The Impact of Financial Institutions on Property Rights – and the Impact of Institutions on Financial Volatility in Transition Economies

Published on: 2014-11-04

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Abstract

A stock exchange and the presence of functioning equity markets is part and parcel of an advanced market-based financial system. Previous research has also established that equity markets function more efficiently in the presence of supporting institutions such as property rights and rule of law. But how do these two aspects of the institutional environment interact? That is, does the performance of a stock exchange support the development of property rights, or can it actually hinder it? The first half of this talk presents evidence that, while a well-functioning stock market may help reinforce property rights through demonstration effects, a stock market that has become “too successful” may entrench interests and lead to property rights-eroding policies.

The second half of this talk looks more closely at the influence running the other way: what have been the determinants of financial volatility in the transition countries of Central and Eastern Europe and the former Soviet Union? I posit that institutional changes, and in particular the volatility of various crucial institutions, have been the major causes of financial volatility in transition. Examining 20 transition economies from 1993-2012, I apply the GARCH family of models to examine financial volatility as a function of institutional volatility. The results show that more advanced institutions help to dampen financial sector volatility, while institutional volatility feeds through directly to financial sector volatility in transition.

About the Speaker

Dr. Christopher A. Hartwell is President of CASE – Center for Social and Economic Research in Warsaw, a Research Professor at Kozminski University, and a leading scholar on the evolution of institutions. Dr. Hartwell’s research concerns transition dynamics, the economics of institutions, and financial sector development. In addition to his academic work, he has advised governments and the private sector on economic policy issues in Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Poland, Croatia, Bosnia, and Kosovo, among others. Dr. Hartwell has also has taught and conducted trainings on macroeconomics and growth issues throughout the CIS and has worked for the World Bank Group and the US Department of the Treasury. Prior to joining CASE, he was Head of Global Markets and Institutional Research at Moscow School of Management – SKOLKOVO Institute for Emerging Market Studies (SIEMS), and he remains a Visiting Fellow with SIEMS. He holds a PhD in Economics from the Warsaw School of Economics and a Master’s in Public Policy from Harvard. He is the author of Institutional Barriers in the Transition to Market: Examining Performance and Divergence in Transition Economies (Palgrave Macmillan, 2013).

Dr Hartwell will also speak at “HKUST IEMS and LAPP – EY Hong Kong Emerging Market Insights Series: As Goes Russia, So Goes Europe?” on November 3, 2014 (Monday) at HKUST Business School Central.

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