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Threshold Effects of Inflation on the Banking Sector Performance in the ASEAN-6 Countries

Author

Listed:
  • Ngo Nu Dieu KHUE

    (Graduate Program, Department of Finance, National Formosa University, Taiwan.)

  • Ya-Wen LAI

    (Corresponding author. Associate Professor, Department of Finance, National Formosa University, Taiwan.)

Abstract

This study examines the influence of inflation on the banking sector performance in the ASEAN-6 countries, with a focus on the threshold effect of inflation. The empirical study is based on the threshold regression models estimated using the panel data of the ASEAN-6 countries including Cambodia, Indonesia, Malaysia, Philippines, Thailand, and Vietnam over the 1996-2016 period. Using various indicators for the banking sector performance, the results provide strong evidence of the inflation-threshold effect in the relationship between inflation and the banking performance. We find that inflation has a negative effect on each of the size indicators of the banking performance when inflation is below their individual threshold rates, around 4-7%, while this negative effect vanishes as inflation rises above these thresholds. However, the asset-quality indicator worsens only when inflation exceeds 3%. Therefore, the findings would be useful for the policy makers in the ASEAN-6 countries to identify a target-inflation regime that is compatible with their banking systems development.

Suggested Citation

  • Ngo Nu Dieu KHUE & Ya-Wen LAI, 2020. "Threshold Effects of Inflation on the Banking Sector Performance in the ASEAN-6 Countries," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 117-133, March.
    • Handle: RePEc:rjr:romjef:v::y:2020:i:1:p:117-133
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    More about this item

    Keywords

    inflation; banking performance; threshold effect; panel data; ASEAN-6.;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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