1. Financial Liberalisation In New Zealand The Impact on Savings and Investment Phillip Mellor

2. The Theory

3. The Financial Sector and Economic Development  The McKinnon-Shaw Hypothesis The Complementarity Hypothesis  Savings and Physical Capital are complementary to one another The Debt Intermediation View of Money  Money is a form of debt to its issuer

4. The Financial Sector and Economic Development  The Role of the Financial Sector 1. To facilitate trading, hedging, diversifying and pooling of risk 2. Allocating resources 3. Monitoring managers and exerting corporate control 4. Mobilizing savings 5. Facilitate the exchange of goods and services

5. Financial Development and Economic Growth  Financial Intermediaries Create money and administer the payments mechanism Bringing together savers and investors  Specialized knowledge and informational advantages  Rationing via the interest rate  Stock Markets Promote acquisition of information about firms Risk diversification Liquidity services

6. Financial Development and Economic Growth  Financial Repression Holding interest rates below equilibrium and directed credit The costs of financial repression  Inefficient non-price rationing of credit  Quasi-tax on growth  Low savings The benefits of limited financial repression  Forcing households to save via credit constraints  Overcoming market failure in financial markets (e.g. externalities and information asymmetries)

7. Financial Liberalisation as a means of Financial Development  Measuring Financial Liberalisation Abiad and Mody’s (2005) index  Consequences of Financial Liberalisation Fragility of the financial sector  South Korea  New Zealand?  Sequencing of Financial Liberalisation Reform of the real economy Then reform of the financial sector

8. The Case of New Zealand

9. New Zealand’s Decade of Reform  Economic and Political Motivations for Reform Economic Stagnation and Decline The 1984 election and initial public support  Theoretical Background Principal-Agent Theory Public Choice Theory  The Sequence of Reform

10. Real Gross Domestic Product

11. Financial Liberalisation in NZ  The Financial Sector pre-reform High degree of intervention and regulation Financial disintermediation  Sequencing of Financial Liberalisation  The Financial Sector post-reform Very open financial sector, virtually no specific regulations

12. Investment Key Point: Public and Private Investment have diverged following liberalisation

13. Savings But there is a problem with how savings is measured

14. Credit and the Money Supply

15. The Evidence Empirical Results for the Case of New Zealand

16. Empirical Results  Empirical results for New Zealand indicate that financial liberalisation has had a positive impact on investment but a negative impact on savings  Estimated elasticities Financial Liberalisation-Investment = 0.112 Financial Liberalisation-Savings = -0.125  The estimated model also found some evidence that the Complementarity Hypothesis is relevant to the case of New Zealand

17. Conclusions  Financial liberalisation has increased the share of total investment to GDP Increased the efficiency of the financial sector Higher real interest rates more accurately reflect the scarcity of financial resources and increase the real return to investors Increased the ability of firms and individuals to invest by reducing credit constraints  Financial liberalisation has decreased the share of gross domestic savings to GDP Lower credit constraints make it easier to borrow for consumption / investment rather than save. Transitional effects on savings behaviour as firms and individuals adjust to the new financial and economic structure.

18. Questions?