The Nexus Between Financial Mechanisms and Economic Performance: Empirical Evidence from Greece

This study examines how direct and indirect financial mechanisms influenced Greece's economic performance from 1999 to 2019, revealing that stock market activity boosts growth while lagged inflation, indirect finance, and FDI drive inflation. The findings highlight deviations from international patterns and call for country-specific policy interventions.

Eftichia Doksaki· Entrepreneurship· 2024· DOI 10.37708/ep.swu.v12i1.4

The core problem

The paper investigates the impact of direct and indirect financial mechanisms on the economic performance of Greece over the period 1999-2019. The central research question addresses how these financial channels—direct finance through stock markets and indirect finance via banking intermediation—affect key macroeconomic outcomes such as economic growth, inflation, and unemployment. The study is motivated by the need to understand the unique dynamics of the Greek economy, particularly in the aftermath of the financial crisis, and to assess whether conventional relationships hold in this context. By employing both bivariate analysis and the Generalized Method of Moments (GMM) technique, the research aims to provide empirical evidence that can inform country-specific economic policy.

The study utilizes annual time-series data for Greece from 1999 to 2019. The analytical framework combines bivariate analysis tools with the Generalized Method of Moments (GMM) technique, which is particularly suited for dynamic panel models and addresses potential endogeneity issues. The GMM approach allows for the estimation of relationships while controlling for unobserved heterogeneity and simultaneity. Key variables include measures of direct finance (e.g., stock market activity), indirect finance (e.g., bank credit), foreign direct investment (FDI), inflation, unemployment, and economic growth. The empirical models are specified to capture both contemporaneous and lagged effects, enabling the examination of dynamic interactions among these macroeconomic factors.

Introduction

The paper investigates the impact of direct and indirect financial mechanisms on the economic performance of Greece over the period 1999-2019. The central research question addresses how these financial channels—direct finance through stock markets and indirect finance via banking intermediation—affect key macroeconomic outcomes such as economic growth, inflation, and unemployment. The study is motivated by the need to understand the unique dynamics of the Greek economy, particularly in the aftermath of the financial crisis, and to assess whether conventional relationships hold in this context. By employing both bivariate analysis and the Generalized Method of Moments (GMM) technique, the research aims to provide empirical evidence that can inform country-specific economic policy.

The findings suggest that Greece's financial system operates in a manner that diverges from typical international experiences. The positive influence of direct finance on growth supports the view that stock market development can stimulate economic activity. However, the significant contribution of indirect finance to inflation raises questions about the effectiveness of banking intermediation in Greece, especially post-crisis. The minimal role of indirect finance in driving growth may reflect structural weaknesses in the banking sector or a shift in financing patterns. The persistence of unemployment and the negative impact of growth on it highlight the need for labor market reforms. Overall, the study emphasizes that one-size-fits-all policy prescriptions may not be appropriate for Greece; instead, tailored interventions that address the specific dynamics of its financial and labor markets are required. Further research should explore the causal links between banking sector health and economic performance to better inform policy.

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