Does Fiscal Transparency Matter for Bank Development? A Lookup on Emerging and Developing Countries

Emna Trabelsi

doi:10.2478/jcbtp-2023-0006

.blurhash-client-img { display: none !important; }

Does Fiscal Transparency Matter for Bank Development? A Lookup on Emerging and Developing Countries

Journal of Central Banking Theory and Practice

Volume 12 (2023): Issue 1 (January 2023)

By: Emna Trabelsi

Open Access

|Jan 2023

Abstract

This paper examines how fiscal transparency is linked to bank development. It also hypothesizes that the effect is mediated by reasonable channel(s). Drawing upon a panel dataset of emerging and developing economies, we find that fiscal transparency is positively related to the private credit and to the ratio of liquid assets, implying that more transparent policies enhance bank development. Our panel regressions and the mediation analysis also suggest that the effect of fiscal transparency on private credit is significantly transmitted through the control of corruption, while it has a direct effect on the ratio of liquid assets.

References

1. Ahmad, E., Aman Ullah, M. and Arfeen, M. I. (2012). Does Corruption Affect Economic Growth? Latin American Journal of Economics, 49(2), 277–305.10.7764/LAJE.49.2.277
Search in Google Scholar Back to article
2. Aisen, A. and Franken, M. (2010). Bank Credit During the 2008 Financial Crisis: A Cross-Country Comparison. IMF Working Paper No. 47. Retrieved from https://www.researchgate.net/profile/Ari_Aisen/publication/46433369_Bank_Credit_During_the_2008_Financial_Crisis_A_CrossCountry_Comparison/links/5592b6c708ae1e9cb4297352.pdf10.5089/9781451963120.001
Search in Google Scholar Back to article
3. Alesina, A., Hausmann, R., Hommes, R. and Stein, E. (1999). Budget Institutions and Fiscal Performance in Latin America. Journal of Development Economics, 59, 233-253.10.1016/S0304-3878(99)00012-7
Search in Google Scholar Back to article
4. Allard, J., Catenaro, M., Vidal, J.P. and Wolswijk, G. (2014). Central bank communication on fiscal policy. European Journal of Political Economy, 30, 1-14.10.1016/j.ejpoleco.2012.12.001
Search in Google Scholar Back to article
5. Allen, F. and Gale, D. (2000) Comparing financial systems. MIT Press, Cambridge.
Search in Google Scholar Back to article
6. Al-Marhubi, Fahim A. (2000) Corruption & inflation. Economics Letters, 66(2), 199-202.10.1016/S0165-1765(99)00230-X
Search in Google Scholar Back to article
7. Almarzoqi, Raja M., Ben Naceur, S. and Kotak, A. (2015). What Matters for Financial Development & Stability? IMF Working Paper No. 173. Retrieved from https://www.imf.org/external/pubs/ft/wp/2015/wp15173.pdf10.5089/9781513501178.001
Search in Google Scholar Back to article
8. Alt, James E. and Lassen, Dreyer D. (2006). Fiscal transparency, political parties, and debt in OECD countries. European Economic Review, 50(6), 1403-1439.10.1016/j.euroecorev.2005.04.001
Search in Google Scholar Back to article
9. Alt, James E., Lassen, Dreyer D. and Rose, S. (2006). The Causes of Fiscal Transparency: Evidence from the American States. IMF Staff Papers, 53(1), 30-57.10.2307/30036021
Search in Google Scholar Back to article
10. Aluko, Olufemi A. and Ajayi, Michael A. (2018). Determinants of banking sector development: Evidence from Sub-Saharan African countries. Borsa Istanbul Review, 18(2), 122-139.10.1016/j.bir.2017.11.002
Search in Google Scholar Back to article
11. Andreula, N. and Chong, A. (2016). Do good institutions improve fiscal transparency? Economics of governance, 17(3), 241-263.10.1007/s10101-015-0175-8
Search in Google Scholar Back to article
12. Arbatli, E. and Escolano, J. (2015). Fiscal Transparency, Fiscal Performance and Credit Ratings. Fiscal Studies, 36(2), 237-270.10.1111/1475-5890.12051
Search in Google Scholar Back to article
13. Arellano, M. and Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence & an application to employment equations. Review of Economic Studies, 58, 277–297.10.2307/2297968
Search in Google Scholar Back to article
14. Arellano, M. and Bover, O. (1995). Another look at the instrumental variables estimation of error components models. Journal of Econometrics, 68, 29–51.10.1016/0304-4076(94)01642-D
Search in Google Scholar Back to article
15. Arestis, P. and Demetriades, P. (1997). Financial development and economic growth: assessing the evidence. Economic Journal, 107, 783–99.10.1111/j.1468-0297.1997.tb00043.x
Search in Google Scholar Back to article
16. Asanović, Ž. (2020). Essay on finance-Growth nexus. Journal of Central Banking Theory and Practice, 9(1), 97-109.10.2478/jcbtp-2020-0006
Search in Google Scholar Back to article
17. Ayadi, R., Arbak, E., Ben Naceur, S. and De Groen, W. P. (2015). Financial Development, Bank Efficiency, and Economic Growth Across the Mediterranean. In: Ayadi R., Dabrowski M., De Wulf L. (eds) Economic and Social Development of the Southern and Eastern Mediterranean Countries. Springer, Cham.Bai, J. and Ng, S. (2013). Principal components estimation and identification of static factors. Journal of Econometrics, 176(1), 18-29.10.1007/978-3-319-11122-3_14
Search in Google Scholar Back to article
18. Bayar, Y. (2019). Macroeconomic, institutional and bank-specific determinants of non-performing loans in emerging market economies: A dynamic panel regression analysis. Journal of Central Banking Theory and Practice, 8(3), 95-110.10.2478/jcbtp-2019-0026
Search in Google Scholar Back to article
19. Baldrich, J. (2005). Fiscal Transparency and Economic Performance. Working Paper. Retrieved from http://www.aaep.org.ar/anales/works/works2005/baldrich.pdf
Search in Google Scholar Back to article
20. Baltagi, Badi H., Demetriades, Panicos, O. and Law, Siong Hook (2009). Financial development and openness: Evidence from panel data. Journal of Development Economics, 89(2), 285-296.10.1016/j.jdeveco.2008.06.006
Search in Google Scholar Back to article
21. Baum, Christopher F. (2013). Dynamic panel data estimators. Retrieved from http://fmwww.bc.edu/EC-C/S2013/823/EC823.S2013.nn05.slides.pdf
Search in Google Scholar Back to article
22. Beck, T. and Levine, R. (2002). Growth and capital allocation: does having a market—or bank-based system matter? Journal of Financial Economics, 64, 147–180.10.1016/S0304-405X(02)00074-0
Search in Google Scholar Back to article
23. Ben Naceur, S. and Ghazouani, S. (2005). Does Inflation Impact on Financial Sector Performance in the MENA Region? Panel Data Evidence. Working paper. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=85634410.2202/1475-3693.1044
Search in Google Scholar Back to article
24. Ben Naceur, S., Cherif, M. and Kandil, M. (2014). What drives the development of the MENA financial sector? Borsa Istanbul Review, 14(4), 212-223.10.1016/j.bir.2014.09.002
Search in Google Scholar Back to article
25. Benito, B. and Bastida, F. (2009). Budget Transparency, Fiscal Performance, and Political Turnout: An International Approach Public Administration Review, 69(3), 403-417.10.1111/j.1540-6210.2009.01988.x
Search in Google Scholar Back to article
26. Blundell, R. and Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87, 115–143.10.1016/S0304-4076(98)00009-8
Search in Google Scholar Back to article
27. Blundell, R. and Bond, S. (2000). GMM Estimation with persistent panel data: an application to production functions. Econometric Reviews, 321-340.10.1080/07474930008800475
Search in Google Scholar Back to article
28. Boyd, J.H., Levine, R. and Smith, D.B. (2001). The impact of inflation on financial sector development. Journal of Economic Literature, 31, 1-19.
Search in Google Scholar Back to article
29. Burdekin, Richard C. K., Goodwin, T., Salamun, S. and Willett, Thomas D. (1994). The effects of inflation on economic growth in industrial and developing countries: is there a difference? Applied Economics Letters, 1(10), 175-177.10.1080/135048594357952
Search in Google Scholar Back to article
30. Caballero, Ricardo J. and Krishnamurthy, A. (2004). Fiscal Policy and Financial Depth. National Bureau of Economic Research Working Paper 10532.10.3386/w10532
Search in Google Scholar Back to article
31. Calderón, C. and Liu, L. (2003). The direction of causality between financial development and economic growth. Journal of Development Economics 72(1): 321-334.10.1016/S0304-3878(03)00079-8
Search in Google Scholar Back to article
32. Chen, C. and Neshkova, M. I. (2020). The effect of fiscal transparency on corruption: A panel cross-country analysis. Public Administration, 98(1), 226-243.10.1111/padm.12620
Search in Google Scholar Back to article
33. Chen, W., Hamori, S. and Kinkyo, T. (2016). Financial development and financial openness nexus: the precondition of banking competition. Applied Economics, 48(12), 1130-1139.10.1080/00036846.2015.1093087
Search in Google Scholar Back to article
34. Cherif, M. and Dreger, C. (2016). Institutional Determinants of Financial Development in MENA countries. Review of Development Economics, 20(3), 670-680.10.1111/rode.12192
Search in Google Scholar Back to article
35. Chinn, M. and Ito, H (2006). What matters for financial development? Capital controls, institutions and interactions. Journal of development Economics, 81(1), 163–192.10.1016/j.jdeveco.2005.05.010
Search in Google Scholar Back to article
36. Christensen, J. (2005). Special Data Section Domestic Debt Markets in Sub-Saharan Africa. IMF Staff Papers, Palgrave Macmillan, 52(3), 1-7.10.5089/9781451846584.001
Search in Google Scholar Back to article
37. Cicatiello, L., De Simone, E. and Gaeta, G.L. (2017). Political determinants of fiscal transparency: A panel data empirical investigation. Economics of Governance, 18(4), 315-336.10.1007/s10101-017-0192-x
Search in Google Scholar Back to article
38. Cottarelli, C., Dell’Ariccia, G. and Vladkova-Hollar, I. (2005). Early Birds, Late Risers, and Sleeping Beauties: Bank Credit Growth to the Private Sector in Central and Eastern Europe and in the Balkans. Journal of Banking and Finance, 29(1), 83–104.10.1016/j.jbankfin.2004.06.017
Search in Google Scholar Back to article
39. Creel, J, Hubert, P. and Labondance, F. (2016). The Intertwining of Bank Credit and Bank Instability. Working Paper. Retrieved from https://www.boeckler.de/pdf/v_2016_10_22_creel.pdf
Search in Google Scholar Back to article
40. Cuadro Saez, L., Gallego, S. and Garcia-Herrero, A. (2003). Why Do Some Countries Develop More Financially? The Role of the Central Bank and Banking Supervision. Moneda y Credito (No. 216), 105–171.
Search in Google Scholar Back to article
41. Demetriades, P. and Andrianova, S. (2004). Finance and growth: what we know and what we need to know. In C. Goodhart (ed.), Financial Development and Economic Growth: explaining the links, Palgrave Macmillan, Basingstoke and New York: 38–65.10.1057/9780230374270_2
Search in Google Scholar Back to article
42. Demetriades, P. O. (2008). New perspectives on finance and growth. Working Paper No. 08/14, Department of Economics, University of Leicester. Do, Q.-T. and Levchenko, A.A., 2004. Trade and financial development, World Bank Policy Research Working Paper No. 3347, Washington, DC.
Search in Google Scholar Back to article
43. Demming, Carsten, L., Jahn, S. and Boztug, Y. (2017). Conducting Mediation Analysis in Marketing Research. Marketing ZFP – Journal of Research and Management, 39, 76-93.10.15358/0344-1369-2017-3-76
Search in Google Scholar Back to article
44. Detragiache, E., Gupta, P. and Tressel, T. (2005). Finance in Lower Income Countries: An Empirical Exploration. IMF Working Paper No. 05/167 (Washington: International Monetary Fund).10.5089/9781451861860.001
Search in Google Scholar Back to article
45. Dutta, N. and Mukherjee, D. (2018). Can financial development enhance transparency? Economic Change and Restructuring, 51(4), 279-302.10.1007/s10644-017-9205-6
Search in Google Scholar Back to article
46. Garcia-Herrero, A. and Del Rio, P., (2003). Financial stability and the design of monetary policy. Banco de España Working Paper No. 0315. Retrieved from https://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/03/Fic/dt0315e.pdf10.2139/ssrn.396980
Search in Google Scholar Back to article
47. Gazdar, K. and Cherif, M. (2014). The quality of institutions and financial development in MENA countries: An empirical investigation. Risk Governance and Control: Financial Markets and Institutions, 4(4), 65-80.10.22495/rgcv4i4c1art1
Search in Google Scholar Back to article
48. Gozgor, G. (2014). Determinants of domestic credit levels in emerging markets: The role of external factors. Emerging Markets Review, 18, 1-18.10.1016/j.ememar.2013.11.003
Search in Google Scholar Back to article
49. Hameed, F. (2005). Fiscal transparency and economic outcomes. IMF Working Paper No. 225. Retrieved from https://www.imf.org/external/pubs/ft/wp/2005/wp05225.pdf
Search in Google Scholar Back to article
50. Hameed, F. (2006). Essays on fiscal transparency and inflation expectations. PhD Dissertation, Johns Hopkins University, pp. 1-170.
Search in Google Scholar Back to article
51. Hansen, Lars, P. (1982). Large sample properties of generalized method of moments estimators. Econometrica, 50(4), 1029-1054.10.2307/1912775
Search in Google Scholar Back to article
52. Hauner, D. (2006). Fiscal Policy and Financial Development. IMF Working Paper No. 06/26 (Washington, International Monetary Fund).10.5089/9781451862867.001
Search in Google Scholar Back to article
53. Hauner, D. (2008). Credit to government and banking sector performance. Journal of Banking and Finance, 32(8), 1499-1507.10.1016/j.jbankfin.2007.07.012
Search in Google Scholar Back to article
54. Hauner, D. (2009). Public debt and financial development. Journal of Development Economics, 88(1), 171-183.10.1016/j.jdeveco.2008.02.004
Search in Google Scholar Back to article
55. Herger, N., Hodler, R. and Lobsiger, M. (2007). What determines financial development? Culture, institutions, or trade. NCCR Trade Regulation Working Paper No. 2007/05.10.2139/ssrn.1092107
Search in Google Scholar Back to article
56. Hsiao, C. (2007). Panel data analysis—advantages and challenges. Test, 16, 1-22.10.1007/s11749-007-0046-x
Search in Google Scholar Back to article
57. Huang, C. J. (2016). Is corruption bad for economic growth? Evidence from Asia-Pacific countries. The North American Journal of Economics and Finance, 35, 247–256.10.1016/j.najef.2015.10.013
Search in Google Scholar Back to article
58. Hwang, J. and Sun, X. (2018). Should We Go One Step Further? An Accurate Comparison of One-step and Two-step Procedures in a Generalized Method of Moments Framework. Journal of Econometrics, 207(2), 381-405.10.1016/j.jeconom.2018.07.006
Search in Google Scholar Back to article
59. Huang, Y. and Temple, J.R.W. (2005). Does external trade promote financial development? CEPR Discussion Paper No. 5150.
Search in Google Scholar Back to article
60. Huang, Y. (2005). What determines financial development? Bristol Economics Discussion Paper No. 05/580. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=92505110.2139/ssrn.925051
Search in Google Scholar Back to article
61. Ismihan, M. and Ozkan, G. (2012). Public debt and financial development: A theoretical exploration. Economics Letters, 115(3), 348-351.10.1016/j.econlet.2011.12.040
Search in Google Scholar Back to article
62. Jarmuzek, M. (2006). Does Fiscal Transparency Matter? The Evidence from Transition Economies. Warsaw, Poland: Center for Social and Economic Research. Retrieved from https://iweb.cerge-ei.cz/pdf/gdn/RRCV_77_paper_03.pdf
Search in Google Scholar Back to article
63. Javier, A. and Hernando, I. (1999). Does Inflation Harm Economic Growth? Evidence from the OECD. In M. Feldstein, ed., The Costs and Benefits of Price Stability, University of Chicago Press, pp. 315-348.
Search in Google Scholar Back to article
64. Kapetanios, G. and Marcellino, M. (2010). Factor-GMM estimation with large sets of possibly weak instruments. Computational Statistics and Data Analysis, 54(11), 2655-2675.10.1016/j.csda.2010.04.008
Search in Google Scholar Back to article
65. Kopits, G. and Craig, J. (1998). Transparency in Government Operations. IMF Occasional Paper No. 158.10.5089/9781557756978.084
Search in Google Scholar Back to article
66. Kostas, M. (2002). The impact of financial liberalization policies on financial development evidence from developing economies. Discussion Papers in Economics 02/1, Department of Economics, University of Leicester.
Search in Google Scholar Back to article
67. Kaufmann, D., Kraay, A. and Mastruzzi, M. (2010). The worldwide governance indicators: Methodology and analytical issues. World Bank policy research working paper, (5430).
Search in Google Scholar Back to article
68. Law, S. H. and Azman-Saini, W. N. W. (2012). Institutional quality, governance, and financial development. Economics of governance, 13(3), 217-236.10.1007/s10101-012-0112-z
Search in Google Scholar Back to article
69. Levine, R., Loyaza. N. and Beck, T. (2000). Financial intermediation and growth: Causality and causes. Journal of Monetary Economics, 46, 31-77.10.1016/S0304-3932(00)00017-9
Search in Google Scholar Back to article
70. Luna, P. H. L. and Montes, G. C. (2017). Mitigating corruption through fiscal transparency: a panel data approach. Working Paper. Retrieved from https://www.anpec.org.br/encontro/2017/submissao/files_I/i5-d4a89660590a747a0316f17f1af25fff.pdf
Search in Google Scholar Back to article
71. Mehrhoff, J. (2009). A solution to the problem of too many instruments in dynamic panel data GMM. Discussion Paper, Series 1: Economic Studies No. 31. Retrieved from https://core.ac.uk/download/pdf/6386086.pdf10.2139/ssrn.2785360
Search in Google Scholar Back to article
72. Montes, Gabriel C. and da Cunha Lima, Luiza L. (2018). Effects of fiscal transparency on inflation and inflation expectations: Empirical evidence from developed and developing countries. The Quarterly Review of Economics and Finance, 70, 26-37.10.1016/j.qref.2018.06.002
Search in Google Scholar Back to article
73. Montes, G. C. and Luna, P.H. (2020). Fiscal transparency, legal system and perception of the control on corruption: empirical evidence from panel data. Empirical Economics. https://doi.org/10.1007/s00181-020-01849-910.1007/s00181-020-01849-9
Search in Google Scholar Back to article
74. Mun, M. W. and Ismail, N. W. (2015). The Impact of Domestic Public Debt on Financial Development in Malaysia. International Journal of Social Science Research, Macrothink Institute, 3(2), 1-19.10.5296/ijssr.v3i2.7167
Search in Google Scholar Back to article
75. Nickell, S. (1981) Biases in dynamic panel models with fixed effects. Econometrica, 49(6), 1417-1426.10.2307/1911408
Search in Google Scholar Back to article
76. Oueslati, T. and Ouerghi F. (2018). Does central banking promote financial development? Borsa Istanbul Review, 18(1), 52-75.10.1016/j.bir.2017.09.001
Search in Google Scholar Back to article
77. Pham, Thi Hong Hanh (2015). Determinants of Bank Lending. HAL Working Papers. Retrieved from https://hal.archives-ouvertes.fr/hal-01158241.
Search in Google Scholar Back to article
78. Preacher, K.J. and Hayes, A.F. (2008). Asymptotic and resampling strategies for assessing and comparing indirect effects in multiple mediator models. Behavioral Research Methods, 40, 879-891.10.3758/BRM.40.3.879
Search in Google Scholar Back to article
79. Roodman, D. (2009a). A note on the theme of too many instruments. Oxford Bulletin of Economics and statistics, 71(1), 135-158.10.1111/j.1468-0084.2008.00542.x
Search in Google Scholar Back to article
80. Roodman, D. (2009b). How to do xtabond2: an introduction to difference and system GMM in Stata. Stata Journal, 9(1), 86-136.10.1177/1536867X0900900106
Search in Google Scholar Back to article
81. Sahay, R., Čihák, M., N’Diaye, P. and Barajas, A. (2015). Rethinking Financial Deepening: Stability and Growth in Emerging Markets. Revista De Economia Institucional, 17(33), 73-107.10.5089/9781498312615.006
Search in Google Scholar Back to article
82. Sedmihradská, L. and Haas, J. (2013). Budget Transparency and Fiscal Performance: Do Open Budgets Matter? ACTA VSFS, 7(2), 109-122.
Search in Google Scholar Back to article
83. Tanasković, S., and Jandrić, M. (2015). Macroeconomic and institutional determinants of non-performing loans. Journal of Central Banking Theory and Practice, 4(1), 47-62.10.1515/jcbtp-2015-0004
Search in Google Scholar Back to article
84. Teig, M. (2006). Fiscal Transparency and Economic Growth. Paper presented at European Doctoral Seminar, 06.
Search in Google Scholar Back to article
85. Voghouei, H., Azali, M. and Law, S.H. (2011). Does the political institution matter for financial development? Economic Papers: A Journal of Applied Economics and Policy, 30(1), 1–2.10.1111/j.1759-3441.2011.00095.x
Search in Google Scholar Back to article
86. Voghouei, H., Azali, M. and Al Jamali M. (2011). A survey of the determinants of financial development. Asian Pacific Economic Literature, 25(2), 1-20.10.1111/j.1467-8411.2011.01304.x
Search in Google Scholar Back to article
87. Wang, Rachel F., Irwin, Timothy C. and Murara, Lewis K. (2015). Trends in fiscal transparency: Evidence from a new database of the coverage of fiscal reporting IMF Working Paper No. 188. Retrieved from https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Trends-in-Fiscal-Transparency-Evidence-from-a-New-Database-of-the-Coverage-of-Fiscal-4317710.5089/9781513523965.001
Search in Google Scholar Back to article
88. Wehner, J. and de Renzio, P. (2013). Citizens, legislators, and executive disclosure: the political determinants of fiscal transparency. World Development, 41, 96–108.10.1016/j.worlddev.2012.06.005
Search in Google Scholar Back to article
89. Windmeijer, F. (2005). A finite sample correction for the variance of linear efficient two-step GMM estimators. Journal of Econometrics, 126(1), 25-51.10.1016/j.jeconom.2004.02.005
Search in Google Scholar Back to article