).

BMD is used to denote PUB, PRB, INB, or CBM. The latter are used one at a time, comprising our four different models.

Models differ by how bond market development is measured. Model 1 uses public sector bond intensity, Model 2 uses private sector bond intensity, Model 3 uses international bond intensity, and Model 4 uses a composite index of the three bond market indicators.

GIRFs examine the effect of a one-off shock to one of the innovations on the current and future values of the endogenous variables.

In the standard finance literature, the bond market is well integrated with banks and the stock market and they are usually interconnected through near-concomitant changes in several macroeconomic variables (Rahman and Mustafa 1997). See Mu et al. (2013) for a discussion of the importance of the bond market for economic growth.

Note that PCA has some limitations, as every estimation method does: interpretation problems, scaling problems, and higher-order correlation problems.

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Titel: Bond Market Development, Economic Growth and Other Macroeconomic Determinants: Panel VAR Evidence
verfasst von: Rudra P. Pradhan
Mak B. Arvin
Sara E. Bennett
Mahendhiran Nair
John H. Hall
Publikationsdatum: 12.04.2016
Verlag: Springer Japan
Erschienen in: Asia-Pacific Financial Markets / Ausgabe 2/2016
Print ISSN: 1387-2834
Elektronische ISSN: 1573-6946
DOI: https://doi.org/10.1007/s10690-016-9214-x