Page 24 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.76, # 1, 2019, pp. 20-33

GDP ratio-, CONTROLS indicat e control factors such as macroeconomic, financial,
institutional and demographics. Analysis was conducted for 64 countries including
Azerbaijan and covers period of 2010-2017.

It should also be noted that in the regression equation for control factors of
dependent variables of = və = we have followed

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methodology developed by King, Levine (1993a), King, Levine (1993b), Ramey,
Ramey (1995), Levine, Zervos (1998), Easterly et al. (2000), Durlauf et al. (2005),
Aghion et al. (2005), Beck et al. (2014), Sahay et al. (2015) and Arcand et al. (2015).

For = equation I have referred to Lee (1992), Cottarelli et al. (1998) , Blot et
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al. (2015), and for = equation we have referred to researches conducted
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by Kaminsky, Reinhart (1999), Domac, Martinez-Peria (2003), Boyd et al. (2004), Beck
et al. (2006), Schularick, Taylor (2012), Anginer et al. (2014), Sahay et al. (2015).

, – shows difference among countries for the frequency of the crisis happened

with (k=1) being permanent economic growth rate, (k=2) volatility of growth rate,
(k=3) inflation and loan market. Coefficients of the equation ,1 (j=1,...4) shows
linear and quadratic components of financial markets development on each of the 4
purposes of the macroeconomic policy. For the reference, in theoretical and
empirical researches, reverse U shape relationship for GDP growth is also defined. If
we consider this fact, then for equation (1) we can indicate that there is U shape
relationship for the volatility of economic growth rate, inflation and financial
stability.

In order to analyze parameters of the regression equation, we have used 2-Step
Generalized Method of Moments to solve endogeneity problem. As for the
instrumental variables, we have used current and first lag of the institutional
explanatory variables. This was especially used to explain different levels of
development of financial markets among countries. We have found optimal level at

−0.5 / ,1 (j=1...4) after regression equation was solved.
,2

If non-linear relationship is observed for any of 4 purposes of the macroeconomic
policy and if development indicators of financial sector are important in the given
area, then we can find optimum level for each of 4 purposes of the macroeconomic
policy. Optimization process can be described as below:

∗
, = 1 1, + 2 2, + 3 3, + 4 4, → , → (2)
,
1 2 3 4

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