Financial Development, Financial Openness, and Policy Effectiveness

Round 1

Reviewer 1 Report

Comments and Suggestions for Authors

The manuscript entitled “Financial Development and Policy Effectiveness”, provides a comprehensive examination of the relationship between financial development, financial openness, and policy effectiveness in stimulating the economy. I offer the following comments based on its strengths, value added, and policy implications along with areas to improve:

Strengths:

The paper covers a significant and timely topic, important for policymakers and financial analysts. It employs a robust empirical methodology, including panel data analysis and dynamic GMM approach. It blends a decent number of related literatures in the introduction, establishing a solid foundation for the study.

The methodology is sound, and well executed.

Objective Clarity:

The objective is clear and well-articulated, focusing on understanding how financial development and openness influence policy effectiveness in different countries.

Value Added:

The paper adds value by exploring the international spillover effects of US economic crises, an area not widely covered in existing literature.

It also contributes by differentiating the effects of financial development on policy efficacy in countries with varying levels of financial development.

Policy Implications:

The paper successfully outlines significant policy implications, especially concerning monetary and fiscal policies in developed and developing countries.

Areas to Improve:

The literature review is comprehensive; however, it could benefit from discussing contrasting viewpoints or recent developments.

The paper could be enhanced by offering more specific policy recommendations or discussing the applicability in different economic contexts. Expand on the policy implications section to provide clearer, actionable recommendations.

Overall, the manuscript is well-crafted with substantial contributions to the field. Nonetheless, addressing these suggestions could enhance its clarity, robustness, and practical relevance.

Author Response

Dear Anonymous Reviewer,

We thank you for your valuable comments. Please find our response to your comments attached to this email. We hope our responses satisfy your concerns. 

Best,

Authors.

Author Response File: Author Response.pdf

Reviewer 2 Report

Comments and Suggestions for Authors

On page 11 and page 16, the word "I" should be replaced with "we" as the paper has multiple authors.

Author Response

Dear Anonymous Reviewer,

Thank you very much for your comment. Please find our response to your concerns on the paper. We hope our rework can allay your concerns. 

Best,

Authors. 

Author Response File: Author Response.pdf

Reviewer 3 Report

Comments and Suggestions for Authors

This paper studies the relationship among financial development, financial openness and policy effectiveness from a global perspective, and finds that the former two have a certain inhibitory effect on the latter, and have certain value for research and practice. Here are some questions for authors to consider:

1. Whether the results of the study validate the theory of diminishing utility, that is, eating one apple at a time is not the same as eating five apples at a time.

2. Whether the results of the study are validating the theory of diminishing marginal utility of scale or the theory of diminishing marginal utility of development level, for example, in terms of high jump, the higher the more difficult it is to jump.

3. Whether the study can carry out heterogeneity analysis of different developing countries, and clarify that the research conclusions of countries with different levels of development are obviously different, and countries below developed countries need to strengthen the shortcomings of financial development.

4. Why does a recession in the U.S. weaken policy effectiveness, and can strong financial institutions help mitigate the crisis? Does this apply to countries outside the U.S.?

5. The paper uses data before 2019, after several years, combined with the current economic state, what kind of speculation will there be?

Author Response

Dear Anonymous Reviewer,

Thank you very much for your comments and suggestions. Please find the attachment where you will find our responses to your comments. We hope that our responses satisfy your concerns.

Best,

Authors.

Author Response File: Author Response.pdf

Reviewer 4 Report

Comments and Suggestions for Authors

In the study, the authors look at the relationship between financial development, financial openness and the effectiveness of policies in stimulating economic growth. The research methodology is based on regression analyses adapted to panel data.

The study can be considered interesting if it proves its originality (plagiarism 16.63%) and if consistent revisions are made regarding the organization of the content and reporting of the results.

To improve their work, the authors should consider the following recommendations.

The abstract needs consistency in the presentation of the assumed objectives. Before presenting the methods used and the results obtained, there must be a clear scoring of the objectives, integrating all the interdependencies that are the subject of the analysis.

Then, for more clarity, only statistically significant results should be scored in the abstract.

In the whole paper, there is inconsistency regarding the analyzed sample: abstract (89 countries), methodology (about 100 countries), results (27 countries, 98/99/100/102/107 countries). At the same time, it is not a certainty about the analyzed period, although from the abstract reference is made to the period 1980-2018

In the introduction, the sources must be specified for the following two ideas:

India balked from signing the Regional Comprehensive Economic Partnership (RCEP) …

Similarly, the US cancelled its plan to sign the Trans-Pacific Partnership agreement suspecting that …

The introduction needs to report the results of more recent studies, given that this section attempts to substitute the literature review section. This recommendation does not deny the usefulness of articles already cited.

In the following sentence, the authors are asked to detail the institutions to which they refer.

To be specific, literature has focused mostly on how institutions …

In Subsection 2.1, the authors present the Financial Development Index. For the representation in Figure 2 to be credible, the authors must provide details on the indicators underlying the determination of FDI (size and liquidity of markets, ability of individuals to get access to financial services, ability of financial institutions to provide services in low costs).

These details must include information on both financial institutions and financial markets. For these indicators, the authors must specify: methodology of determination, source of the data, period of time for which they were calculated, number of countries included in the analysis.

If the authors have taken an image from another source, they must mention the source. At the same time, the authors must clearly highlight whether the methodology for determining FDI is original or has been taken over. Thise recommendation also applies to the FOI (respectively, Figure 3).

In the sentence below the authors must check whether they are transactions or transitions.

For controls on capital transitions (k3), ...

Authors must provide arguments justifying why the determination of the “share of five-year window” was necessary.

On page 8, the authors must assess whether k_t,1 is equivalent to k_1,t (to be in agreement with the other variables, k_2,t or k_4,t).

For the representation in figure 3 to be credible, the authors must provide details on the indicators underlying the determination of FOI. These details must include information on the methodology of determination, source of the data, time period for which they were calculated, and number of countries included in the analysis.

The first idea in subsection 3.1. mentions that “the main purpose of this paper is to study the implications of financial development on the policy effectiveness”.

According to the abstract and introduction, the purpose of the study is much more complex. The same situation is highlighted by the equation (1), which includes both policies and the crisis. The lack of consistency in presenting the paper's objective(s) confuses readers. To make things clearer, authors can set one primary goal and several secondary goals (but this setting must be applied in the abstract).

 

In Sections 3 and 4 (Methodology and Results) there are many ideas formulated in the first person (I study, I use, I introduce etc.), although the study has 4 authors.  In addition, the authors must provide justifications for this inconsistency.

The authors state that they use M1 and M2 as proxies for monetary policy, but do not specify that they refer to monetary aggregates. At the same time, the methodologies for determining these aggregates, which may differ from country to country, are not taken into account.

The authors are asked to provide further details to support that equation (2) is obtained by replacing the variable γ^po_j,t−i in equation (1), as stated in the text. The last term of the two equations must then be explained more clearly, and the encodings used must be detailed (for example, what w^y stands for is not specified).

In section 3.2. the authors mentioned that they collected FDI data from the IMF. However, section 2.1 does not specify this fact. From section 2.1 it is understood that the authors built the proxy for financial development.

Therefore, if the FDI is collected from the IMF, then figure 2 must have a reference to the source of the data.

In the same section (3.2), the authors briefly detail the source of data for the assessment of production growth, referring to 2010 (although the declared period of analysis is 1980-2018). For empirical research to be considered solid, authors should provide more details about the source of the data for each indicator used in the paper (including the periods for which these data were collected).

 

In section 4.1, the authors should provide a justification for differences in the number of countries analyzed for the impact assessment of monetary policy and fiscal policy (tables 1 and 2).

Section 4.2 states that the analysis is based on the panel dataset from 99 countries from 1980 to 2018. However, in Table 3, the analyses are presented at the level of two different samples (27 and 99 countries respectively).

In interpreting the data in Table 3, the authors must explain the abbreviation AR(1).

Table 4 requires a data arrangement so that results can be easily tracked. First, the authors must ensure consistency in the presentation of the LFD and HFD sub-samples, both in the case of monetary policy impact analysis and in the case of tax policy impact analysis). Second, the authors must reposition the data on the number of observations, instruments, and countries. Third, the authors must clearly specify the number of countries analyzed and the period of the data. The last details must complete the paragraph before Table 4.

For clarity, the text below Table 7 should allow correlations with the results shown in Table 7 to be made. More specifically, the authors must discuss the results by referring to the indicators and numerical values of the results presented in Table 7.

This recommendation may also be considered for the paragraphs discussing the results in Tables 5, 6, and 8.

Considering the results (table 7), the authors must evaluate the truth value of the following idea: “The negative coefficients indicate that financial openness diminishes non-significantly the interaction between financial development and monetary policies on influencing output growth”. Finally, the interaction between financial development and policies was not statistically proven.

In Section 4.7, the authors analyzed the relationship between financial development and policy variables using domestic credit. This initiative is not correlated with those mentioned in Section 3.1, where the use of M2 aggregate was stipulated.

For clarity, the authors must avoid repeating the same expressions/ideas. E.g.:

- It is important to understand … on the topic … on the topic.

- Figure 2 shows the map of countries indicating the average financial development index (FDI) from 1980 to 2018. / Figure 2 shows the average FDI of countries from 1980 to 2018.

- Notes: Figure 3 shows the financial openness index of countries across the world. / Figure 3 shows the financial openness of countries acorss the world.

Authors must conduct a check on the technique and clarity of the English language (e.g.: across/acorss).

In the current version, the content of the manuscript seems to have included several book chapters. It is not a clear delimitation, as stated in the recommendations for authors (Abstract, Keywords, Introduction, Materials & Methods, Results, Conclusions, Figures and Tables with Captions, Funding Information, Author Contributions, Conflict of Interest, and other Ethics Statements).

The authors must consider the editorial recommendations in the next version of the manuscript.

Author Response

Dear Anonymous Reviewer,

We appreciate you for your valuable comments on our submissions. We trust that your comments have helped us to make this paper better. Please find the attached file where we have attempted to respond to your concerns. We hope that our responses allay your concerns regarding the paper.

Best,

Authors

Author Response File: Author Response.pdf

Round 2

Reviewer 4 Report

Comments and Suggestions for Authors

I appreciate the authors' efforts to improve their work.

The authors responded to the formulated recommendations.

Most of the authors' responses have been integrated into the new version of the manuscript.

Recommendations:

The title can be expanded to better reflect the directions of analysis (financial development and financial openness).

Some abbreviations still need to be detailed (eg: M1, M2).

Author Response

Dear Reviewer,

Please find the attached document.

Best,

Niraj on behalf of all authors. 

Author Response File: Author Response.pdf