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

Author

Listed:
  • Hamid Raza

    (University of Limerick)

  • Bjorn Gudmundsson

    (University of Iceland)

  • Stephen Kinsella

    (University of Limerick)

  • Gylfi Zoega

    (University of Iceland)

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.

Suggested Citation

  • Hamid Raza & Bjorn Gudmundsson & Stephen Kinsella & Gylfi Zoega, 2015. "Experiencing financialisation in small open economies: An empirical investigation of Ireland and Iceland," Working papers wpaper84, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
  • Handle: RePEc:fes:wpaper:wpaper84
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    References listed on IDEAS

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    Cited by:

    1. Eckhard Hein, 2015. "Causes and Consequences of the Financial Crisis and the Implications for a More Resilient Financial and Economic System: Synthesis of FESSUD Work Package 3," Working papers wpaper128, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    2. Guðmundsson, Björn Rúnar, 2015. "Financialisation and financial crisis in Iceland," IPE Working Papers 55/2015, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    3. Hein, Eckhard, 2016. "Causes and consequences of the financial crisis and the implications for a more resilient financial and economic system," IPE Working Papers 61/2016, Berlin School of Economics and Law, Institute for International Political Economy (IPE).

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    More about this item

    Keywords

    Ireland; Iceland; Financialisation.;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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