Temporal causal relationship between stock market capitalization, trade openness and real GDP: evidence from Thailand

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1 MPRA Munch Personl RePEc Archve Temorl cusl relonsh beween soc mre clzon, rde oenness nd rel GDP: evdence from Thlnd Komn Jrnyul Nonl Insue of Develomen Admnsron November 4 Onlne hs://mr.ub.un-muenchen.de/64/ MPRA Per No. 64, osed December 4 :4 UTC

2 Temorl Cusl Relonsh beween Soc Mre Clzon, Trde Oenness nd Rel GDP: Evdence from Thlnd Komn Jrnyul, School of Develomen Economcs, Nonl Insue of Develomen Admnsron, Thlnd. Eml: Absrc: Ths sudy exmnes boh shor-run nd long-run cusl relonsh beween soc mre clzon, rde oenness nd economc growh n Thlnd. Qurer d over he erod from he frs qurer of 99 o he fourh qurer of re used n he nss. The resuls from hs sudy show h here exss undreconl long-run cus runnng from soc mre clzon nd rde oenness o rel GDP. In he shor run, n ncrese n soc mre clzon cuses economc growh o ncrese whle n ncrese n rde oenness decreses nd vce vers. Furhermore, here exs shor-run bdreconl negve cusons beween economc growh nd rde oenness. However, he shor-run henomen re emorry. Bsed uon he resuls from hs sudy, olcymers should y enon o mesures h re ble o enhnce soc mre clzon nd rde oenness f he long-run rge s o cheve hgh economc growh re. Keywords: Economc growh, mre clzon, rde oenness, conegron, cus JEL Clssfcon: F44, C. Inroducon Cl mres cn n morn role n he economc develomen rocess n develong counres. Besdes, rde oenness s beleved o be one of crucl deermnns of economc growh. Demrguc-Kun nd Levne (996) ndce h emergng cl mres hve become more negred wh world cl mres nd fnd evdence h here exss osve correlon beween soc mre develomen nd economc growh. Bec nd Levne (4) fnd h boh bns nd soc mres romoe economc growh n he nel d nss whle Chen nd Lee (6) fnd conrdcory resuls n cross-counry sudy. The cross-counry sudes mgh exggere he role of soc mre n growh rocess. Aress e l. () use me seres d from fve develoed counres o nvesge he relonsh beween soc mre develomen nd economc growh. They fnd h bns re more owerful hn soc mres n romong growh. Lu nd Hsu (6) exmne he role of fnncl develomen n he growh rocess of Twn, Kore nd Jn. One mn fndng s h fnnce-ggreges hve osve mcs on Twn s economy, bu hve negve mcs on Koren nd Jnese economes. Ang (9) fnds h fnncl secor olces n morn role n romong rve nvesmen, whch n urn smules growh. Ths mc s more ronounced for Ms hn for Ind. Chen e l. () use nel d of 46

3 counres o exmne he mc of bnng secor nd soc mre develomen on economc growh. They fnd he U-shed relon beween bnng secor develomen nd growh, bu he nvered U-shed relon beween soc mre develomen nd growh. Anwr nd Coory () fnd h fnncl develomen nd he qu of governnce enhnce he benefs from foregn drec nvesmen nd hus economc growh n Souh Asn economes. There cn be ln beween soc mre clzon, one of vrous ndcors of fnncl develomen, nd rde oenness. Lw nd Demerdes (4) fnd h fnncl develomen of develong counes s fcled when he counres re oen o boh cl flows nd rde. Mny sudes lso focus on he role of rde oenness n he growh rocess. Lloyd nd McLren () fnd h oenness wh resec o rde n goods hs osve mnml effec on growh n Es Asn economes. Yny () fnds evdence h counres wh hgher rde shres re le o hve hgher economc growh. Tsen (6) fnds h economc growh nd rde oenness exhb osve bdreconl cus n Chn durng he erod. Srr (8) uses cross-counry nel d of 5 develong counres o exmne he relonsh beween rde oenness nd economc growh. The resuls show h on rch nd hgh rde-deenden counres benef from rde oenness. In ddon, me-seres nses of ndvdul counres ncludng he Es Asn economes show no osve long-run relonsh beween oenness nd growh. Shhbz () fnds h rde oenness romoes long-run economc growh n Psn. For develoed counres, recen evdence rovded by Brnc () shows h here exss osve bdreconl cus beween rde oenness nd growh n OECD counres. The resen sudy ems o exmne boh shor-run nd long-run relons beween soc mre clzon, rde oenness nd rel GDP n Thlnd durng 99 nd. The bounds esng for conegron s used o deec long-run cus whle he VAR Grnger cus/bloc exogeney es s used for nvesgng shor-run cusons. The nex secon descrbes he merls nd mehods h re emloyed n he nss. Secon resens mn fndngs of hs sudy. The ls secon gves concludng remrs.. Merls nd Mehods The dse used n hs sudy comrses qurer d durng 99 nd. Nomnl GDP, rel GDP 998 rces, exors, mors, nd consumer rce ndex re obned from Thlnd s Nonl Economc nd Socl Develomen Bord. GDP, exors nd mors re n bllons of bh. The seres of soc mre clzon exressed n bllons of bh s obned from he Soc Exchnge of Thlnd webse. Rel soc mre clzon s obned by deflng nomnl mre clzon wh consumer rce ndex. Trde oenness s sm he shre of he sum of exors nd mors n nomnl GDP. All seres re rnsformed no logrhmc seres. The smle sze comrses 84 observons. The resen sudy dos he symoc heory roosed by Pesrn e l. () o es for he exsence of level relonsh beween vrble nd s regressors when he degree of negron of ech vrble s no cern nown. Ths bounds esng

4 rocedure cn rovde unbsed long-run esmes nd vld es sscs. The unresrced error correcon models of hs ARDL rocedure cn be exressed s: lo lo ε φ β () lo lo lo ε φ β () lo lo ε φ β () where denoes frs dfference oeror, s he log of rel soc mre clzon, s he log of rel GDP, nd lo s he log of rde oenness. There re wo ses n he bounds esng for conegron. The frs se s o esme equons () () usng ordnry les squres mehod o deermne he exsence of long-run relonsh beween he hree vrbles. Ths s done by conducng n F- es for he on sgnfcnce of he coeffcens of lgged level vrbles. The null hyohes : H s esed gns he lernve hyohess : H. In oher words, he models n equons () () re esed gns he models whou lgged level vrbles, whch re he ARDL(,, ) models, o obn he comued F-ssc. If conegron exss, he comued F- ssc wll be lrger hn he uer bound crcl vlue. If conegron does no exs, he comued F-ssc wll be smller hn he lower bound crcl vlue. The comued F-ssc h es he vlue beween he uer bound nd lower bound crcl vlues wll led o n nconclusve resul. The exsence of conegron gves he error correcon mechnsm (ECM) exressed s: u lo e φ β λ (4) u lo e lo φ β λ (5) u lo e φ β λ (6) where e - s he error correcon erm (ETC), whch s he one-erod lg of resduls obned from he ordnry les squres esme of level relonsh beween he hree vrbles. The coeffcen λ s he seed of dusmen owrd he long-run equlbrum. The models n equons (4) (6) dec shor-run dynmcs nd show how fs ny devon from he long-run equlbrum wll be correced. The sgnfcnce of he coeffcen of he ETC lso ndces long-run cus beween

5 he hree vrbles f he Wld F-ssc n coeffcen resrcon es s sgnfcn. The mn dvnge of he condonl ARDL rocedure n esng for conegron s h re-rmeerzon of he model no he equvlen vecor error correcon model s no requred comred wh oher echnques of coneron nss. The ECM reresenons exressed n equons (4) (6) show shor-run relonsh beween chnges n levels of he hree vrbles nd her lgs, bu hey do no obvous exhb shor-run cus n he sense of Grnger (969) cus es. To es for he drecons of shor-run cusons beween he hree vrbles, one cn use vecor uoregresson (VAR) model erformed on sonry seres (her frs dfferences) o deec cusons beween sonry vrbles. The VAR reresenon cn be exressed s: β φlo v α (7) lo β lo φ v α (8) β φlo v α (9) The oml lg cn be deermned by Ae nformon creron (AIC). If cus exss, les one of lgged ndeenden vrbles n equons (7) (9) mus be sgnfcn. The sndrd Grnger cus es gves he F-sscs h show wheher or no cusons exs. An lernve roch s Grnger cus/bloc exogeney Wld ess o exmne he drecons of shor-run cus. Ths s erformed n he secfed VAR model. In ddon, hs es wll show whch vrble s n exogenous vrble.. Emrcl Resuls In esng for conegron usng he ARDL roch menoned n he revous secon, esng for un roo of seres n quesons s no requred. However, hs roch s no suble f ny seres s negred of order wo,. e., s I() seres. Accordng o Cho nd Chung (995), he more owerful es for relve smll smle sze s he PP ess roosed by Phlls nd Perron (998). The resuls of un roo ess re reored n Tble. The resuls n Tble show h mre clzon seres s negred of order one, I(), whle he seres of rel GDP nd rde oenness seem o be eher I() or I() seres. The ess n frs dfferences of ll seres show h he order of negron does no exceed one. Therefore, The ARDL rocedure s suble for conegron es. 4

6 Tble Resuls of PP ess for ll vrbles: 99Q-Q4 Level of vrbles Frs dfference of vrbles Vrbles Tes A Tes B Tes A Tes B Inegron -.9 [] -.9 [] -9.8 [] -9.5 [] I() (Mre c.) (.6) (.75) (.)*** (.)*** -.66 [5] -.64 [6] -8.56[44] 7.5[44] I() or I() (rel GDP) (.85) (.)** (.)*** (.)*** lo -. [7] -.64 [5] -9.9[8] -7.5[6] I() or I() (Trde oenness) (.5) (.)** (.)*** (.)*** Noe: Tes A ncludes nerce on whle Tes B ncludes nerce nd lner rend. The number n brce s he oml bndwdh. ***, ** nd ** denoe sgnfcnce he, 5 nd ercen level, resecve. The number n renhess s he robb of cceng he null hyohess of un roo. I() or I() ndces h les one es shows he seres s I(). The models n equons () () re used for esng he exsence of level relonsh beween soc mre clzon, rde oenness nd rel GDP usng rsmonous models. The resuls from bounds esng for conegron re shown n Tble. Tble Resuls from bounds esng for conegron: 99Q-Q4 Comued F ARDL model χ () (),, lo.5 (,,).779 (.678) () lo,,.6 (,,) (.8) (),, lo 6.5 (,,).7 (.845) Noe: The LM es for serl correlon n he secfed ARDL models s reresened by χ (). Three vrbles:, nd lo denoe mre clzon, rel GDP nd rde oenness, resecve. The resuls from bounds ess ndce h conegron exss on n Model wh rel GDP s he deenden vrble. The comued F-ssc of 6.5 s greer hn he crcl vlue of 4.85 he 5 ercen level of sgnfcnce (Tble CI () Cse III n Pesrn e l., ). The oher wo models wh mre clzon nd rde oenness s he deenden vrble gve he comued F-sscs h re smller hn he lower bounds crcl vlue he ercen level of sgnfcnce. Snce he ARDL(,,) model does no exhb serl correlon s demonsred by χ () of he LM es, he long-run relonsh nd shor-run dynmcs re esmed. The resuls re shown n Tble. Pnel A of Tble shows he esme of long-run relonsh beween rel GDP, mre clzon nd rde oenness. The dummy vrble of he 997 fnncl crss s no ncluded becuse dsors he resuls. As mer of fc, he crss could cuse flucuons n rel effecve exchnge re, whch n urn could ffec exors nd mors, nd hus he mc of rde oenness on rel GDP cn be dsored. 5

7 Tble Resuls of long-run nd shor-run dynmcs esmes of he mc of soc mre clzon nd rde oenness on rel GDP, 99Q-Q4 Pnel A. Long-run esmon wh s deenden vrble Coeffcen.96 (.55)*** lo.5 (.548)*** Consn.79 (.5)*** Adused R.88 Pnel B. ECM esmon wh s deenden vrble (-.757) (-4.687)***.45 (.6)** -.9 (.84)* lo -.8 (-.97)* e (-.9)*** Adused R.479 Dgnosc ess: Funconl form: 5.46 (.5) Serel correlon (LM): χ () 5.7 (.77) Norm of resduls: JB.46 (.) Heerosedscy: ARCH().4 (.69) Noe: The number n renhess s -ssc. s he robb of cceng he null hyoheses h here s no serl correlon, no heerosedscy n he resduls, he resduls re norml dsrbued, nd correc secfcon of he funconl form. ***, ** nd ** denoe sgnfcnce he, 5 nd ercen level, resecve. Three vrbles:, nd lo denoe mre clzon, rel GDP nd rde oenness, resecve. I s ren h soc mre clzon nd rde oenness exer he osve mcs on rel GDP n he long run. A one ercen ncrese n soc mre clzon cuses. ercen ncrese n rel GDP. Ths resul confrms he fndngs by Demrguc-Kun nd Levne (996) nd Shhbz (). Smlr, one ercen ncrese n rde oenness cuses.5 ercen ncrese n rel GDP. Ths fndng does no suor he evdence rovded by Srr (8), Lloyd nd McLren (), bu confrms he resuls of Yny (). Pnel B of Tble shows he esme of he shor-run dynmcs from he ECM reresenon. The relonsh beween chnge n soc mre clzon nd economc growh s sgnfcn osve whle he relonsh beween chnge n rde oenness nd economc growh s sgnfcn negve. However, he szes of hese coeffcens re mnml. In ddon, one-erod lgged chnge n soc mre clzon hs smll mc on economc growh. The sgnfcnce of lgged chnge n mre clzon usfes he choce of seleced lg lengh. The esmed condonl ECM equon fls o ss he funconl form mssecfcon es he 5 ercen level of sgnfcnce. Ths ndces h here mgh be some symmeres or nonlner effecs n he dusmen of rel GDP rocess, whch lner secfcon cnno e no ccoun. Furhermore, he resence of non-norm n he resduls mgh be due o smll or modere smle sze. The nferences bou he esmed coeffcens n erms of F-ess nd -ess should be resonb ccure becuse he 6

8 vrnce of he resduls s consn, whch s confrmed by he ARCH es. Overll, he esmed ECM equon hs some desrble feures. The hgh sgnfcn coeffcen of he error correcon erm, e -, s mnus nd hs he bsolue vlue of hn one. Ths ndces h ny devon from long-run equlbrum wll be rd correced. The sgnfcnce of he coeffcen of he error correcon erm lso ndces long-run undreconl cus runnng from soc mre clzon nd rde oenness o rel GDP. Ths s evdenced by he Wld F-ssc, whch s equl o 5.46 wh he robb of., nd hus leds o he reecon of he null hyohess h he esmed coeffcen of he ECT s zero. The Grnger cus/bloc exogeney es s lso conduced o exmne he drecons of shor-run cus beween he hree vrbles. The oml lgs of seven re deermned by AIC. The resuls re shown n Tble 4. Tble 4 Resuls of VAR Grnger cus/bloc exogeney Wld es Deenden vrble lo [] (.4) 5.98 [] (.5)** lo 6.97 [-] (.4) [-] (.)*** 7.4 [-] 9.88 [-] - (.44) (.8)*** χ (7) for on es (.8).68 (.77)* 5.8 (.)*** Noe: The sgn n brce denoe osve or negve cuson. The number n renhess s -vlue. ***, ** nd ** denoe sgnfcnce he, 5 nd ercen level, resecve. Three vrbles:, nd lo denoe mre clzon, rel GDP nd rde oenness, resecve. Ths es denfes he shor-run cusons beween he hree vrbles. The resuls show h undreconl cus runs from mre clzon nd rde oenness o ouu growh. Whle mre clzon moses negve mc on ouu growh, rde oenness moses osve mc on. Furhermore, ouu growh negve ffecs rde oenness. Therefore, bdreconl cusons beween rde oenness nd ouu growh re observed n he shor run. Ths fndng s smlr o he fndng by Brnc (), bu wh he oose sgn of cusons. Soc mre clzon s no ffeced by boh rde oenness nd ouu growh s evdenced by he on Wld ssc. Soc mre clzon s hus he on exogenous vrble. 4. Concludng Remrs Ths sudy ems o nvesge he emorl cusl relonsh beween soc mre clzon, rde oenness nd economc growh n Thlnd. Boh shorrun nd long-run cus ess re conduced. Qurer d over he erod from he frs qurer of 99 o he fourh qurer of re used n he nss. In esng for long-run cusl relonsh, he ARDL bounds es s doed o deermne wheher he coeffcen of he error correcon erm s sgnfcn negve nd es 7

9 he bsolue vlue of less hn one. For he shor-run cus nss, he VAR Grnger cus es s emloyed. The resuls from hs sudy show h here exss undreconl long-run cus runnng from soc mre clzon nd rde oenness o rel GDP. In he shor run, n ncrese n soc mre clzon cuses economc growh o ncrese whle n ncrese n rde oenness decreses nd vce vers. Furhermore, here exs shor-run bdreconl cusons beween economc growh nd rde oenness,.e., rde oenness moses negve mc on economc growh nd economc growh moses negve mc on rde oenness. However, he shor-run henomen re emorry. Bsed uon he resuls from hs sudy, olcymers should y enon o mesures h re ble o enhnce soc mre clzon nd rde oenness f he long-run rge s o cheve hgh economc growh re. References Ang, J. B., 9. Prve nvesmen nd fnncl secor olces n Ind nd Ms, World Develomen, 7(7), 6-7. Anwr, S., Coory, A.,. Fnncl develomen, olcl rghs, cvl lberes nd economc growh, Economc Modellng, 9(), Aress, P., Demerdes, P., Lunel, K.,. Fnncl develomen nd economc growh: he role of soc mres, Journl of Money, Cred nd Bnng, (), 6-4. Bec, T., Levne, R., 4. Soc mres, bns nd growh: nel evdence, Journl of Bnng nd Fnnce, 8(), Brnc, S.,. Trde oenness, growh, nd nform: nel VAR evdence from OECD economes, Economcs Bullen, (), Chen, C-H., Lee, C-C., 6. Sme fnncl develomen ye dfferen economc growh: why?, Journl of Money, Cred nd Bnng, 8(7), Chen, C-H., Lee, C-C., Chen, S-W., Xe, Z.,. Roles ed by fnncl develomen n economc growh: n lcon of he flexble regresson model, Emrcl Economcs, 4(), -5. Cho, I., Chung, B., 995. Smlng frequency nd he ower of ess for un roo: smulon sudy, Economcs Leers, (), -6. Demrguc-Kun, A., Levne, R., 996. Soc mres, corore fnnce nd economc growh: n overvew, World Bn Economc Revew, (), -9. Grnger, C. W. J., 969. Invesgng cusl relons by economerc models nd cross secrl mehods, Economerc, 7(),

10 Lw, S. H., Demerdes, P. O., 4. Cl nflow, rde oenness nd fnncl develomen n develong counres, Money Mcro nd Fnnce (MMF) Reserch Grou Conference Per. Lu, W. C., Hsu, C., 6. The role of fnncl develomen n economc growh: he exerences of Twn, Kore, nd Jn, Journl of Asn Economcs, 7(4), Lloyd, P. J., McLren, D.,. Oenness nd growh n Es As fer he Asn crss, Journl of Asn Economcs, (), Pesrn, M. H., Shn, Y, Smh, R. J.,. Bounds esng roches o he nss of level relonshs, Journl of Aled Economercs, 6(), Phlls, P. C. B., Perron, P., 988. Tesng for un roo n me seres regresson, Bomer, 75(), Srr, P., 8. Trde oenness nd growh: s here ny ln?, Journl of Economc Issues, 4(), Shhbz, M.,. Does rde oenness ffec long-run growh?: conegron, cus nd forecs error vrnce decomoson ess for Psn, Economc Modellng, 9(6), 6-9. Tsen, W. H., 6. Grnger cus ess mong oenness o nernonl rde, humn cl ccumulon nd economc growh n Chn, , Inernonl Economc Journl, (), 85-. Yny, H.,. Trde oenness nd economc growh: cross-counry emrcl nvesgon, Journl of Develomen Economcs, 7(),