54

Godley-Lavoie Model. Empirical Perspective

at the Level of the European Union1

PhD Cristina Maria Triandafil

PhD Candidate Teodor Adrian Morar

Abstract:

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. Kiriescu ".
 55

1. Introduction

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.
 56

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 (YD ) of households is expressed as net income from
wages (W * Ns), from which we substract taxes (TS):

YD W NS TS
(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.
 57

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*Bh-1 -r-1*Bh-1 + r- 0
Expenses 1*Bcb-1
Central Bank +r-1*Bh-1 -r-1*Bcb- 0
Revenues 1
Taxes -T +T 0
Variation of -H +H 0
Money Supply
Variation of -Bh +Bh -Bcb 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 (1), well-being accumulated in
the past (Hh-1), and consumption in this (2):

C * YD * Hh
1 2 1 (2)
 58

Government expenditures not covered by tax policy requires financing

through bond issuance:

HS HS HS Gd Td
1 (3)

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

(4)

Where
Y= Gross Domestic Product
C= households consumption
G= government expenses
1 = appropriate share of consumption in disposable income
= 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.
 59

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.
 60

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
 61

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.
 62

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.
 63

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 research2.

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 financiarizrii asupra procesului de convergen economic, C. Morar
Triandafil, paper published online series of INCE, http://www.ince.ro/
 64

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.
 65

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
1 2 3 4 5 6 7 8 9 10 11

Bulgaria

12

10 Saving rate
8

6 Lending rate

2 Government bond
yield
0
1 2 3 4 5 6 7 8 9 10 11
 66

Czech Republic

8.00
7.00
Saving rate
6.00
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

Latvia

18.00
16.00
Saving rate
14.00
12.00
10.00
Lending rate
8.00
6.00
4.00
2.00 Government bond
yield
0.00
1 2 3 4 5 6 7 8 9 10 11
 67

Lithuania

12.00

10.00 Saving rate

8.00
6.00 Lending rate
4.00
2.00 Government bond
0.00 yield
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
0.00
1 2 3 4 5 6 7 8 9 10 11
 68

Poland

25
20
Saving rate
15
10 Lending rate

5
Government bond yield
0
1 2 3 4 5 6 7 8 9 10 11

Romania

40.00
35.00 Saving rate
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 Stock Market

Capitalization
100.00
Accumulation rate
50.00

0.00 Stock price growth

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

-50.00
Ratio between
-100.00 productivity and
salaries
Utilization rate
Bulgaria

400.00
Stock Market
300.00 Capitalization

200.00 Accumulation rate

100.00
Stock price growth
0.00
Ratio between
00
01
02
03
04
05
06
07
08
09
10

-100.00
20
20
20
20
20
20
20
20
20
20
20

productivity and
salaries
-200.00 Utilization rate

-300.00
 70

Czech Republic

400.00 Stock Market

Capitalization
300.00
200.00 Accumulation rate
100.00
0.00 Stock price growth
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

-100.00
-200.00
Ratio between
-300.00
productivity and
-400.00 salaries
-500.00 Utilization rate

Latvia

200.00 Stock Market

100.00 Capitalization
0.00 Accumulation rate
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

-100.00
-200.00 Stock price growth
-300.00
-400.00
Ratio between
-500.00 productivity and
-600.00 salaries
Utilization rate
-700.00
 71

Lithuania

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

Hungary

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

-50.00
salaries
-100.00 Utilization rate
-150.00
 72

Poland

Stock Market
400.00
Capitalization
300.00
200.00 Accumulation rate
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
-500.00 Utilization rate
-600.00

Romania

400.00
300.00 Stock Market
200.00 Capitalization

100.00 Accumulation rate

0.00
-100.00 1 2 3 4 5 6 7 8 9 10 11 Stock price growth

-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 activity
30.00 Capital
20.00 utilization rate
10.00
Accumulation
0.00 rate
1 2 3 4 5 6 7 8 9 1011

Bulgaria

80
70
Consumption share
60 in GDP
50 Interest rate
40 corresponding to
credit activity
30 Capital utilization
20 rate

10 Accumulation rate
0
1 2 3 4 5 6 7 8 9 10 11
 74

Czech Republic

100
Consumption
80 share in GDP

60 Interest rate
corresponding
40 to credit activity
Capital
utilization rate
20
Accumulation
0
rate
1 2 3 4 5 6 7 8 9 1011

Latvia

80.00
70.00 Consumption share
60.00 in GDP
50.00 Interest rate
40.00 corresponding to
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
60.00 in GDP
50.00 Interest rate
40.00 corresponding to
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

Hungary

100
90
Consumption share
80
in GDP
70
60 Interest rate
50 corresponding to
40 credit activity
Capital utilization
30
rate
20
10 Accumulation rate
0
1 2 3 4 5 6 7 8 9 10 11
 76

Poland

90
80 Consumption share
70 in GDP
60
Interest rate
50
corresponding to
40 credit activity
30 Capital utilization
20 rate
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 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
 77

References

1. Iancu, A. (2006), Problema convergenei 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 hasnt 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 18093. 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
 79

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 Language4 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, thats 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, thats why, many times the
prices from the stock exchange are called reference prices.

Mr. Gheorghe Ciobanu identifies three functions of the stock exchange5:

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

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;
 80

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 doesnt
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 investors 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;
Specialized stocks 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;
 81

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;
National stocks, they have an impact on a country level;
International stocks, the impact of transactions is an international
one;

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

constitution6:
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.
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;
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 ;

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;
 82

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
Surveillance7 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;
 83

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 wasnt 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
cant 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;
 84

References

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
 85

Negotiating communication across the European Union

PhD Vasile Neaca

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
 86

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 rivalry9. 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 one10.

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 everyones personal life to ''control peoples 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
 87

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 protection12.

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 1990s, 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
 88

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 negotiation13. 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 inconclusive14.

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
 89

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
 90

References

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 lillusion; 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.
 91

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);
Bankruptcy or fraud prediction in banks;
Identifying the risks of debts (rating of titles, bonds and shares,
related risks to mortgage loans);
Monitoring of capital markets (shares return, prediction of shares
profitability on stock exchange, determining patterns of share
price);
Financial forecasts (patterns determining and time series
predictions, forecast for interest and exchange rates, determining
forward and swap rates).
 92

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.

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;
Seasonal component, 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.
 93

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 a synthetic form in the
mental representation of the human agent;
Graphic model, where a graph or a table presents the system
properties;
Mathematical model, 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
 94

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

activation of neurons.

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.
 95

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
 96

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
 97

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 delay line, direct structure (feed-forward)
driven by Levenberg - Marquardt optimization algorithm;
Adaptive ADALINE network with both internal input delay line
and at the synapses.

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.
 98

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.

The Levenberg Marquardt algorithm is applied on the same set of

data.
 99

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
 100

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.
 101

References

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

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

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.
 108

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