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Kopa Alina, student

Laskava O. Y., language and scientific supervisor

Kyiv National University of Technology and Design

 Kyiv, Ukraine




Economic growth has long been under meticulous study. Though, the idea of connecting it to the financial advancement of the country has arisen only recently. Since early 90’s a huge amount of econometric instruments have been employed to shed some light upon the ambiguous relationship between financial sector activity and economic growth. This paper is another tribute to the study of empirical link between financial intermediaries and the national economy. Exploring the nature of those ties serves us as a goal, whereas learning to extract benefit from this knowledge is our task. The underlying theory can be concisely summarized this way. Financial sector interacts with the national economy. [3] This relationship is allegedly two-sided and mutual. The case can be divided into following clauses:

a. financial sector development enhances economic growth by means of efficiently allocated resources;

b. economic expansion spurs improvement and enlargement within the  net of financial intermediaries;

c. financial factors, though, may simply contain some information about future movements in the macroeconomic variables without affecting the real side of economy and vice versa.

The most popular ideas always on the agenda of our government are political and economical stability. The latter task is narrowed to search for tools and methods of regulating macroeconomic performance. Thus, understanding the 2 insights of financial and real sector interdependence and pointing out some oblique levers of influencing economy will be mostly appreciated. To be more specific, detection of the causal linkage between financial sector and economy will equip us with a tool for promoting economic advancement. Detection of the purely indicative linkage will provide us with a tool for economic forecasting. Absence of any interdependence will prove the failure of such theory within Ukrainian reality and will force us to pick more suitable model comprising financial and economic sectors. [2]

Following an idea introduced by Levine (1997), we let banks and stock market (SM) represent financial system. This is a reasonable assumption, since investment transactions are conducted mainly through banks as loan-issuing institutions and SM as a mean of attracting new investments and repurchasing the existing ones. Furthermore, combined capitalization of banks and SM is incomparably bigger than that of mutual funds, pension funds, etc. The core of our analysis would be analyzing the nature of connection between financial sector and real economy, focusing on the stock market. We will concentrate on the SM as the prior object for examination, though controlling for influence of banks as a crucial element of the model. The arguments for this according to Levine (1997) are as following:

a. IPO’s provide economy with extra investment which eventually will result in GDP growth;

b. stock markets can affect economic activity through the creation of  liquidity. People will be willing to invest more for long periods if their risk is decreased by liquid assets (stocks);

c. stock prices reflect the expectations of the company’s future profits.  Therefore, market index can be considered a generalized measure    for the expected profitability of all businesses involved. Overall  performance of businesses is a basis for economic development;

d. remembering the notion of “asymmetric information” we may refer  to the stock market as an ex-ante-information-acquiring facility. This  brings us to the idea of SM incorporating all information relevant to either growth or recession, which is reflected in prices, indices, trade  volumes. [1]

Uvarov (2003) and Laurenceson (2002) showed development of financial sector to be a leading factor of economic progress. I will focus on searching for the empirical evidence of such dependence or its absence in Ukraine. Once again I stress that I will concentrate on the SM activity, though, controlling for the impact of banks, which is supposed to give us a proxy for estimating return on capital employed by economy. That means – capital in circulation is concentrated mainly in banks and stock market and all the profits (e.g. deposit interest or return on investment) are concentrated there. Following this, we will estimate the nature of connection between financial performance and economic growth.  Putting theory and estimation methods aside for a moment we try to understand the environment. [4] We realize that Ukrainian stock market and banking sector endure both a temporary perturbation at the moment. Any comments on current situation may, therefore, seem partial. What is more, recent events and anticipation of evolutionary processes leave us undecided whether to praise financial sector or bury it. Any kind of forecast is, therefore, restricted in preciseness. According to the latest information, available from official analytical reports on Ukrainian financial sector, we witness an upswing of stock market performance accompanied by slow-down in real sector growth. This means that connection is still present, though it is not stable due to overall weakness of Ukrainian stock market.

Ukrainian stock market has not shown any significant achievements for the past 10 years – only 1% of private investors’ money has reside on the stock market, not all financial instruments are adopted and even fewer freely circulate. Nevertheless, stock market is expected to advance in the coming years since the environment is favorable.

Ukrainian banking sector is now facing a continuous series of mergers and takeovers with foreign banks. Entrance of foreign capital will change situation in banking sector drastically. Professional analysts expect those Ukrainian banks surviving mass buy-outs will be forced to go public on world-wide trading platforms, which is another way to attract foreign capital. Total loans and deposits grow annually at approximately the same 60% pace, allowing us this way to anticipate major improvements in banking institutions stability during nearest coming years. [5] Active participation in housing estate construction projects of the majority of Ukrainian banks strengthens the basis for long-term development strategies. Loans in national currency are becoming cheaper, which is a token of healthy bargaining environment. Ukrainian banking sector, as well as other financial institutions, are being heavily relied upon by policy makers. Many macroeconomic expectations are linked to and are conditional of steady financial growth. The ties between real and financial sector are becoming more obvious and integrated as the two spheres evolve.

Stock market is positioned and recognized as an indicator of economic growth in all developed countries by politicians, investors, financiers and hopefully we are about to become no exception.



1. Alesina, A. and R. Gatti (1995), Independent Central Banks: Low Inflation at No Cost., American Economic Review 85, 196-200

2. .Basantsov I. B. Reigning fіnansovy control, Yogo kontseptualnі aspects / I. B. Basantsov // Formuvannya rinkovih vіdnosin in Ukraine. - 2005. - № 11. - C. 24

3.  Mexico Declaration of Independence. XIX Congress of INTOSAI, November 2007 g.Mehiko, the United

4. Kleiman, Lawrence S. « Management and Executive Development. » Reference for Business:  Encyclopedia of Business (2010): n. pag. Web. 25 Mar 2011

5. Gill, Carol. A Review of the Critical Perspective on Human Resource Management. Melbourne Business School.

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