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Experiencing financialisation in small open economies: An empirical investigation of Ireland and Iceland

Hamid Raza, Bjorn Gudmundsson, Stephen Kinsella () and Gylfi Zoega
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Hamid Raza: University of Limerick
Bjorn Gudmundsson: University of Iceland

Working papers from Financialisation, Economy, Society & Sustainable Development (FESSUD) Project

Abstract: We examine the macroeconomic factors associated with financialisation in Ireland and Iceland from the perspective of international capital flows. To understand financialisation in the two countries we construct three ARDL models using three aspects of financialisation: financial depth, credit growth and deposit liabilities of the financial sector. Focusing on the current account, we find that financialisation is associated with an increase in foreign rentiers’ profit due to excessive international borrowing. Our measures of financialisation indicate that trade openness, also a measure of globalisation, has a negative relationship with financialisation in Iceland, while in Ireland the relationship is positive. Our results also suggest that both countries experienced an increase in the wage share along with rapidly increasing household debt in Ireland and increasing non financial corporate debt in Iceland. We conclude that institutional differences played a vital role in the solutions to the crises which destabilised the economies of Ireland and Iceland. We use the institutional differences between the two economies and suggest policy prescriptions to limit the scale and scope of similar crises in small open economies.

Keywords: Ireland; Iceland; Financialisation. (search for similar items in EconPapers)
JEL-codes: G32 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2015-01-01
New Economics Papers: this item is included in nep-cfn and nep-opm
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