Measuring market efficiency : a comparative study

Abstract

Economic theory and past research indicate that market efficiency is important for a country's economic performance, with particular effect on the country's economic resilience. This means that a country with an efficient allocation of resources will be able to absorb, withstand and bounce back from the negative effects of external shocks. A country's market efficiency basically depends on the degree to which quantities and prices rapidly adjust to move towards equilibrium. However, market failure may inhibit a country's market efficiency. ln this study, market efficiency is assumed to depend on three types of markets; namely the goods market, the labour market and the financial market. A country with a high degree of efficiency in the three markets will imply a high level of market efficiency. A measure of market efficiency is a measure for countries to realise where they stand in terms of efficiency in the whole economy's market; with particular attention to the goods market, the labour market and the financial market. Having such a measure will help in the determination of a country's economic resilience. Measuring market efficiency is particularly important for small states like Malta, which might be highly exposed lo external shocks and, due to its smallness, might struggle to compete with larger countries. Such a measure will thus help a particular country to identify its weak points with regards to its market efficiency. This dissertation presents a cross-country comparison with respect to market efficiency for 28 European countries. Scores and rankings for each country in terms of the goods market efficiency, the labour market efficiency and the financial market efficiency are computed. The constructed indices have also shown some relationships with four main economic indicators. firstly, a positive relationship emerged between the goods market efficiency and inflation. Furthermore, there is an indication that a high level of labour market efficiency tends to reduce the rate of unemployment. Finally, market efficiency is a determinant of both the country's economic resilience and per capita GDP.