Cointegration and Causality between Financial Development and Economic Growth: Evidence from Morocco

Searching for Determinants of Pay or Not to Pay Cash Dividend in Indonesia

Triasesiarta Nur and Kresnohadi Ariyoto Karnen

Month of the Year and Pre-Holiday Effects in Indonesia and Malaysia Shari’ah Compliance

Helma Malini and Mohamad Jais

The Impact of Pre-Closing Implementation to Price Efficiency in Indonesia Stock Exchange

Gilang Praditiyo

The Determinant Factors of Real Estate Investment Trust (REIT)’s Performance: Evidence from Asian REITs

Nor Edi Azhar Binti Mohamad and Ilyas Ariefin Bin Zolkifli

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Copyright © 2014 Management Research Center (MRC), Department of Management, Faculty of Economics,

January 2014 • VOL.VI • NO.1

Contents

Cointegration and Causality between Financial Development and Economic Growth: Evidence from Morocco

Abdellatif Chatri and Abdelouahab Maaruf ____________________________________

Searching for Determinants of Pay or Not to Pay Cash Dividend in Indonesia

Triasesiarta Nur and Kresnohadi Ariyoto Karnen _______________________________

Month of the Year and Pre-Holiday Effects In Indonesia and Malaysia Shari’ah Compliance

Helma Malini and Mohamad Jais ____________________________________________

The Impact of Pre-Closing Implementation to Price Efficiency in Indonesia Stock Exchange

Gilang Praditiyo _________________________________________________________

The Determinant Factors of Real Estate Investment Trust (REIT)’s Performance: Evidence from Asian REITs

Nor Edi Azhar Binti Mohamad and Ilyas Ariefin Bin Zolkifli _______________________

Cointegration and Causality between Financial Development and Economic Growth: Evidence from Morocco

Abdellatif Chatri* and Abdelouahab Maaruf**

Mohamed V University, Rabat, Morocco

The debate on the relationship between economic growth and financial development has been steadily growing in these recent years. However, the existing theoretical and empirical literature pro- vides conflicting views in this respect. This paper proposes an empirical investigation of the nature of this relationship in the Moroccan context. More precisely, it explores the cointegrating and the cau- sality issue between economic growth and financial development. The latter is measured by largely used indicators. In particular, we use capital market proxy, in addition to the traditional indicators of financial intermediation. The findings show that financial development explains significantly the growth, but the direction of causality depends on the indicator used to measure the financial deepen- ing and the time horizon of analysis (short or long terms).

Keywords: Financial development, Economic growth, Cointegration, Causality, VECM

Introduction

long-time conventional ideas have been tested on this occasion.

The international financial crisis of 2008 is Indeed, it is nowadays recognized that the in-

a seizing phenomenon in several respects. It stability due to the financial innovation process is striking by its scope, its rapid contagion to

development can likely penalize in return the the global financial system, but also according

economic growth and annihilate, consequently, to the intervention of public authorities, by the

the positive effects of financial development. unprecedented measures and new modalities,

The dramatic decline of the potential growth of in order to break the spiral of distrust in the

OECD countries by nearly three points (OCDE financial system. Moreover, it is appealing by

(2010) p.243), under the influence of the last its cost and its duration, as five years later, its

financial crisis is the eloquent proof. effects and repercussions on the real economy

The positive impact of financial develop- continue to be drastically felt.

ment on economic growth (McKinnon, 1973; Throughout this crisis, which is one of the

Shaw, 1973) is not a systematic. It is true that most impressive and undeniably unparalleled

most studies conclude that there is a positive since World War II, there has been an abun-

relationship between these two sectors (King dance of researches on the nexus between the

and Levine,1993, p.718; Levine, Loayza and financial sector and the real economy 1 . Various Beck, 2000, p.31; Benhabib and Spiegel, 2000,

*Faculty of Law and Economics,Mohamed V University Avenue des Nations-Unies, B.P. 721 Agdal - Rabat – Maroc, E-mail: chatriabdellatif@yahoo.fr. **Faculty of Law and Economics,Mohamed V University Avenue des Nations-Unies, B.P. 721 Agdal - Rabat – Maroc, E-mail: abdelmaarouf@gmail.com.

1 The analysis of Bagehot ( 1873 ) and Schumpeter ( 1911 ) are often considered as precursors in this respect.

INDONESIAN CAPITAL MARKET REVIEW • VOL.VI • NO.1

p.341; Christopoulos and Tsionas, 2004, p.55; similar works on Moroccan case (Solhi, 2006; Giuliano and Ruiz-Arranz, 2009, p.144). How-

Abouch et Ezzahid, 2006; Alaoui, 2004). From ever, some studies show that this relationship

our point of view, investigating the financial can be negative (Kaminsky and Reinhart, 1999,

development and economic growth relation- p.494; Demirgüc-kunt and Detragiache,1999,

ship makes sense, only when the direct regula- p.35), and a non-lineardue to the presence of

tions are removed. That is why we have taken threshold effect (Greenwood and Jovanovich,

as a starting point of our analysis the year 1998, 1990, p.1076; Berthélemy and Varoudakis,

which marks the achievement of the financial 1996, p.11; Deidda and Fattouh, 2002, p.339),

liberalization process in Morocco and coin- or also inexistent (Robinson (1952), Lucas

cides also with the new base year of national (1988)). Besides, some studies have explored

accounts.

the interaction between those sectors, with even The last but not the least contribution of this there ambivalent results (Agbetsiafa, 2003;

paper lies in the fact that it goes above the study Waqabaca, 2004; Odhiambo, 2004; Fowowe,

of the link between financial and economic sec- 2010).

tors, but aims to approach the question of their Considering these diverse and contradictory

causality.

proposals, this paper aims to provide an empiri- The rest of the paper is organized as follows. cal evidence on the relation between financial

The first section presents a brief review of the development and economic growth in the Mo-

literature. The second one exposes our model. roccan context.The importance of this paper

The third presents and discusses the results. stems from the following elements. Firstly, it concerns the particular case of Mo-

Literature Review

rocco, where the financial sector is considered as a model on the regional area.Thus, the re-

The arguments supporting the importance forms undertaken to deepen and modernize the

of the financial system in stimulating economic financial sector, were not only worth wiping out

growth are not new. Schumpeter (1911) high- successfully the international financial crisis th lighted at the beginning of the 20 century the

(Chatri, Maarouf et Zouiri, 2013, p.178), but role of banks in the financing innovations. Dur- also leading to have a financial sector enough

ing the 50’s, Gurley and Shaw (1955) stressed diversified and endowed with all the attributes

the importance of financial intermediation in of a modern financial sector (IMF, 2008, p.5).

economic growth. Inspired by these ideas, Pat- Consequently, the case of Morocco is an ex-

rick (1966) shows that efficient financial system cellent example to approach the nature and the

increase saving and its allocation to productive extent of the relationship between financial de-

investments.

velopment and economic growth. It was not until the early 70’s when the link Secondly, if the majority of the similar works

"finance- economic growth "started to be treat- have examined this relationship within the con-

ed in a detail, through the school of financial text of the panel data (Yoke-Kee et Muzafar,

repression developed by Goldsmith (1973), 2011; Rachdi et Ben Mbarek, 2011; Abu-Bader

McKinnon (1973) and Shaw (1973). Accord- et Abu-Qarn, 2008; Ben Naceur et Ghazouani,

ing to these authors, the reduction by monetary 2005; Bernard, 2000; Turunc, 1999), the pre-

authorities of the nominal interest rates discour- sent work focuses deliberately on the specific

ages savings and fixes investment below the and isolated case of Morocco. This permits to

equilibrium level that would be necessary for avoid biased results related to specific politi-

the economic growth. They suggest liberalizing cal, institutional and economic factors of each

the financial sector in order to increase savings country.

and investment and improve capital efficiency. Thirdly, it uses the homogeneous data with-

With the development of the endogenous out apparent structural bias, contrary to several 2 growth theory in the 80’s the debate on the

2 In order to overcome inadequacies of the neoclassical growth model which cannot explain the mechanisms those gener-

Chatri and Maaruf

link between financial development and growth

3) has known a considerable revival. Within this framework, the models developed show that

I t = ϕS t

Taking into account (1), the growth rate in financial development is an important channel

year t +1 can be expressed as: through which growth in the stationary state oc-

curs endogenously. 4) In this regard, one of the first models which

established a theoretical framework of positive Equations (2) and (3) allow to deduce the relationship between financial intermediation

steady growth rate g:

and economic growth is developed by Ben- civenga and Smith (1991). Based on the theo- retical analysis of financial intermediation of Gurley Show, the aforementioned authors have developed an overlapping-generations mod-

5) el in which the banking system plays an im-

portant role. The latter provides funds for long where s = S / Y denotes the gross saving rate. term productive investment and allows, by pro-

The equation (5) shows that financial devel- viding liquidity, investors to hold bank deposits

opment can affect growth through three chan- rather than liquid and unproductive assets 3 .

nels: i) increasing the proportion of savings (ø) This article is deepened by several other

allocated to investment productive, ii) improv- works (De Gregorio, 1992; Roubini-I-Martin,

ing the marginal productivity of capital (A) iii) 1992; Saint-Paul, 1992; King et Levine, 1993),

and increasing savings rate of the economy (s). each of which focused on a very particular as-

In parallel to this theoretical framework, a pect of finance-growth relationship. A more

rich empirical literature demonstrating how complete analysis was presented by Pagano

inefficient financial system can positively in- (1993), who has identified three main channels

fluence the long term growth rate has been through which financial system can influence

emerged (among others Greenwood and Jo- growth, starting from the following model de-

vanovic (1990), Levine (1991), Bencivenga veloped by Rebelo (1991):

and Smith (1991). The empirical work of King Y = AK

and Levine (1993) is highly important to men-

tt

tion here. Its importance lies in the fact that it where Y, A, K are respectively the produc-

confirms the existence of a strong relationship tion, the marginal productivity of capital and

between growth and financial development for the capital stock. He introduced for this purpose

a broad sample composed of 80 countries. In the conventional model of the gross investment

addition, it is based on various relevant indica- (I t ):

tors of financial development on growth. =K t+1 -

Levine (1991), Bencivenga, Smith and Starr

I t (1-δ)K t

(1996) have based their works on financial where the coefficient (δ) denotes the capital

market indicators. They demonstrate that the depreciation. It assumes also that the fraction

liquidity of stock market is crucial as it facili- (1-ø) of capital is absorbed by financial inter-

tates investment in long term projects and thus mediation (cost of intermediation and pruden-

stimulates economic growth. In the same line, tial rules):

Greenwood and Smith (1997) demonstrate that

ate the growth in stationary state.According to this model, developed by Solow (1956), economic growth is explained by two exogenous variables: demographic factors and technology. For more details on the theories of growth, see for example Aghion, P. and Howitt, P (2010), "l’économie de la croissance" Economica.

3 We find here the findings of Diamond and Dybvig who have shown that banks are relevant according to their "endog- enous response" to the divergence on time horizons consumption. Cf, Diamond, D.W. Dybvig, P.H. « Bank runs, deposit

insurance and liquidity », Journal of Political Economy, Vol. 91, No. 3, 1983, pp. 401-419.

INDONESIAN CAPITAL MARKET REVIEW • VOL.VI • NO.1

a developed stock market can reduce the cost inson (1952) considers that financial sector is of mobilizing savings and facilitate productive

not relevant on economic development. Lucas investment. Taking into account the global mar-

(1989) suggests also that the role of financial ket, Rousseau and Wachtel (2000) have also

factors in economic growth is exaggerated. stressed the benefits of deep and liquid financial

In the same line, some authors (Mayer, 1988; markets.

Stiglitz, 1993) have even shown that competi- While these different studies have confirmed

tion between banks can be harmful to financial the general idea of the existence of a positive

stability and that a developed stock market is relationship between financial development and

not really important for financing the economic economic growth, they did not however detect

growth.

the direction of this relationship and whether Moreover, the failure of financial liberaliza- the financial development leads or follows the

tion process in some countries (Rabemanan- real output growth. Patrick (1966) who has in-

jara, 1998, p.18), and the inconclusive results vestigated this problem, was the first to iden-

of some studies (Ben Naceur and Ghazouani, tify two-way causality depending on the level

2005, p.219; Andersen and Trap, 2003, p.190 of economic development. The first one, called

question the positive relationship between fi- “demand following”, is from "financial" sec-

nancial development and economic growth. tor to the "real" one and characterizes the early

Meanwhile, some works have demonstrated stages of development. The second causal re-

that the relationship between financial develop- lationship between financial development and

ment and economic growth can be non-linear economic growth is termed “supply leading”. It

(Greenwood and Jovanovich, 1990, p.1076; is from the "real" sector to the "financial" one

Berthélemy and Varoudakis, 1996, p.11; Dei- and marks the mature stage of economic devel-

dda and Fattouh, 2002, p.339. In particular, it opment.

was shown that this relationship can be circular Otherwise, the nature of indicators measur-

or characterized by the presence of threshold ing financial development influences signifi-

effects.

cantly the intensity and the sense of its relation- More recently, several empirical studies ship with economic growth. The ambivalent

have focused on "too much finance" issue in findings of Gupta (1984) and Jung (1986) are

order to show the "Dark Side" of financial de- very eloquent at this level. While Gupta con-

velopment. In particular, they have investigated firms Patrick’s findings using M2/GDP as an

if there is a threshold above which financializa- indicator of financial development, the results

tion starts to have a negative impact on growth. obtained by Jung differ depending on the indi-

In this respect, Cecchetti and Kharroubi (2012) cator chosen. Indeed, the use of M1/GDP sup-

have examined how financial development af- ports this result whilethe use of M2/GDP does

fects aggregate productivity growth based on not.

a sample of 50 advanced and emerging econo- Similarly, because of the institutional and

mies during the period 1980-2009. They have political features of each country, the direction

found that, in the case of advanced countries, of causality differs from one system to anoth-

when private credit grows to the point where er, as observed by Demetriades and Hussein

it exceeds GDP, it becomes a drag on produc- (1996) and Demetriades and Aristis (1997).

tivity growth (Cecchetti and Kharroubi, 2012, Besides that, other studies have highlighted the

p.2). More generally, they have demonstrated fundamental difference between the short-term

that when the financial sector represents more dynamics and the long-term economic growth

than 3.5% of total employment, further increas- and financial development relationship (Fow-

es in financial sector size tend to be detrimental owe, 2010; Darart, 1999).

to growth. Arcand, Berkes and Panizza (2012), In contrast with the previous literature, some

focusing on the non-monotone relationship authors remain skeptical to the role of finan-

between financial and economic development cial systems in economic growth. Thus, Rob-

highlighted especially by Deidda and Fattouh

Chatri and Maaruf

(2002) and Rioja and Valev (2004), have found services and more specifically, financial inter- comparable results, using different data sets and

mediation function (Beck, 2011, p. 50). From empirical approaches. In particular, their results

this point of view, financial regulation and pol- suggest that finance starts having a negative ef-

icy should focus on the improvement of vari- fect on output growth when credit to the pri-

ous services provided by the financial system to vate sector reaches 80-100% of GDP (Arcand,

the real economy (payment, savings, credit and Berkes and Panizza, 2012, p. 6).

risk management) that may positively impact This non-monotonic relationship between

growth.

the size and growth of the financial sector is consistent with the vanishing effect highlighted

Research Method

by Rousseau and Wachtel (2011). Indeed, these authors have demonstrated that finance is not

Data

always good for growth. "Too much Finance" could conversely produce a “leakage effect”

The common problem faced by the majority of financial depth on the real economy. In this

of empirical works is to find appropriate indica- respect, they have demonstrated that credit to

tors to gauge the extent of financial develop- the private sector has no statistically significant

ment. In this paper, we opt for the traditional impact on GDP growth over the 1965-2004

indicators, largely inspired by the synthesis of period. Moreover, according to these authors,

Pagano (1993), which demonstrated that the fi- the excessive financial deepening or too rapid

nancial sector can affect economic growth via credit growth could weaken banking system

three channels: i) improving the Savings rate, and cause financial crisis and thereby could

ii) increasing savings allocated to productive have major negative implications for the real

investment and iii) reducing the cost financial economy.

resources as a result of the rise of the produc- In the same vein, De la Torre and al. (2011) 4 tivity of capital and reduction of risks . We will

focus also on the finance-crisis nexus. In this add, as well, an indicator reflecting the depth of respect, they have provided numerous insights

financial markets. Finally, insofar as the sources on the dangers of excessive financial develop-

of economic growth are not exclusively finan- ment. In particular, they have pointed out that

cial, the model discussed above also includes a the "Too much finance" result may be consistent

real variable control (investment). with positive but decreasing returns of financial

Our general model is written as follows: depth which, at some point, become smaller than the cost of instability brought about by the

GDPc t = α 0 + α 1 Z it + α 2 I t + ε t 6) dark side (De la Torre and al., 2011, p.2). These recent works presented above (among

with:

others) as well as the painful experience of the - GDPc t represents the Gross Domestic Prod- financial crisis of 2008 has led both academ-

uct per capita in constant prices as endog- ics and policymakers to reconsider their prior

enous variable, reflecting the development conclusions. It is nowadays largely admitted

of the real economy;

that financial development has also dark side. - Z it denotes a vector of financial variables: In particular a bloated financial system can be-

• The credit to private sector to GDP ratio come a drag on the rest of the economy.

(denoted CREDSP_GDP), measuring ef- It is for this reason that some authors believe

ficiency of the banking system in the allo- that the debate should focus not on the size of

cation of financial resources, as the most the financial sector and its impact on economic

of the funding of productive activities is growth, but rather on the benefits of financial 5 allowed by banks ;

4 This function of risk reduction is considered by some authors as rationale for financial intermediaries. Cf Allen, F.A. and Santomero,A, (1996), "The Theory of Financial Intermediation" Working paper, Wharton Financial Institutions Center.

5 The annual average bank credit to nominal GDP has increased from 49% in 2008 to 81% in 2011.

INDONESIAN CAPITAL MARKET REVIEW • VOL.VI • NO.1

• The liquidity ratio (denoted M3_GDP), + α 4 L (CAP - GDP) t calculated as the ratio of average aggre-

+ α 5 L (INVEST - GDP) t + ε t 7) gate broad money (M3) to GDP. This in-

dicator provides information on the size Remember that our aim in this paper is to test and the depth of the financial sector and

empirically the long-term relationship and the reflects also the banks efficiency in the

causality relationship between financial devel- mobilizing financial savings;

opment and economic growth in the particular • The ratio of market capitalization, which

context of Morocco. For this purpose, we use is equal to the values of listed securities

the Vector Error Correction Model (VECM), stock exchange divided by GDP (denoted

which has the advantage of incorporating the CAP_GDP). It is assumed that since the

concept of cointegration and distinguishes be- financial market reform of 1993, the stock

tween the short-term and long-term dynamics. market could be an additional source of

This method involves the following three steps: financing the economy;

The unit root test in order to estimate the • The interest rates on Treasury bonds 5

order of integration of the series, knowing that years (denoted rBDT 5Yrs ), chosen as refer-

most economic and financial series are non- ence for capturing the evolution of inter-

stationary.

est rate. In fact, this maturity is consid- The cointegration test for checking the exist- ered as benchmark line on the Moroccan

ence of a long-term stable relationship between market and therefore able to reflect the

non-stationary variables integrated of the same evolution of financial market conditions;

order. There are several tests for cointegration, - I t denotes the ratio of investment to GDP

the most known is Johansen test (1988), which (denoted INVST_GDP). It is used as a con-

is based on the maximum likelihood method. trol variable. We assume that the volume of

The causality test as any cointegrated sys- investment is positively correlated with eco-

tem implies the existence of an error correction nomic growth.

mechanism that prevents variables to deviate - ε t is the error term.

too much from their long-run equilibrium. Em- Although each individual financial indicator

pirically, the causal relationship can be ana- has its limits. Nevertheless, using this table of in-

lyzed using the error correction model (ECM) dicators provides an insightful picture of finan-

or the vector error correction model (VECM). cial development. The variables are considered

The estimation of these models will be com- in logarithmic forms: L(GDPc), L(M3_GDP),

pleted by the Granger causality test (1988), L (CREDSP_GDP), L(CAP_GDP), L(rBDT 5Yrs )

which assumes that the knowledge of the his- and L(INVST_GDP). They are quarterly and

tory of one variable improves the estimate of cover the period from 1998 to 2011. It should

another variable.

be noted in this regard that given the absence of quarterly data on investment covering the en-

Result and Discussion

tire period, we used the interpolation procedure highlighted by Goldstein and Khan (1976) to

Unit Root Test

generate quarterly data missing.

A long-term relationship between several

Econometric Methodology

variables requires two conditions. First, the variables must be non-stationary and integrated

Given the foregoing, the model (6) above on the same order for avoiding spurious regres- can be written as follows:

sion problems. Secondly, their stochastic trends must be related, that is to say, there must be one L(GDPc)t = α 0 + α 1 L (M 3 - GDP ) t or more linear combinations of these non sta- + α 2 L (CREDSP - GDP) t tionary variables that are stationary.

+ α 3 L (rBDT 5Yrs ) t

Chatri and Maaruf

Table1. Unit root test

Order of integration L(GDPc)

-3.712132 I(1) 1 st difference

-10.11346* I(0) L(M 3_GDP)

-0.577684 I(1) 1 st difference

-10.95825* I(0) L(CREDSP_

1 Yes

Yes

0.151848 I(1) GDP)

-0.865875 I(1) 1 st difference

-6.460597* I(0) L(CAP_GDP)

-1.240580 I(1) 1 st difference

-7.553538* I(0) L(rBDT 5Year )

-1.848286 I(1) 1 st difference

-7.858560* I(0) L(INVEST

1 Yes

Yes

-1.782685 I(1) _GDP)

-0.842862 I(1) 1 st difference

-4.159870* I(0) Notes : Tests ADF: *** reject of the unit rootat 1%, ** reject of the unit root at 5%, * reject of the unit root at 10%.

1 Yes

Yes

Table 2. Akaike and Schwarz criteria (VAR models)

Therefore, first, we determine the order of information according to the criteria of Akaike integration of the different series through the

and Schwarz.

standard unit root tests. We use for this purpose As it turns out most often Akaike criterion the Augmented Dickey Fuller, with the null hy-

gives contradictory results to Schwarz ones. pothesis of the nonstationarity. The following

The suggested lags are respectively 5 and 1. table gives the results, which show that all se-

However, the results of the estimation models ries are non-stationary and first order integrat-

led us to adopt 5 lags on level. Therefore, the

ed, denoted I (1) at 1%. This result suggests a Johanson test was made on stationary series stable long-term relationship between the used

with a 4 lags. The results (Table 3) show that at variables.

5%, there are three long term relationships, at least in one direction between the explanatory

Johansen Cointegration Test

variables and the endogenous variable, which exhibit similar behavior over time.

The previous results show that there is a high probability of cointegration between se-

Error Vector Correction Model and Granger

lected variables and permit subsequently to ap-

Causality

ply the vector error correction representation. Thus, in order to ensure proper specification of

The error vector correction model includes these models, it is necessary to determine the

two relationships that link the financial sector number of lags (p) optimizing the provision of

and economic growth. The long term station-

INDONESIAN CAPITAL MARKET REVIEW • VOL.VI • NO.1

Table 3. Johansen test

Hypothesized

0.05 No. of CE(s)

Trace

0.05 Max-Eigen

Critical Value Prob.** None *

Eigenvalue

Statistic

Critical Value

Prob.**

Statistic

40.07757 0.0003 At most 1

33.87687 0.0018 At most 2

27.58434 0.0096 At most 3

21.13162 0.1934 At most 4

Table 4. Long-term relationship between economic growth and financial development

Variable

Coefficient

Std. Error

t-Statistic

Prob.

0.000000 M3_ GDP

0.000000 CREDSP_GDP

0.000600 CAP_GDP

0.000100 rBDT 5YrS

0.015500 INVEST_GDP

8.173374 Adjusted R-squared

0.984743

Mean dependent var

0.133541 S.E. of regression

0.983218

S.D. dependent var

-5.175296 Sum squared resid

0.017300

Akaike info criterion

-4.958294 Log likelihood

0.014964

Schwarz criterion

645.455700 Durbin-Watson stat

Prob(F-statistic)

0.000000

ary relationship and the short-term relationship. tests on residuals show that it is sufficiently ro- The later takes into account the self-correcting

bust, as evidenced by their independance, nor- mechanisms leading to the convergence to the

mality, stationarity and homoscedasticity (see steady state.

Table A1 in Appendix).

Therefore, the results obtained using the Long-term Equilibrium Relationship

OLS estimation are robust and confirm the long term equilibrium relationship between financial

The simplest way to estimate the long-term variables and real variables, especially since relationship between economic growth and fi-

all selected explanatory variables seem explain nancial indicators is to apply the ordinary least

significantly economic growth. More specifi- squares (OLS) regression to the equation (7)

cally, the signs of variables "capturing" the fi- above.

nancial development are those expected. This Before discussing the results given in Table

corroborates the theoretical assumption under

4 above, it is necessary to ensure its statistical which the financial sector plays an active role and therefore operational quality.

in economic growth, through its ability to mo- The adjustment quality of the model, as

bilize saving and it allocation more efficiently, measured by the coefficient of determination

and to reduce the cost of resources and diver- (adjusted R²), is significant. This high level may

sify funding for private operators. nevertheless be related to the presence of col-

Indeed, the liquidity ratio, measured by the linearity between the explanatory variables in

ratio of broad money to GDP, affects signifi- the model, especially since it includes different

cantly and positively economic growth, with an financial variables, which may be highly cor-

elasticity of 0.5. This means that a long term related. However, the high significance of all

economic growth is expected to increase by regression coefficients at 1% lead us to believe

5% when the liquidity ratio increases by 10%. that collinearity is not strong and, therefore, to

Similarly, the increase in funding provided to not “drop”some variables, particularly since

private sector has a positive and significant our goal is to "capture" simultaneously the three

influence on economic growth. The elasticity channels transmission from finance to growth

between these two variables is 0.12 and means highlighted by Pagano (1993). Furthermore, the

that the long term economic growth is expected

to increase by nearly 1.2% when the credit dis- tributed to private sector increases by 10%. In addition, the development of direct funding, an- other important indicator of financial develop- ment seems also affect significantly and posi- tively economic growth. However, in this case, the elasticity is very low not exceeding 0.04. More specifically, the improvement of market capitalization of 10% would raise the long term economic growth by 0.4%. Finally, with regard to the link between interest rates and economic growth, it seems that it is significant and nega- tive and in accordance to what is expected. The results show that an increase of interest rate of 10% would reduce the long term economic growth by around 0.7%. This result confirms the active role in the development of financial sector in economic growth, so it reduces the cost of resources, and thereby improves the long-term growth potential.

All these results, consistent with the theoret- ical literature, mean that the financial system, in particular financial intermediation, influences significantly the Moroccan economic growth. This positive role attests that the improvement of the productive and allocative efficiencies of the financial sector is verified in the Moroccan context.

In contrast, the results show that the increase of investment by 10% would affect negatively the long-term economic growth (2.4%).This un- expected finding may nevertheless be explained by the following complementary features. First, on a general level, several studies on the effec- tiveness of investment in Morocco show that is non-productive (World Bank, 2006; Sekkat, 2004; Abouch and Ezzahid, 2004; Ministry of economy and Finance, 2002). More recently, the IMF in its Article IV consultations report of 2011, underlines clearly the persistence of low efficiency of investment projects (IMF, 2011, p.16). Furthermore, the analysis of the nation- al investment behavior on the period studied shows that it was supported in particular by public investment, along with the policy of the major projects undertaken by Morocco to catch

the recorded deficit in basic infrastructure 6 . The potential benefits of this kind of investment

cannot be felt only in the long term (Agénor, 2006). However, the model chosen covers a rel- atively short period (1998-2011) and thus is not able to capture entirely those effects. Moreover, the effort provided in term of investment in in- frastructure has benefited mainly to the rest of the world and not to the domestic productive sectors. Indeed, the imports to GDP ratio have increased from 28% in 1998 to nearly 49% in 2011.

After analyzing the results of the Johansen cointegration test and highlighted the long-term relationship between the growth and the finan- cial variables, we turn to estimate the error cor- rection model. This model permits to analyze, on the one hand, the speed of convergence of growth rate to its long term equilibrium level and, on the other hand, the contribution of fi- nancial sector in the short-term dynamics of economic growth.

Short-term Relationship

Given the optimal lag of our cointegration relationship, the basic model to estimate takes the form below. It should be noted that we can in the same way specify and estimate models in which the endogenous variable is represented by one of financial variables of our model.

ΔL(GDPc) t =

α i (ECMi) t-1

+ β i ΔL(GDP)i t-i

+ γ i ΔL(M 3 - GDP )i t-i

+ γ i ΔL(CREDSP - GDP)i t-i

+ ρ i ΔL(CAP - GDP)i t-i

+ τ i ΔL(rBDT 5Yrs )i t-i

+ φ i ΔL(INVEST - GDP)i t-i

+ ω+ε t

Chatri and Maaruf

6 Public investment has multiplied by more than seven from 1998 to 2011.

INDONESIAN CAPITAL MARKET REVIEW • VOL.VI • NO.1

Table 5. Error correction model-Wald test

D_L(CREDSP_GDP) D_L(CAP_GDP) D_L(rBDT 5Yrs ) Test Stat

D_L(GDPc)

D_L(M3_GDP)

Value Value

(P-value) (P-value) D_L(GDPc)

10.324 (0.0353) 1.8503 (0.7633) D_L(M3_GDP)

3.2718 (0.5134) 7.9837 (0.0922) D_L(CREDSP_GDP) F-statistic

9.2407 (0.0554) 2.0660 (0.7236) D_L(CAP_GDP)

3.0083 (0.5564) 4.5334 (0.3386) D_L(rBDT 5YrS )

13.416 (0.0094) 1.6887 (0.7928) D_L(INVEST_GDP) F-statistic

with: usually seen in underdeveloped countries, the ECM t-1 : represents the error correction term of

value of the speed adjustment appears rela- each cointegrating relationship lagged one time

tively low suggesting that after a shock, growth period. It is estimated from long term equilib-

tends to return rapidly towards its stationary rium. This term is denoted by Eviews by "Coin-

long term equilibrium. From a financial stabil- tEq."

ity point of view, this result reflects the fact that ε t : Random variable identically and indepen-

a temporary financial sector dysfunction is not dently distributed.

very troublesome in term of economic perfor- The results provided in Appendix (Table

mance because the return of the national econ- A2), which presents five different models, ac-

omy at its potential level should be quick. This cording to the variable taken as endogenous

result may be related to the fact that the stable variable. The error correction term has a fun-

relationship cointegration contains only market damental importance. It measures the speed of

capitalization and interest rates that are known adjustment of the dependent variable to its long

for their volatility and may therefore quickly re- run equilibrium level. More specifically, the co-

turn to their fundamental behavior. efficient should be negative, but less than -1 for

Otherwise, the long-term financial deep- long-term stable relationship.

ening seems to be "caused" by real variables, The results show that for each model there

except where it is measured by the volume of is at least one negative and statistically signifi-

loans to the private sector. Indeed, the results cant error term, which validates the existence

show that in this case the error term is not be- of a long-term relationship between financial

tween -1 and 0 (model 3). In contrast, at least deepening and economic growth. More pre-

one error term is negative and statistically sig- cisely, this result indicates that there is a restor-

nificant for the other measures. Thus, nearly ing force and error correction mechanism that

76% deviation of the liquidity of the economy brings financial and real variables to the same

compared to its long-run equilibrium is correct- long-term expansion path. It also means that se-

ed by the system (model 2). This rate drops to lected financial variables cause long-term eco-

23% if the cointegrating vector contains loans nomic growth.

(model 3). Similarly, the model corrects 73% of The estimation of the first model, which re-

the deviation of the market capitalization rela- tains the GDP per capita as the dependent vari-

tive to its long-term equilibrium level (model able revealed that this adjustment coefficient is

4). Finally, with regard to the interest rate, the -0.63 which means that the system corrects at

system corrects 67% of its deviation from its long term 63% of GDP per capita deviation. In

long-term equilibrium level (model 5). other words, after any shock, the rate growth

In addition, the Wald test (Table 5) shows returns to its long term equilibrium level in less

that short-term causality between economic than 6 months on average. Contrary to what is

development and financial deepening is true

Chatri and Maaruf

Table 6. Information criteria Akaike and Schwarz: VAR models for different lags

Table 7. Granger Test

F-Statistic Probability D_L(GDPc) does not Granger Cause D_L(M3_GDP)

Null Hypothesis:

Obs

54 3.21607 0.07885 D_L(M3_GDP) does not Granger Cause D_L(GDPc)

1.34304 0.25190 D_L(GDPc) does not Granger Cause D_L(CREDSP_ GDP)

54 3.40074 0.07098 D_L(CREDSP_ GDP) does not Granger Cause D_L(GDPc)

1.93094 0.17069 D_L(GDPc) does not Granger Cause D_L(CAP_ GDP)

54 2.48943 0.12080 D_L(CAP_ GDP) does not Granger Cause D_L(GDPc)

4.19721 0.04565 D_L(GDPc) does not Granger Cause D_L(rBDT 5YrS )

54 0.68266 0.41252 D_L(rBDT 5YrS ) does not Granger Cause D_L(GDPc)

0.17532 0.67718 D_L(GDPc) does not Granger Cause D_L(INVEST_ GDP)

54 5.15132 0.02749 D_L(INVEST_ GDP) does not Granger Cause D_L(GDPc)

0.02170 0.88347 D_L(M3_ GDP) does not Granger Cause D_L(CREDSP_ GDP)

54 10.6958 0.00193 D_L(CREDSP_ GDP) does not Granger Cause D_L(M3_ GDP)

0.28244 0.59741 D_L(M3_ GDP) does not Granger Cause D_L(CAP_ GDP)

54 0.57291 0.45259 D_L(CAP_ GDP) does not Granger Cause D_L(M3_ GDP)

0.32205 0.57287 D_L(M3_ GDP) does not Granger Cause D_L(rBDT 5YrS )

54 0.21287 0.64649 D_L(rBDT 5YrS ) does not Granger Cause D_L(M3 _ GDP)

3.73205 0.05894 D_L(M3_ GDP) does not Granger Cause D_L(INVEST_ GDP)

54 5.80552 0.01962 D_L(INVEST _ GDP) does not Granger Cause D_L(M3_ GDP)

2.02325 0.16100 D_L(CREDSP_ GDP) does not Granger Cause D_L(CAP_ GDP)

54 0.16339 0.68775 D_L(CAP_ GDP) does not Granger Cause D_L(CREDSP_ GDP)

0.41185 0.52391 D_L(CREDSP_ GDP) does not Granger Cause D_L(rBDT 5YrS )

54 0.60292 0.44105 D_L(rBDT 5YrS ) does not Granger Cause D_L(CREDSP_ GDP)

1.02792 0.31543 D_L(CREDSP_ GDP) does not Granger Cause D_L(INVEST_ GDP)

54 3.52533 0.06616 D_L(INVEST_ GDP) does not Granger Cause D_L(CREDSP_ GDP)

0.40292 0.52842 D_L(CAP_ GDP) does not Granger Cause D_L(rBDT 5YrS )

54 5.6E-07 0.99940 D_L(rBDT 5YrS ) does not Granger Cause D_L(CAP_ GDP)

2.79090 0.10093 D_L(INVEST _ GDP) does not Granger Cause D_L(rBDT 5YrS )

54 0.21201 0.64715 D_L(rBDT 5YrS ) does not Granger Cause D_L(INVEST_ GDP)

1.13261 0.29223 D_L(INVEST_ GDP) does not Granger Cause D_L(CAP_ GDP)

54 0.00461 0.94616 D_L(CAP_ GDP) does not Granger Cause D_L(INVEST_ GDP)

only when the latter is measured by the market and Ranciere (2002, p.15), who present it as an capitalization. Moreover, the causality seems

explanation for the apparent contradiction be- to be bidirectional in this case. In fact, market

tween the literature on crises and the literature capitalization "cause" economic growth, while

on endogenous growth.

all other variables seem to have no short-term From the econometric point of view, the re- effect on it. Conversely, the economic growth

sults of different specifications adopted are here does not "cause" any short-term financial vari-

also significant (Table A3 in Appendix). Tests able, except market capitalization. This result is

on the residuals validate their independence, not surprising that other variables (In particular,

normality and homoscedasticity hypothesis. liquidity of the economy, loans to private sec-

Otherwise, the R² is at a reasonable level (rang- tor) may exert their effects on growth on long

ing from 58% to 76%) with respect to the spec- term perspective.

ificity of the model. Indeed, in the short-term We note simply that this difference in the

perspective, growth rate is a function of several nature of causality between the two sectors

variables that cannot all be identified properly according to the time horizon (short and long

by an econometric representation .

term) has already been implemented by Loayza

INDONESIAN CAPITAL MARKET REVIEW • VOL.VI • NO.1

Granger Causality Test that the financial system reacts a passively to the needs expressed by the real sector. In oth-

To better understand the link between fi- er words, there should be a minimum level of nancial development and economic growth, it

growth of the GDP per capita before observing is important to complete this work by a test of

really its benefits on the financial activity. By causality in the Granger sense between the fi-

crossing this threshold, it leads to modernize fi- nancial variables and real variables. To do this,

nancial sector, in particular through creation of we have first estimated different VAR models

an integrated financial market, which will not in order to determine the optimal number of

fail to exert its effects on economic growth. lags (Table 6).

This result is in line with the findings of The results of the Granger test (Table 7),

several theoretical works including Robinson made on the basis of the series in first differ-

(1952), who considers that the financial sec- ence, show the absence of any feedback loop,

tor simply follows economic dynamic. It is ie bidirectional causality between the variables

also comparable to the findings of some em- of our model.

pirical works (among others Rioja and Valev, Otherwise, the unidirectional sense of cau-

2004, p.127; Deidda and Fattough, 2002, p.339; sality between economic performance and fi-

Berthelemy and Varoudakis, 1996, p.11) which nancial development depends on the indicator

show that it takes to reach a certain level of in- used to identify the financial deepening. Thus, if

come per capita, so that it is possible to develop financial development is measured by tradition-

the various types of intermediation and to ben- al indicators of intermediation – liquidity ratio

efit from their positive effect on the growth. or funding to private sector- the Granger cau-