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Godley-Lavoie Model. Empirical Perspective at the Level of the European Union 1

Abstract:

PhD Cristina Maria Triandafil PhD Candidate Teodor Adrian Morar

The objective of the present study consists of the application of the Godley-Lavoie model at the level of the European Union. The key-variables encompassed by the model are analyzed from a dynamic perspective in order to highlight the multiple relationships that govern the interactions between financial system and real economy. The innovative part of the model brings in the stock-flow consistency approach that highlight the dynamic interferences between various economic entities, with a special focus on the impact of financial system on the economy as a whole.

The paper brings in a complex approach, highlighting the comparative perspective between EU Member States located in Central and Eastern Europe and Euro-zone countries; the dynamic of key variables is reflected in both cases, revealing main causes that determined different experiences at the level of the flows directed in a complex system of mutual relationships from one entity to the other.

Key-words: Godley-Lavoie, financialisation, real economy, financial system JEL Code: E20, E60, E61, E52

1 This study is a part of post-doctoral research project ‘’The sustainability of nominal and real convergence within the EU in the context of the financial crisis: implications on the prudential regulatory framework within the POSDRU project "Scientific research economic, support to welfare and human development in a European context "developed within the National Institute of Economic Research" Costin C. Kiriţescu ".

1. Introduction

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Financialisation has emerged as a result of increased deregulation of the banking system and capital account liberalization, which favored migration of capital flows and globalization. Gradually, besides banking system, there appeared new financial markets dominated by innovative entities, investment funds, investment vehicles that have sustained their securitization transactions in the virtue of structured financial products. The magnitude of the financial system, representing essentially the foundation process of financialisation, gave incentive to a new economic paradigm based on accumulation achieved through financial dimension.

The European Union was marked by financialisation, which influenced in a significant manner the economic convergence. Moreover, important differences in the levels of economic development among Member States were marked by varying degrees of financial system development.

This study applies the Lavoie-Godley model at the level of the European Union, aiming to illustrate the whole complex of relations between the different entities that are at the forefront of the economic system. The focus is oriented towards the integrated nature of this model, which allows to view mutual dependencies between households, central governments, businesse environment and financial system. In this manner, the process of financialisation is no longer considered only in terms of financial system dynamics, but through the flows by which various entities are related. Thus, financialisation process is found in multiple interdependencies that govern the interaction with the real economy.

Research is structured as follows: in section two Godley-Lavoie model is presented in terms of key variables and interactions between them, in section three the model is applied to the European Union, focusing on its dynamic key variables, and the last section presents the key findings of the study.

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2. Presentation of the Godley-Lavoie model

The Godley-Lavoie model brings to the fore the mixture between financial economy and real economy in light of the complex relationships between different entities operating in the economic system. Thus, the basic idea of the model is the migration flows from one entity to another, the perspective being a dynamic one. Moreover, the model focuses on capturing these flows consistently while the rigors of formal order are placed in the background (Lavoie, 2008). According to the model, at the forefront of the economic system there are five main players: firms, households, banks, government administrations and central banks. In table 1 are presented the transaction flow between these entities. Therefore, companies contracting external financial resources to finance investment plans, some of these external resources are drawn from the banking system, while another part are attracted by the capital market. The rate of accumulation of fixed capital depends on the rate of productive capacity utilization, both significantly influenced by the interest rate.

Banks grant credits to households based on their net income while households consumption is a key factor in determining the amounts advanced as loans since it determines the level of net income. The amounts advanced are negatively correlated with the interest rate of the loan. Disposable income (Y D ) of households is expressed as net income from wages (W * Ns), from which we substract taxes (T S ):

Y

D

(W * Ns), from which we substract taxes (T S ): Y D W N S
(W * Ns), from which we substract taxes (T S ): Y D W N S

W N

S

T S
T
S

(1)

Nominal short-term interest rates and long term interest rates are strictly controlled by the central bank, while bond issues made by central governments or volume of loans granted by banks are strictly under the impact of the demand. Neither the central government nor the central bank exerts any influence on them.

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Real wages depend on productivity and employment level; there is a predetermined target level of the real wage on the labor market and nominal wage growth is conditioned by the difference between the target and the current level of real wages.

Table 1 Transaction flow matrix outlined in Godley-Lavoie model

       

Central Banks

Central

Current

Capital

Households

Companies

Governments

Operati

Operati

ons

 

ons

Consumption

 

-C

+C

     

0

Government

 

+G

-G

   

0

Expenses

Gross

+Y

-Y

     

0

Domestic

Products

Interest

r

-1 *B h-1

 

-r -1 *B h-1

+

r -

 

0

Expenses

 

1

*B cb-1

Central

Bank

   

+r -1 *B h-1

-r -1 *B cb-

 

0

Revenues

1

Taxes

 

-T

 

+T

   

0

Variation

of

-ΔH

     

+ΔH

0

Money Supply

Variation

of

-ΔB h

 

+ΔB h

 

-ΔB cb

0

Bonds

0

0

0

0

0

0

Source: Monetary Economics, Godley, W. and M. Lavoie, Palgrave Macmillan, 2006

Household consumption depends on disposable income (YD) and consumption share in disposable income (α 1 ), well-being accumulated in the past (H h-1 ), and consumption in this (α 2 ):

C

* 1
*
1

Y

D

2
2

*

H

h 1
h
1

(2)

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Government expenditures not covered by tax policy requires financing through bond issuance:

H H H 1 G T S S S d d
H
H H
1 G
T
S
S
S
d
d

(3)

By aggregating the previous expressions, GDP can be reflected as:

the previous expressions, GDP can be reflected as: (4) Where Y= Gross Domestic Product C= households’

(4)

Where Y= Gross Domestic Product C= households’ consumption G= government expenses α 1 = appropriate share of consumption in disposable income φ = fiscal rate

Each entity operating in the economic system has a buffer for possible absorption of shocks manifested in the economy. For business, the buffer is found in the form of stocks and bank borrowing, and in case of households, it is the deposits. For government entities, central bank and commercial banks, the buffer are reflected in the bonds held by them. The authors of the model explained this aspect by the fact that deposits and loans are primarily demand dependent.

The Godley-Lavoie has certain limitations due to the assumptions made, so the economy is assumed to be a closed, any relations with the international financial system are ignored. Also, any holdings of financial assets of firms are not sufficiently capitalized.

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3, The impact of the interactions between households, business environment, banking system and central government on the process of financialisation in light of the Godley-Lavoie model. Analysis at the EU level

The interaction between financial markets and banking, government, households and business environment in the context of the transaction flows plays a key role in the approach proposed by Godley-Lavoie. The methodology used in this sense involves the analysis of relevant variables in order to illustrate the transactional flows, presented in table 1, which reveals the multiple facets of the real economy and of the financial system. Thus, it emphasizes the dynamic interaction between those entities, having implications on financialisation process at the EU level. The indicators used in the analysis were taken from the Eurostat website, being followed up on an annual basis over the period 2000-2011.

A first set of variables on which the model focuses encompass saving rate, lending rate and bond yield for securities issued by central governments . Appendix No.1 shows graphically the dynamics of these variables in the European Union, emphasizing a comparative perspective between euro area and Central and Eastern Europe.

Over the period under review, there is a remarkable similarity in the dynamics of saving rate and government bond yields for securities in the euro area. For the countries of Central and Eastern Europe, the similarity is temporarily present in the sub-periods; for example, in Bulgaria, the similarity is present during the years 2000-2004 and 2009-2010, and in the case of Latvia between years 2003-2006. Czech Republic has the same similarity as eurozone in terms of growth corresponding to the two variables.

Lending rate is at a higher level in comparison with the saving rate for the euro zone as for the first part of the period, and later to be surpassed by bond yields.

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Except for Bulgaria, in all the other countries of Central and Eastern, the lending rate remains at a higher level than saving rate. Financial crisis has driven bond yields, surpassing the savings rate and lending rate. In fact, except for the Czech Republic, with all other countries in Central and Eastern Europe, growth rate is higher for bond yield, in comparison with saving and lending rates, reflecting significant country risk premium. Euro area bond yields follow this dynamic only in the latter part of the period under review, when, under the impact of the financial turmoil, there was triggered a sovereign debt crisis which has attracted funding need and thus bond yields upsurge.

In the Godley-Lavoie model (2007, 2008), enterprises can significantly influence the financialisation of the economy through financing on the capital market. A comparative analysis of the share of market capitalization to GDP ratios in relation to the dynamics of capital market indices, brings in the financing policy of investment among companies; an accelerated price appreciation for capital securities reflected in a positive dynamic of the index in opposition with a decrease in market capitalization may indicate a reduction of capital market issues and a focus on profit reinvestment, which favors self-financing investment. The allocation of internal resources to support important investment policy increases domestic costs, with subsequent implications on inflationary pressures.

Gradually, the inflation erodes economic growth, affecting global welfare. The phenomenon described by the Godley-Lavoie model (2007a) is reflected in the evolution of variables captured in the graphs presented in Appendix no. 2.

Thus, in all countries, market capitalization reduction stands in relation to the dynamics of the shares market value, revealing possible reduction of share issue and implicitly the profit reinvestment envisaged to finance the investment programs.

The most significant discrepancy between the market value of equity securities and market capitalization stands for the euro area and for Poland and Hungary. Other countries (Czech Republic, the Baltic countries) have a smaller difference between the two variables, reflecting either equity issue or significant appreciation of their market value. This dynamic also

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highlights optimistic expectations that dominated financial markets in the European Union, especially in the second half of the period, which led to significant appreciation in the market value of equity securities.

Inflationary pressures are highlighted at EU level by the inferior to one ratio between productivity growth and wage growth. The most important difference between productivity growth and wage growth is observed in Poland, Romania and Latvia; these countries are characterized by negative values of the indicator, reflecting a disproportionate increase in wages compared to productivity.

If the euro area, the relationship between productivity growth and wage growth is maintained, except for the period 2008-2009, highlighting the productivity gains that however, are higher than, but close to the unit value in 2007.

Financial turbulences caused abrupt decrease of the indicator, which for nearly two years reduced productivity. This development occurred in the context of global imbalances, accompanied by numerous restructurings in the corporate sector; however, in 2011 the situation was balanced, the indicator is significantly closer to the unit value.

Another key variable which is at the forefront of Godley-Lavoie model is represented by consumption; enhanced consumption leads to an increase in the utilization rate and accumulation rate, while creating a positive dynamic of profit, which reduces dependence on external financing through the reinvestment of profit. Appendix no.3 reveals the evolution of these variables in the euro area and in the countries from Central and Eastern Europe. Important levels of consumption are observed both in the euro zone and in the Central and Eastern Europe countries. In general, except for the Czech Republic, the consumption is higher in the countries of Central and Eastern Europe in relation to the euro area, indicating that the growth registered in the last decade in the European Union has been strongly influenced by consumerism.

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For all countries surveyed, the utilization rate remains at a significant level, reflecting a sustained period of production capacity recovery. If the euro area, utilization rate follows a stable trajectory over the period, not recording fluctuations under the impact of the financial turmoil. Central and Eastern Europe countries are characterized by a reduction of the utilization rate in 2009-2011; the highest sensitivity under the influence of financial turmoil stands for Baltic countries. In this manner, the fragility of the production structures for emerging countries is brought forth; this fragility depends on foreign investment flows, which due to investor risk aversion triggered by financial turmoil, have made numerous withdrawals, leading to higher macroeconomic volatility, passed on to business. The dynamics of the accumulation rate follows about the same linear trend for the euro area countries, unlike the countries of Central and Eastern Europe, with certain fluctuations from one period to another, according to stronger macroeconomic volatility. Moreover, in all other countries, the rate of accumulation similar to the utilization rate, diminishes under the impact of the financial turmoil, reflecting a decrease in the capital base; the financial crisis has affected investment policy in the corporate sector, companies showing a strong interest for activities that support liquidity and operational dimension, to the detriment of the investment.

Variable showing the most important movements in the countries of Central and Eastern Europe is the rate of return; the contrast with the linear nature of development outlined in the Euro Area was evident. Highly oscillatory dynamics of the profit rate for emerging countries include periods when it decreases significantly, especially under the impact of the financial crisis. In contrast, the euro area is characterized by maintaining the rate of return on a permanent basis.

Based on the Lavoie-Godley model, under normal conditions of economic growth, unaffected by any turbulence, a decrease in interest rate assets positively influences the rate of accumulation through the support of investment policy, while growth rate favors passive consumption and utilization, affecting productive capacity. This effect is explained by enhanced savings and revenues distributed to holders of capital.

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Amid the macroeconomic event turmoil, these relationships are not confirmed, interest rate reduction resulting in lower capital accumulation, even at a pace much faster than any increase in case of an active interest reduction.

Conclusions

The research unveils that in the euro area, the interest rate follows a similar trajectory to the assets accumulation rate; there is a consistency at the level of the oscillatory evolution, active interest reductions are closely followed by reductions in the rate of accumulation, confirming the assumption of the model Godley-Lavoie for the periods of macroeconomic turbulence. We can not say that the 2001-2011 period was marked by such developments, characterized by increased volatility, but this situation stands for the last 2-3 years. The absence of an impact exerted by interest rates on the level of capital accumulation can be interpreted through the accelerated development of the capital market in the euro area countries where traditional banking system based on financial intermediation, is surmounted by modern financial products.

In the case of Central and Eastern Europe, a similar trend is observed in Hungary and Poland; the situation can be explained by the fact that in these countries, capital market is more developed than other countries in the region, as evidenced by previous research 2 .

For the other countries, the interest rate is in the position of a driver of the accumulation rate, since potential decrease causes the increase of the accumulation rate, confirming that in the financial systems based on traditional financial intermediation, loan interest rate may be a factor accelerating capital accumulation. In the other countries, there is an increase in the rate of accumulation on an ongoing basis until 2007, reflecting the period marked by low interest rates and thus important liquidity in the system.

2 Impactul financiarizării asupra procesului de convergenţă economică, C. Morar Triandafil, paper published online series of INCE, http://www.ince.ro/

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In respect of the second effect surprised in the Godley-Lavoie model, respectively the impact of the passive interest rate on the utilization rate in the virtue of the positive effect on consumption, the research highlighted the absence of such impact in the eurozone. For the Central and Eastern Europe countries, there can be remarked the sequential impact, within certain sub-periods. Financial crisis caused the elimination of the interest rate impact on production capacities, stressing that during turbulence periods, the relationships between variables, apparently entered into some classic dynamic, acquire other meanings.

According to Godley-Lavoie model, an increase in consumption causes the acceleration of the utilization rate and hence the rate of accumulation. On short term, the effect on profit is negative, resulting in a decrease of profit, because on long term, the effect is positive.

In the euro area, there is a linear trend of the variables, they present a nearly constant rate from one period to another, not affected by any fluctuations. Financial crisis caused a slight decrease in consumption, but the interesting aspect consists of the fact that accumulation and utilization rate remain at the same level, not recording fluctuations.

For the countries of Central and Eastern Europe, the profit rate dynamics are oscillatory, unlike other variables, recording the highest degree of volatility. Under the impact of the financial crisis, profit falls, being negative. In the case of Bulgaria and the Baltic countries, the utilization rate and the rate of accumulation follows a similar dynamic, with a high degree of correlation, which shows that investment policy was supported by capitalizing production capacity.

The results obtained in the virtue of this model have to be interpreted taking into account the potential limitations imposed by the operationalisation of the model based on the dynamic of the key variables.

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Annex 1 - Results derived out of the application of the Lavoie-Godley model: dynamic of saving rate, lending rate and government bond yield at the level of the EU Euro zone

7.00 6.00 Saving rate 5.00 4.00 Lending rate 3.00 2.00 Government bond 1.00 yield 0.00
7.00
6.00
Saving rate
5.00
4.00
Lending rate
3.00
2.00
Government bond
1.00
yield
0.00
1
2
3
4
5
6
7
8
9
10 11

Bulgaria

12 10 Saving rate 8 6 Lending rate 4 Government bond 2 yield 0 1
12
10
Saving rate
8
6
Lending rate
4
Government bond
2
yield
0
1
2
3
4
5
6
7
8
9
10 11

66

Czech Republic

8.00

 

7.00

7.00

Saving rate8.00   7.00 6.00 5.00 4.00 Lending rate 3.00 2.00 1.00 Government bond yield 0.00 1

6.00

5.00

4.00

Lending rate4.00

3.00

2.00

1.00

Government bond1.00

yield

0.00

1

2

3

4

5

6

7

8

9 10 11

18.00

 

16.00

16.00
16.00

14.00

Saving rate

12.00

10.00

8.00

Lending rate

6.00

4.00

2.00

Government bond

0.00

yield

 

1

2

3

4

5

6

7

8

9

10 11

Latvia

Lithuania

67

12.00 Saving rate 10.00 8.00 6.00 Lending rate 4.00 2.00 Government bond yield 0.00 1
12.00
Saving rate
10.00
8.00
6.00
Lending rate
4.00
2.00
Government bond
yield
0.00
1
2
3
4
5
6
7
8
9
10 11

Hungary

16.00 14.00 12.00 Saving rate 10.00 8.00 Lending rate 6.00 4.00 Government bond yield 2.00
16.00
14.00
12.00
Saving rate
10.00
8.00
Lending rate
6.00
4.00
Government bond yield
2.00
0.00
1
2
3
4
5
6
7
8
9
10 11

Poland

68

25 20 Savingrate 15 Lendingrate 10 5 Governmentbondyield 0 1 2 3 4 5 6
25
20
Savingrate
15
Lendingrate
10
5
Governmentbondyield
0
1
2
3
4
5
6
7
8
9
10 11

Romania

40.00 Saving rate 35.00 30.00 25.00 20.00 Lending rate 15.00 10.00 5.00 Government 0.00 bond
40.00
Saving rate
35.00
30.00
25.00
20.00
Lending rate
15.00
10.00
5.00
Government
0.00
bond yield
1
2
3
4
5
6
7
8
9 1011

69

Annex 2 - Results of the application of the Lavoie-Godley model: the dynamics relevant to the interaction between the real economy and the financial system in the European Union Euro zone

150.00 StockMarket Capitalization 100.00 Accumulationrate 50.00 0.00 Stockpricegrowth -50.00 Ratiobetween
150.00
StockMarket
Capitalization
100.00
Accumulationrate
50.00
0.00
Stockpricegrowth
-50.00
Ratiobetween
-100.00
rod ctivit and
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

Bulgaria

400.00 Stock Market 300.00 Capitalization 200.00 Accumulation rate 100.00 Stock price growth 0.00 Ratio between
400.00
Stock Market
300.00
Capitalization
200.00
Accumulation rate
100.00
Stock price growth
0.00
Ratio between
-100.00
productivity and
salaries
-200.00
Utilization rate
-300.00
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

Czech Republic

70

Stock Market 400.00 Capitalization 300.00 200.00 Accumulation rate 100.00 0.00 Stock pricegrowth -100.00 -200.00
Stock Market
400.00
Capitalization
300.00
200.00
Accumulation rate
100.00
0.00
Stock pricegrowth
-100.00
-200.00
Ratio between
-300.00
productivity and
-400.00
salaries
Utilization rate
-500.00
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

Latvia

200.00 Stock Market Capitalization 100.00 0.00 Accumulation rate -100.00 -200.00 Stock pricegrowth -300.00
200.00
Stock Market
Capitalization
100.00
0.00
Accumulation rate
-100.00
-200.00
Stock pricegrowth
-300.00
-400.00
Ratio between
-500.00
productivity and
salaries
-600.00
Utilization rate
-700.00
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

Lithuania

71

StockMarket 200.00 Capitalization 100.00 Accumulationrate 0.00 -100.00 Stockpricegrowth -200.00 -300.00
StockMarket
200.00
Capitalization
100.00
Accumulationrate
0.00
-100.00
Stockpricegrowth
-200.00
-300.00
Ratiobetween
-400.00
productivityand
-500.00
salaries
Utilizationrate
-600.00
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

Hungary

350.00 Stock Market 300.00 Capitalization 250.00 Accumulation rate 200.00 150.00 Stock price growth 100.00 50.00
350.00
Stock Market
300.00
Capitalization
250.00
Accumulation rate
200.00
150.00
Stock price growth
100.00
50.00
Ratio between
0.00
productivity and
-50.00
salaries
-100.00
Utilization rate
-150.00
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

Poland

72

Stock Market 400.00 Capitalization 300.00 Accumulation rate 200.00 100.00 0.00 Stock price growth -100.00 2000
Stock Market
400.00
Capitalization
300.00
Accumulation rate
200.00
100.00
0.00
Stock price growth
-100.00
2000 2002 2004 2006 2008 2010
-200.00
Ratio between
-300.00
productivity and
-400.00
salaries
Utilization rate
-500.00
-600.00

Romania

400.00 300.00 Stock Market Capitalization 200.00 Accumulation rate 100.00 0.00 1 2 3 4 5
400.00
300.00
Stock Market
Capitalization
200.00
Accumulation rate
100.00
0.00
1
2
3
4
5
6
7
8
9
10 11
Stock price growth
-100.00
-200.00
Ratio between
-300.00
productivity and
-400.00
salaries
Utilization rate
-500.00
-600.00

73

Annex 14 - Results of the application of the Lavoie-Godley model:

evolution of the accumulation rate, physical capital utilization rate, consumption weight in GDP and profitability rate

Euro zone

90.00 80.00 Consumption 70.00 share in GDP 60.00 Interest rate 50.00 corresponding to 40.00 credit
90.00
80.00
Consumption
70.00
share in GDP
60.00
Interest rate
50.00
corresponding to
40.00
credit activity
Capital
30.00
utilization rate
20.00
10.00
Accumulation
0.00
rate
1
2
3
4
5
6
7
8
9 1011
Bulgaria 80 70 60 50 40 30 20 10 0 1 2 3 4 5
Bulgaria
80
70
60
50
40
30
20
10
0
1
2
3
4
5
6
7
8
9
10
11

Consumption share

in GDP

Interest rate

corresponding to

credit activity

Capital utilization

rate

Accumulation rate

Czech Republic

74

100 Consumption share in GDP 80 Interest rate 60 corresponding to credit activity 40 Capital
100
Consumption
share in GDP
80
Interest rate
60
corresponding
to credit activity
40
Capital
utilization rate
20
Accumulation
0
rate
1
2
3
4
5
6
7
8
9 1011

Latvia

80.00 70.00 Consumption share in GDP 60.00 50.00 Interest rate corresponding to 40.00 credit activity
80.00
70.00
Consumption share
in GDP
60.00
50.00
Interest rate
corresponding to
40.00
credit activity
30.00
Capital utilization
20.00
rate
10.00
Accumulation rate
0.00
1
2
3
4
5
6
7
8
9
10
11

75

Lithuania 80.00 70.00 Consumption share in GDP 60.00 50.00 Interest rate corresponding to 40.00 credit
Lithuania
80.00
70.00
Consumption share
in GDP
60.00
50.00
Interest rate
corresponding to
40.00
credit activity
30.00
Capital utilization
rate
20.00
10.00
Accumulation rate
0.00
1
2
3
4
5
6
7
8
9
10
11
Hungary
100
90
Consumption share
80
in GDP
70
60
Interest rate
corresponding to
50
credit activity
40
Capital utilization
30
rate
20
10
Accumulation rate
0
1
2
3
4
5
6
7
8
9
10
11

Poland

76

90 Consumption share 80 in GDP 70 60 Interest rate 50 corresponding to 40 credit
90
Consumption share
80
in GDP
70
60
Interest rate
50
corresponding to
40
credit activity
30
Capital utilization
rate
20
10
Accumulation rate
0
1
2
3
4
5
6
7
8
9
10 11

Romania

90.00 80.00 Consumption share 70.00 in GDP 60.00 Interest rate 50.00 corresponding to 40.00 credit
90.00
80.00
Consumption share
70.00
in GDP
60.00
Interest rate
50.00
corresponding to
40.00
credit activity
Capital utilization
30.00
rate
20.00
Accumulation rate
10.00
0.00
1
2
3
4
5
6
7
8
9
10 11

References

77

1. Iancu, A. (2006), Problema convergenţei economice, Oeconomica’,

no4.

2. Lavoie, M. (2007). Financialisation issues in a post-Keynesian Stock- Flow consistent model. Mimeografado.

3. Lavoie, M., Godley, W. (2001-2). Kaleckian growth models in a stock and flow monetary framework: a Kaldorian view. Journal of Post Keynesian Economics, 2, p. 277-311.

4. Lavoie, M.; Rodriguez, G.; Seccareccia, M. (2004). Similitudes and discrepancies in post-Keynesian and Marxist theories of investment:

a theoretical and empirical investigation. International Review of Applied Economics, p. 127-149.

78

Organizational types of capital markets. Stock exchanges versus OTC markets

PhD Candidate Mircea Ciolpan PhD Dorina Poanta

Abstract: Main differences between regulated and non regulated markets are: flexibility and adaptability to participants’ necessities for non regulated markets, in comparison to the rigor and sometimes authorities’ lack of response regarding the natural evolution of the capital markets. The impact of the world crisis from 2007 has determined the government from different countries and central banks to find solutions regarding the control of the existing risks from the non regulated markets.

Key-words: capital markets, stock exchange, non regulated markets JEL Code: E44, G01, G18;

From a historical point of view, the first form of manifestation of the commodity markets or capital markets hasn’t been regulated by the authorities. This aspect has allowed the development of transactions and has consolidated the future instruments of working. The exagerations that have been made, especially the ones which speculate the price of the transacted products, have determined the authorities and the participants from these markets to search for solutions, in order to maintain the equilibrium between demand and offer for each product. At an European level, the apparition of the regulations and of stock exchange has been a relatively slow process, as we can notice even from the first years of the stock exchange: Bruge 1409, Anvers 1460, Lyon 1462, Toulouse 1469, Amsterdam 1530, Londra 1554, Paris 1563, Berlin 1716, Viena 1771, New York 1772, Madrid 1809 3 . The first exchange markets are the commodity markets and then the stock markets. The derivatives products hace appeared within the commodity markets and the big majority of the stock exchanges dedicated to financial derivatives are ex or

3 Denzel A. Markus, Handbook of world exchange rates 1590-1914, Ashgate Publishing Ltd., Surey, England, 2010

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present commodity exchanges. The first aspect which characterized the stock exchange at the beginning was the specialization. The stock exchanges have begun to specialize in certain products and transactions. This way, have appeared and developed stock exchanges representatives for the main raw materials. From this point of view, the universal part of the stock transactions have become very important. As we speak, stock markets and commodity markets are central elements in the economical and financial culture, both European and worldwide. The Explanatory Dictionary of the Romanian Language 4 defines stock exchange as follows: „The institution where securities and foreign currencies are negotiated or where commodity transactions are developed.” Stock exchange is a market economy institution and from a theoretical point of view is very close to a market with a perfect competition. This comparison is facilited by the main characteristics of the stock exchange. The number of participants is huge and their access is free. The decision of investment or market withdrawal is free for every participant. Transacted products are standardized and there are no preferences for producers, that’s why we can say that transacted products are homogeneous. Theoretically speaking, investors have equal access to the informations necessary to consolidate the decision to invest. From this point of view, the authorities supervise the transparency of the transactions which are made. If we look at the way in which price is created, we can see that the stock exchange agrees for an equilibrium price, that’s why, many times the prices from the stock exchange are called reference prices.

Mr. Gheorghe Ciobanu identifies three functions of the stock exchange 5 :

Macroeconomical function; Microeconomical function; Evaluation function; Macroeconomical function represents the connection between long term economies and the financial needs of the state companies. This

and the financial needs of the state companies. This 4 The Explanatory Dictionary of the Romanian
and the financial needs of the state companies. This 4 The Explanatory Dictionary of the Romanian
and the financial needs of the state companies. This 4 The Explanatory Dictionary of the Romanian

4 The Explanatory Dictionary of the Romanian Language, Publishing House Univers enciclopedic, Bucharest, 2009; 5 Ciobanu Gheorghe, Stock exchanges and stock transactions, Economical Publishing House, Bucharest, 1997, pg 16;

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function creates an alternative to the banking system and represents a decision factor in the economical development of a state. Another aspect is the correlation with the banking system. This way, investors can decide on which market to invest. Through reduced costs and high efficiency, investors can understand and control better risks and also make investments. Last but not least, we have the information and evaluation function regarding the prices of transacted products. The stock exchange is the one which can transfer risks from one entity to another. Taking into account the investors’ aversion towards risk, they can try to be covered in front of risks or can search for profit if they are interested in taking risks. Microeconomical function has various manifestations at a company level. Thus, a first aspect influenced by stock exchange is the notoriety of the company. Another aspect is related to obtaining capital for a listed company, in case the transaction of the already issued shares doesn’t produce a rise of capital. Companies listed on the stock exchange benefit in general from a good management, in comparison to not listed companies. This aspect is more visible in the market economy of the transition countries. The evaluation function allows a good estimation of investments and of the investors’ fortune. It is more difficult to estimate the value of some titles or not listed products or to negotiate their selling and buying. From an investor’s point of view it is very important the information about the real value of the investments made. Anoher side of this function regards the promptitude of different operations with products. From the point of view of the stock exchange, we can make various classifications:

When it comes to the object of transactions we have the following categories:

General stocks – they operate a large number of products; they operate a large number of products;

Specialized stocks – they operate a certain type of products. This category can be divided in other they operate a certain type of products. This category can be divided in other categories:

o Commodity markets transaction of commodities or derivatives financial products;

o Stocks for commercial operations specialized in transacting certain services: insurances; freight;

o Stock exchanges deal with securities;

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If we talk about the value and the volume of transactions, stocks can be divided in:

Local stocks, have an impact on one or more regions;and the volume of transactions, stocks can be divided in: National stocks, they have an impact

National stocks, they have an impact on a country level;in: Local stocks, have an impact on one or more regions; International stocks, the impact of

International stocks, the impact of transactions is an international one;National stocks, they have an impact on a country level; There are several kinds of stock

There are several kinds of stock markets, when it comes to forms of constitution 6 :

State stocks, are created, organized and administered by the state central authorities.They appeared at the beginning of XIX century, in Belgium in 1801 and in France in 1807.markets, when it comes to forms of constitution 6 : Private stocks, are stock commercial entities,

Private stocks, are stock commercial entities, where stockholders can be individuals or legal persons. Stockholders must elaborate a Status and functioning governing rules, according to state laws;of XIX century, in Belgium in 1801 and in France in 1807. Mixed stocks, are a

Mixed stocks, are a mixed form of stock exchange, where state participates together with individuals and legal persons, when it comes to consolidating an anonymous society ;and functioning governing rules, according to state laws; Besides regulated markets we have also the negotiation

Besides regulated markets we have also the negotiation markets. Something specific to these markets is the direct meeting between seller and buyer. The apparition of these markets must be respected within stock institutions. A large number of companies wanted to be listed on the non regulated markets. One of the denominations of the negotiation market is over-the-counter (OTC) market. Main differences between regulated and non regulated markets are: flexibility and adaptability to participants’ necessities for non regulated markets, in comparison to the rigor and sometimes authorities’ lack of response regarding the natural evolution of the capital markets. Another major difference is the lack of compensation, which is manifesting through the apparition and amplification of the counterpart risk. The third major difference is represented by the number of transacted products. From the point of view of financial derivatives, the non regulated markets are quoting some parts of these products, because of the rapid innovation of the investors. When the 2007 financial crisis began, the non regulated

6 Ciobanu Gheorghe, Stock Exchange and stock transactions, Economical Publishing House, Bucharest, 1997, pg.70;

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market was operating international transactions which exceeded several times the volume of the world GDP. This aspect has generated and continues to generate fears about the repeated risks for the national economies, because of the participation on these markets of some banking entities and commercial corporations which have an international impact. We also have to mention the lack of transparency of the non regulated markets, in comparison to the stock markets. This aspect correlated with the important volume of transactions has determined the materialization of the repeated risks, especially in the autumn of 2008, when the American Bank Lehman Brothers Holdings Inc has failed, a bankruptcy which had international implications. The impact of the world crisis from 2007 has determined the government from different countries and central banks to find solutions regarding the control of the existing risks from the non regulated markets. Simultaneously, systems for avoiding possible difficulties (which appear when financial derivatives products are operated) have been created. They have taken into consideration the situations in which the banking system may be affected again by a lack of liqidities and by the methods of avoiding situations as too big to fail. The negotiations of the central banks have been very difficult because of the different interests of the participating countries and because of the complexity of negotiations. Starting with 2011, the new European System of Financial Surveillance 7 has come into operation. It has two components: a.) the macroprudential level, represented by the European Committee of Systemic Risk and b.) microprudential level represented by the European Surveillance Authority; this level has also three parts: European Banking Authority, European Authority of Transferable Securities and Markets, Insurance and European Authority of Occupational Pensions. The surveillance activity is carried on by the European Committee of Systemic Risk and by the European Surveillance Authority. These entities have an activity based on collaboration and they exchange informations in order to reach their goals. The main goal of the European Committee of Systemic Risk is to diminish and prevent systemic risk. The Committee collects and analyses informations about systemic risk, from all the members of the European Union, as well as from countries outside the Union.

7 Report about Financial Stability 2011, National Bank of Romania, pag 130;

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At an international level, a strong analysis of the financial derivatives’ impact on non regulated markets, has been made. If in the period of the crisis, between 2007-2009, the Government from Europe and North America has suggested severe limitations when it comes to operating financial derivatives products, because of their negative influence on the financial banking system, rhetoric has become less vehement with the passing of time. If between 1988-2007 the keyword to describe capital markets’ surveillance was non regulation, the crisis which started in 2007 has determined a back action and the approach of a conservative speech of limiting investors’ liberties on the non regulated markets. I personally consider that this position is as bad as absolute freedom, which was offered by authorities before the 2007 crisis. As I already presented, the evolution of the financial derivatives wasn’t a sudden one and an important aspect is the fact that the derivatives operations have appeared long time ago, in early days, so, we can conclude that the derivatives represent a necessity of the market. Also, the existance and the amplitude of non regulated markets show that stock exchanges can’t satisfy entirely the needs of the investors. Authorities’ attempt to transform the non regulated markets into stock institutions is only a form of dictatorship over free will. Certain situations may occur when companies create dangerous derivatives and operate them through dedicated entities. The interdiction to operate any form of financial derivatives, outside the strong regulated markets, will put aside the speculators and will generate new risks, through the lack of investors interested in taking risks. The lack of speculators may also cause a decrease of liquidities, fact which has immediate consequences for the protection operations towards risks. In 2012, international agreements, signed at the level of the International Bank of Regulations and International Swap and Derivatives Association (ISDA) 8 have established the necessity of the non regulated markets to have Houses for Compensation for the financial derivatives products. The end of 2012 is the deadline for the national legislation to assume these international agreements. The responsability of such implementation belongs to the National Bank of Romania together with the Ministry of Public Finances.

8 ISDA letter sent to BNR and MFP from 28.03.2011;

References

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1. Ciobanu Gheorghe, Stock exchanges and stock transactions, Economical Publishing House, Bucharest, 1997

2. Denzel A. Markus, Handbook of world exchange rates 1590-1914, Ashgate Publishing Ltd., Surey, England, 2010

3. ISDA letter sent to BNR and MFP from 28.03.2011

4. Report about Financial Stability 2011, National Bank of Romania

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Negotiating communication across the European Union

PhD Vasile Neacșa

Abstract: Part of the negotiation process, the communication facilitates parties to reach a compromise as a result of their interaction. Departing from the evidence of this fact and taking into account the evolution of decision making process across the European institutions in the last 25 years, we should notice the communication as the most significant instrument from the negotiation process. All this was possible due to the multiplication of interactions among actors, the democratization of the negotiation process, as well as to the technological development and the importance that the media recorded in recent decades.

In this context we will place our analysis on the proposed subject trying to evaluate which is the degree of dependence on communication in political decision-making process of the UE and we will identify the evolution of the process of relationship between negotiation and communication within the same European institutions.

Key-words: negotiation, communication, EU institution JEL Code: F51, M38, N10

Before 1987, when it was to be adopted '' The Single European Act (SEA) '', it was obvious that the decision making process and assuming of responsibilities in the EU, stands on the shoulders of the Council of Europe and the European Commission. The process of negotiation and communication was structured and assumed at a level of national and international experts and representatives of Member States during several annual meetings. In principle, the basis of communication and negotiation at the level of the Council, were the reports issued by the experts in the matter. As a result of bilateral and multilateral meetings among the representatives of the Member States, a new policy line was noticed as to be followed. This fact

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offers the possibility of new charismatic and competent leaders in economics, finance or international strategy to emerge. The decision assumed was to be implemented at the European Commission level on the basis of a well-defined pyramid scheme. Communication was also subject to the same hierarchy rules.

Along with the SEA adoption and of the Maastricht Treaty, operational since 1993 and by increasing the role of the EP in the European co- decision-making process, the negotiation and the communication become instruments easy to reach by a multitude of actors. Interest and lobbying groups are directing their increasingly interest and energy towards EP. So, at the beginning of the present century we can affirm without being wrong, as the relationship between the PE and CE takes place sometimes in partnership and sometimes into rivalry 9 . And the Media will play an increasingly important role during the all existence of the EU.

Back in time, in USA, President Kennedy's funeral in November 1963, had to change forever the extent and speed to which media could influence the national public opinion and then the international one 10 .

Targeting more an elitist audience, or being of bon ton once upon a time, Media gets now to be considered as the most important element of influence and manipulation of the masses in the present structure of modern democracy, cultivating and exciting feelings of envy and jealousy among the elites and the masses, creating ghosts sometimes antagonistic, digging in everyone’s personal life to ''control people’s life through Media'. 11 And this is mainly due after November 1963, to the technological progress recorded, to acceleration of globalization process and of democratization of communication means and decision making process.

9 Westlake M,'' The Commission and the Parliament. Partners and Rivals in the European Policy-making process.'' London, Butterworths 1994 10 American Television broadcasted live and continuously (48 h) the funeral of President Kennedy. The gestures made by Jacky Kennedy during the funeral which were coming out

of the initially established protocol, made the American public to begin to be increasingly more interested in watching TV than go to movie theaters to watch weekly actuality. 11 See'' file'' Murdoch. BBC Hacking mobiles and controlling peoples with media. June

2012

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Therefore, the changes experienced over time in the process of participation in political decision-making within the EU have multiplied, giving way to what we know today.

And throughout this period, the relationship between negotiation, communication and compromise was perfected in many ways where the ''compromise'' plays the central role in defining present and future European architecture. For someone inexperienced, the relationship between media and politics seems strange considering constructive criticism leveled at politics. But in reality the two cohabits and supports each other in idea to better inform the masses. Occasionally, Media should sacrifices on the altar of progress and democratic spirit, a leader or two, as result of a negotiation with a politics hungry of power. But politics sometimes close ranks and accepts no compromise, especially in front of new intruders such as NGOs organizations for protection of animals or organizations of fight for equal rights and consumer protection 12 .

This situation has been perpetuated and has generated a seemingly new element that is related to negotiations and which has a constructive side, but also one less constructive. On the positive side we can count on the rise of the compromise that is the expression of polishing the warrior feelings with an accent on national character rather than trans-national among European leaders. On the other hand, compromise generated and continues to generate a poor quality among the compromise leaders put to represent the European Union. And examples of European-level professional incompetence abound.

12 In the 1990’s, organizations for the protection of animals had gained a bad fame among European politics, since it has begun a process of harassment of members of the European Parliament and the European Commission with all kinds of letters in support of their causes. They monitored the voting process involving an element of respect for animals, publishing the results in its own interpretation. Therefore MEPs and EC have preferred to have contacts and collaborate with different ecological organizations which knew the unwritten code of communication and were less acidic and active. In other words, all European political block has been practicing a policy of discrimination against interest groups that were active on the market in Brussels. Media, besides the one subsidized by the NGOs organizations, got rarely involved in this hidden war, in order to impose a communication behavior. See, Paul-H Claeys & Co., lobbing, Pluralism and European Integration.PIE-EIP, 1998, p 140

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They are asked to lead in areas that they do not have the basic knowledge and their activity as leaders in one area or another is completely irrelevant. The political network and the obedience and relation with media are the propeller engines. As a result, the activity of CE and of the Union as a whole is mediocre. If we would consider only the transition from the Stability and Growth Pact (SGP) launched dysfunctional since the beginning in 1993 to the European Budgetary Pact in March 2012, we will find that many of the solutions of compromise made during the negotiation process had as final result an absolute zero in terms of dynamic European policy. Not to mention the public money spent during these 18 years of perpetual transformation.

So far, as one can see easily, the process of negotiation and communication within the EU is blocked by nationalist feelings promoted by the leaders having national interests, from their seats in Brussels. On the other hand, at global level, negotiation is like a film with a scenario and an end well known in advance by the strong ones. In this context, communication by its multitude of expressions written, oral, visual complies with the rules already knew. From time to time, a bemol in communication makes the army of the elected to shake a little. But the rules of the game are always known and rarely is exceeded the red line between the players.

In such a case, Media apologizes in 2 rows on the last page, of a possible error in communication negotiation 13 . If two great powers are confronting, Media does not mix, wait and mediate if possible. If not, comments on a single article accidentally cast on an ''n'' page, a sequence of negotiation as may be inconclusive 14 .

But we should not understand that the EU as an organization is an exception. Organizations such as the United Nations (UN) or Black Sea Economic Cooperation (BSEC) are milled by masses of inefficient bureaucrats that daily negotiate to communicate for an easy life on the public money. United Nations has been waiting for many decades an

13 Michel Collon, Poker Mentor, Les grandes puissances to Yougoslavie et les prochaines guerres, EPO, 1998, pp-28-33. 14 Financial Times dismay in Europe as Boeing wins U.S. contract, 27.02.2011. See Case Prestige accident in'' Dossier du sur l'M / T Prestige www.afcan.org site

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institutional reform that will allow more equitable and efficient operation for the benefit of the population. But, a part of politics operates a deadlock situation to continue to promote their own interests. To make things to be more undercover, media releases from time to time an allusive message to the need for reform. Another example is a regional organization BSEC with generous intentions at first, but which no longer justifies its existence, if we would evaluate the effective working of the last 10 years in support of the population. Takes place meetings, over meetings which translates into no completion reports. 15 And all these, is to remain in the sphere of communication and negotiation, and not to mention the level of corruption that does executions in all regional and international institutions. Once in a while, is sacrificed an European Commissioner or a General Manager but only because of a pilot error between media and political power.

Conclusion

Negotiation of communication within the EU takes the form of a permanent dialogue of compromise that is exercised between politics and Media. Population is considered by both sides as a handle mass represented by a certain quantity which changes direction depending on how the two powers understand each other. In the current system of modern Democracy where power lies in the hands of the powerful ones, we passively assist as witnesses to the establishment of a dictatorship of democracy, event slightly covered by a partially subdued Media. And negotiation of communication was formed as a hologram in the service of some, but not many.

15 Basil Neacsa, Ph.D. Thesis, The Black Sea Economic Cooperation as an element of Regional Stability and Security'', 2004

References

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1. Paul-H Claeys, Lobbyin Pluralism and European Integration, Presses

InterUniversitaires Europeennes, Bruxelles,1998.

2. Michel Collon, Poker Mentor ;Les grandes puissances,la Yougoslavie

et les prochaines guerres, EPO, 1998, pp.-28-33.

3. Westlake M, ‘’The Commission and the Parliament. Partners and

Rivals in the European Policy-making process.’’ London, Butterworths 1994.

4. Martin Wolf, Why Globalisation Works, Yale University Press, 2004.

5. Jacques H. Paget, Le pouvoir de l’illusion; Les secrets de la

persuasion, les cles de votre reussite. Plon, Mai 2012.

6. Vasile Neacsa, Punctul Critic, Decembrie 2011.

7. Vasile Neacsa, Teza de Doctorat-The Black Sea Economic

Cooperation as an element of regional Stability and Security’’,2004.

8. The Economist, Globalisation, Profile Books Ltd, 2001.

9. Financial Times, 2010-2012.

10. Liberation 2010-2012.

11. Le Soir 2010-2012.

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Application of neural networks in financial series production

Phd Eng. Calin Mihai Rangu

Abstract: Neural networks represent a viable alternative to classical regression model. These can learn from experience, can generalize and remove elements of noise and distortion. Usually, neural networks are based on learning algorithms with reverse propagation; if the model is not involved into a local optimum and there is a corresponding number of nodes at the in the intermediary level, the mean square error minimizes.

Key-words: Neural networks, prediction, financial forecasts JEL Code: C45, C53

Introduction

Prediction is one of the most perspective applications of neural networks. Neural networks can be used in finance, for example:

Analysis of financial conditions (creation of expert systems over financial system, classification of information in accounting reports, profiles development for borrowers who could be bad payers);Neural networks can be used in finance, for example: Bankruptcy or fraud prediction in banks; Identifying

Bankruptcy or fraud prediction in banks;profiles development for borrowers who could be bad payers); Identifying the risks of debts (rating of

Identifying the risks of debts (rating of titles, bonds and shares, related risks to mortgage loans);be bad payers); Bankruptcy or fraud prediction in banks; Monitoring of capital markets (shares return, prediction

Monitoring of capital markets (shares return, prediction of shares profitability on stock exchange, determining patterns of share price);titles, bonds and shares, related risks to mortgage loans); Financial forecasts (patterns determining and time series

Financial forecasts (patterns determining and time series predictions, forecast for interest and exchange rates, determining forward and swap rates).markets (shares return, prediction of shares profitability on stock exchange, determining patterns of share price);

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The applicability of results is extremely large, but for this particular situation has been chosen an area of interest for the Romanian banking market interest rates prediction on the interbank market, with a bivalent significance. It is important for the interbank market participants to be able to predict the evolutions of market indicators, and for those who are interested in portfolio investment, estimating volumes invested in short term deposits in comparison with investments in other financial market instruments.

The convergence of neural network predictions with the reality on an interbank market can be viewed by financial analysts as a measure of market flow in line with specific mechanisms of market economy, against an apparently unpredictable evolution, which highlights outside political influences for the banking and financial systems. The network can learn predictable trends from previous behaviour, but not volitional interventions determined by foreign factors for the process described by the time series.

The analysis of time series has three main purposes: prediction, modelling and characterization. Standard approach of time series prediction is based on building a model that generates the observed frequency . As the explicit equations of this model, usually, are not known, the rules that determine system evolution must be extracted from the previous observation regularities.

be extracted from the previous observation regularities. The data analysis of time series leads to its

The data analysis of time series leads to its decomposition into components, each component being defined as a major factor, which can affect any series. There were identified three major components within time series:

Trend, which refers to long-term trends of time series to increase or decrease; , which refers to long-term trends of time series to increase or decrease;

Seasonal component, refers to periodic behaviour of time series within a specific time, usually a year; , refers to periodic behaviour of time series within a specific time, usually a year;

Irregular component refers to the fluctuation, which overlaps the trend and seasonal component. refers to the fluctuation, which overlaps the trend and seasonal component.

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In the identification of the system, to characterize series, it is seeking from the set of possible models, that one, which best meets, the imposed restrictions by system. In time series prediction, the system validation criterion is given by the prediction error. After the most convenient model of the system has been determined, it is required its validation: the system is tested again on a new set of data, different from the data set initially used for model selection.

It is also necessary a model that defines the way these variables are interconnected. The model of a system corresponds to the relations between different system instances or system knowledge. Models can be given in different forms:

Mental model, it does not require any mathematical formalism, and the system behaviour is described by , it does not require any mathematical formalism, and the system behaviour is described by a synthetic form in the mental representation of the human agent;

Graphic model, where a graph or a table presents the system properties; , where a graph or a table presents the system properties;

Mathematical model, there are mathematical relations between system variables, often differential equations. , there are mathematical relations between system variables, often differential equations.

Methods using neural networks, or other systems that can learn directly from examples, are considered as avoiding the use of a system model for generating time series. In fact, there is always such a model, but it can be implicit, in the assumptions underlying the system used for learning as the case of neural networks.

The advantage of models using neural networks is that they can approximate or reconstruct any nonlinear continuous function. The learning process of a neural network can be seen as producing a multi- dimensional surface, composed of a set of nonlinear functions, that approximates data in accordance with a certain error norm. Different architectures of neural networks can be used for time series prediction.

From all these, the multi-layer perceptron and networks with radial basis function are the most common. In the case of multilayer perceptron, the previous values of time series are applied at the entrance of network. The hidden layer of multilayer perceptron executes the summing of input

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weights, and the nonlinear transformation is made by a function of sigmoid activation of neurons.

is made by a function of sigmoid activation of neurons. Multilayer perceptron Weights are adjustable and

Multilayer perceptron Weights are adjustable and are determined during network regulation. It is known from practice that a training set of sample of p, a network with one hidden layer and (p-1) hidden units can reproduce exactly the training set. However, this is just a suggestion, because the number of layers and hidden units depends on the specific problem. Recurrent networks are neural networks with reaction pathways. Currently, there are two types of recurrent networks: relaxing and standard. Relaxing networks start at an initial given state and reach equilibrium at a fixed point, denoting usually a class. The convergence is provided by imposing some restrictions on the reactions.

Relaxing networks may never reach the fixed point, but it is not a desirable behavior and it does not help the classification. Recurrent networks are used for time series prediction, rather trying to model a particular trajectory, than to achieve a fixed point. It can be predicted a continuous range of values by changing the input results in recurrent network.

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95 There is noticed a relatively limited robustness of neural network models for noisy signals prediction.

There is noticed a relatively limited robustness of neural network models for noisy signals prediction. In this sense, it is analyzed the robust filtration of prediction models, the method relies on robust filtration for data interpolation in moments of major errors, and is associated to a non- Gaussian procedure of estimation the maximum plausibility.

Neural networks are mostly adequate when there is no aprioric knowledge on the characteristics of observed time series. Neural networks were declared as an effective tool in understanding and predicting sequences. An important advantage of using neural networks is their ability to emulate new features for time series, without a prior decryption of the system mechanisms that generate them. The generalization ability can be reduced at input-output application interpolation, approximated by a direct neural network. In some cases, when direct static neural networks may not adequately describe the confounding regularities of sequences, can be used dynamic recurrent neural networks.

Autoregressive recurrent networks have the ability to use contextual information on time scales of not imposed a priori extension. The network must be able to store its internal state, not only the previous values of the input signal. For this purpose, synaptic connections are no longer described by simple weights, but by autoregressive filters. The filter parameters are continuously adjusted, so as to select the aspects of the input sequence that are not relevant for temporal associations which determine the time series behavior. At the same time, recurrent neural networks can predict

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time series that require state system keeping, which it has generated for potential endless periods of time.

In recurrent networks, the current output depends on the output at preceding moments, which is determined by the previous parameters. Therefore, parameters for past and present must be calculated. Any change in the value of a parameter will influence the future evolution of the entire system dynamic. The real-life problems involve description of some systems characterized by a large number of variables, parameters, as well as the study of interactions that result from complex nonlinear dynamics and chaotic or random behavior. On the other hand, the amount of available collected data for characterization the system under consideration is always limited. Therefore, it is necessary to make a compromise between complexity and accuracy of the considered system description, in order to enable handling of such problems.

Input-output pairs form the training set that would lead to the building of system model, while the current predicted value is given by the system output. This approach leads to the problem of optimal choice of predefined input sequence to simplify the resulting input-output transfer function. Obviously, any predictive system can try to predict only the value of the deterministic part, if it exists, of a given signal. By definition, the random part of the signal, meaning noise, can be described only in statistical terms. The deterministic part of the signal can be introduced further in a prediction system, such as a wavelet neural network, to estimate the following sequence or extrapolate the signal. The noise component can be processed statistically.

The wavelet transform is an important tool in signal analysis and features extraction. The wavelet transform gives a good local representation of signal both in the frequency domain, as well as in the time one. Unlike the Fourier transform, which is global and provides a description of the general regularity of signals, the wavelet transform handles the spatial distribution of singularities. Financial series prediction The interest interbank market is the chosen field for modeling and testing (BUBID, BUBOR, and EURIBOR for the period January 2001

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December 2003), the place where banks borrow each other, performing short-term investments, from one day to one year. These averages are important because, according to them, banks set their own interest rates. So, the average interbank interest rates create the basic bank interest.

These rates are very important both for banks, as well for their customers. Identifying patterns and predicting these future rates have a great significance, because banks can calculate the possible influences of various fluctuations in advance, analyzing the best way to place funds or debt. Different types of available funds’ investments can be analyzed, establishing the investment structure.

These short-term rates affect directly the operations with financial instruments. Most of the short-term instruments are purchased at a fixed interest rate, payable at maturity. For example, if bills are bought at a lower value than the nominal rate. The difference represents the discount fee applied to the nominal value. Its correct setting can determine a real return at maturity or a potential loss, if the rates and the default fee discount are calculated knowingly or not. Methods of estimating trends and recognizing patterns are actually methods of optimization seeking to minimize the error. We can say that is made a mapping of a set of vectors into another set of vectors. For a given set of vectors, the network is looking for a weighting matrix to produce an output vector with components very close to the output.

The following neural networks have been implemented:

Network with input delayoutput. The following neural networks have been implemented: line, direct structure (feed-forward) driven by Levenberg -

line, direct structure (feed-forward)

driven by Levenberg - Marquardt optimization algorithm;

Adaptive ADALINE network with both internal input delay line and at the synapses.driven by Levenberg - Marquardt optimization algorithm; The algorithm goes through the following main steps: Network

The algorithm goes through the following main steps: Network Selection, Network Involvement, and Network Operation Check by outputs simulation and comparing predictions with actual values.

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The neural network is a recurrent network that contains a response from the output to the input layer. Both actual entry and the reactor entry have delay lines.

For illustration, it was performed modeling with ADALINE networks, and for interbank rates: some relevant time series were taken for patterns and prognosis determining. After 5 times training on the same network for BUBID time series for six months, it is obtained more than one third decrease of the average quadratic rate, observing that the neural network output and its prediction are very close to the target signal (real effective interest rates on those days).

The neural network, built and simulated through the proposed program, provides a very quick learning and a prediction with a very good deviation in order to establish the evolution pattern of interest rates on the interbank market, to set the main interest rate for determining market and investment policy.

interest rate for determining market and investment policy. The Levenberg – Marquardt algorithm is applied on

The Levenberg Marquardt algorithm is applied on the same set of data.

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99 The specificity of this algorithm relates to the adjustment prediction step, so as to get

The specificity of this algorithm relates to the adjustment prediction step, so as to get faster in the position of minimum root mean square error, supposing that we have an error curve with a parabolic trend, which is generally applicable for minimum points. The system does not progress with a fixed step.

As an innovation, this application allows setting of a moment in the future for value prediction; the date can be set at the user choice. Also, it can set the last time interval from which the new value is going to be predicted by previously trained neural network and on which an input vector with a given size by this value will run.

By the designed application and the results of built network: the future values of interest rates for the following day and in many cases up to 30 days can be predicted on the interbank market. There are situations in which the prediction is valid until six months after the last interest used in network involvement.

One of the examples analyzed in thesis: BUBID in a period of 1 month. We will choose a learning rate of 0.2, so we will increase slightly the importance of the last data (from the 60 selected for each future prediction, data which slide over the entire rotation interval). We will train the network from the beginning, so without pre training and we will freeze

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it later (after 500 statistical observations). The chosen date is December 18, 2002 and more than 30 working days, meaning February 6, 2003.

As can be seen, the obtained relative errors are similar, 2.0929% after one day, and 2.5178% after 30 working days, which is very good. It can be observed, that approximately from April the prediction is not exact, but practically, for a period of around three months the prediction follows the trend established by the prior involving of network on the first 500 observations.

Conclusions

The universality of predictive model was verified by the prediction of known repetitive series, whose features were changed abruptly from

a (quasi) periodic variation, to one non periodic, which has a proven the capacity of neural network system to learn the methodology of adaptive prediction and not the data itself.

References

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Calin Mihai Rangu, PhD Thesis, Polytechnic University of Bucharest, 2004

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Educational process - support to sustainable growth

Maria Triandafil

Abstract: This article is intended to highlight the contribution of education to economic growth. In this sense, there are presented a number of theories about the multidimensionality of education, with emphasis on its role in human development, economic and social consolidation. In addition, there are brought to the fore examples of interest in the EU Member States in the education support, reflected in the share of education spending in GDP.

Keywords: education, human development, economic growth, the Lisbon Strategy JEL code: I21, I25, O19

Introduction

Balanced economic development relies fundamentally on economic growth. In traditional literature, economic growth was predominantly of quantitative origin, counting on material accumulation. Modern approaches are focused on the qualitative aspect, strictly targeting growth by improving the human dimension of living standards. Thus, the concept of human development arose to which were subsequent research approaches were dedicated. Since 1990, the United Nations Development Programme (UNDP) founded the Development Report on an annual basis. Other international bodies like the OECD, Eurostat, United Nations Department of Economic and Social Affairs are concerned in particular with the implementation of research programs aimed at analysing and enhancing human development.

Many research approaches have focused on identifying the essential factors of human development. It was unanimously recognized that human development and economic growth are determined in a fundamental

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manner by education. The Maastricht Treaty highlighted the role of education in strengthening economic growth; this role was subsequently confirmed by the Lisbon Strategy.

Lisbon Strategy is an agreement made by the European governments, gathered at the European Council in March 2002 (held in Lisbon), whose goal was to structure the economic and social policies at the European level in accordance with the challenges imposed by globalization. Under this agreement, it was established that, in the years 2010 - 2020, Europe will become the most competitive region in the world economy.''The new strategy focused on mitigating the disparities between EU, U.S. and Japan based on the educational phenomenon, considered to be the competitive support, which is characterized by sustainable economic growth, with positive effects : new jobs, lower inflation, better environmental policies. In 2002 the European Council emphasized that education is the European social model and the European education systems must become ‚’’global landmarks’’ until 2013.

1. Education and economic development

In contemporary society, economic growth is supported in an effective manner by the of education of the population. Thus, human capital''capital gains the same importance as physical material. W. Schultz (1961) and Gary S. Becker (1962) have supported the hypothesis of improving productivity by enhancing the emphasis placed on the human dimension and thus, by increasing the financial resources dedicated to education.

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Chart no. 1 The weight of education expenses in GDP in the Central and Eastern Europe in 2010

expenses in GDP in the Central and Eastern Europe in 2010 Source: Eurostat database The share

Source: Eurostat database

The share of education expenditure in GDP reflects the fact that education has become the modality by which the gaps between countries with different economic development levels can be surmounted. In emerging markets from Central and Eastern, we notice a sharp disparity at the level of the allocations for education. Countries with the highest share in 2010 are Lithuania and Slovenia (33% and 27%), while countries with the lowest percentage are Poland and Romania (4% and 4.38%).

Public social expenditure and education expenditure increased in Romania in real terms during 2000-2009, mainly due to the steady growth in GDP during the reference period. Public expenditure on education is about 5% of GDP in most European countries, including the new Member States. In 2010 the highest percentage is recorded in Denmark while the average of European Union member states is 5.2%. Compared with other EU member states in 2002, Romania, along with Bulgaria, had the lowest percentage of financial ressources allocated for education out of all member states or European Union acceding countries: 3.5 and 3.6% of GDP respectively.

A very important aspect of education expenditure is represented by their effective management. In the '60s, the educational crisis was felt acutely at the international level; known as the,,world crisis of education’’, it occured

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in the context of inconsistencies between the educational needs of real and professional life and curriculum content. Padoan and Mariani (2006) brought forth the existence of malfunctions between education and society:

Methods and educational programs are not tailored to the demands of professional life;the existence of malfunctions between education and society: The society is distinguished by a pronounced dynamism

The society is distinguished by a pronounced dynamism at the strucural level, which is often in opposition to the static nature of the eductional content;are not tailored to the demands of professional life; Needs of qualitative professional life are not

Needs of qualitative professional life are not reflected in educational products.opposition to the static nature of the eductional content; 2. Education on a continuos basis The

2. Education on a continuos basis

The basic principle of this theory is that lifelong learning is the framework for the restructuring and development of education and training systems, providing key skills, and lifelong consistency between formal, informal and non-formal learning strategies. School can not continue to be a formal place to ensure the original education, but it must become a learning center offering learning opportunities for young generations and also lifelong learning programms to adults. These learning centers must provide a high level of qualitative educational standards by modular, flexible and articulated educational structures within a coherent qualification framework, and qualitative activities within these structures that are to be provided by staff with good qualifications.

Romania is faced with a low participation rate in training of 25-64 years age group (1.6% in 2009 compared with the target for 2010 - 12.5%). Relative rigidity of the formal education system in terms of portability and formal validation of the results gained in different learning environments is one of the main causes of this situation.

Ensuring an important qualitative level requires specific actions regarding the educational framework such as the introduction of new teaching techniques based on individual needs of students who pursue their

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cognitive development, promoting innovation in teaching learning strategies. Poor performance of schools and universities in providing quality education and relevant qualifications in the labor market are closely related to school or university management capacity to effectively use financial and human resources, and the know-how. It is necessary to achieve the development of tools and quality assurance mechanisms at system and education provider level, training of personnel in quality management. Contemporary education must face the challenges posed by transitional process to a market economy, the need for enhanced competitiveness and structural changes in the labor market.

Providing a modern and quality education will fully contribute to the formation of a well-educated and competitive human capital. This is the main element in creating a stepping stone in the development of knowledge-based society. A quality education provides initial key skills for learning throughout life. Initial levels of education are fundamental in shaping a set of skills and competencies needed for further development and achieve a workforce that is able to meet the challenges of the knowledge society. Sustainable growth and sustainable employment is possible by raising the profile of abilities and skills and qualifications structure of human capital through education.

Available data on Romania indicate that there is a weak correlation between the offer of educational qualifications provided by initial education and training system and labor market requirements. The high rate of youth unemployment comes, unfortunately, to support this conclusion. In this context, investment in education, especially technical education training at all levels, should focus on ensuring adequate reserves in terms of quantitative and structural changes consistent with qualifications of the labor market.

Recently, analysts have focused their interest on sustainable development concept, which involves ensuring the quality of life. It was also noted the emergence of a higher complexity degree of problems that society is facing, as opposed to the limited capacity to solve. Method for solving key problems lies in the opinion of specialists, in ''societal learning, based on the integration in the educational process not only of individual

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dimensions, but also of the collective size, deeply rooted in the notion of group. ''The knowledge society is the purpose and context of contemporary development, because knowledge is the only resource that grows with use, competitiveness depends on the quantity and quality of knowledge used and the profitability of any particular company may increase depending on the investment in the production of knowledge (intellectual capital) than in acquiring as physical assets''(Suciu, M., 2006).

Conclusions

This study has brought to the fore the concept of educational process in close correlation with the phenomenon of economic growth. Providing a modern and quality education will fully contribute to the formation of a well-educated and competitive human capital. This is the main element in creating a stepping stone in the development of knowledge-based society. A quality education provides initial key skills for learning throughout life. Sustainable growth and sustainable employment is possible by raising the profile of abilities and skills and qualifications structure of human capital through education.

Ensuring an important qualitative level requires specific actions regarding the educational framework such as the introduction of new teaching techniques based on individual needs of students who pursue their cognitive development, promoting innovation in teaching learning strategies. Poor performance of schools and universities in providing quality education and relevant qualifications in the labor market are closely related to school or university management capacity to effectively use financial and human resources, and the know-how. It is necessary to achieve the development of tools and quality assurance mechanisms at system and education provider level, training of personnel in quality management. Contemporary education must face the challenges posed by transitional process to a market economy, the need for enhanced competitiveness and structural changes in the labor market.

References

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