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Banking sector stability and economic growth in post‐transition European Union countries

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  • Yilmaz Bayar
  • Djula Borozan
  • Marius Dan Gavriletea

Abstract

Economic growth is considered to be an essential means for poverty alleviation and improving countries' well‐being. Disturbances and instability in the banking sector may jeopardize financial stability and generate adverse, considerable and long‐lasting consequences therefor. This study analyzed the dynamic and causal effects of various indicators of banking sector stability on economic growth by employing new generation panel cointegration and causality tests in post‐transition European Union countries over the period 1998–2016. Taking into account cross‐sectional dependence between countries, the presence of heterogeneity in the errors, endogeneity and structural breaks, the long and short run analyses revealed the cointegration relation between the variables, the statistically significant positive effect of banking sector stability on economic growth and the efficiency of the error correction mechanism. The causality analysis disclosed the opposite causality direction between the particular banking sector stability indicators and economic growth, suggesting that banking sector stability is a complex, hierarchically structured multidimensional construct. Its different dimensions require different policy responses aiming at preventing future shocks and mitigating the adverse effects, while encouraging economic growth.

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  • Yilmaz Bayar & Djula Borozan & Marius Dan Gavriletea, 2021. "Banking sector stability and economic growth in post‐transition European Union countries," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 949-961, January.
    • Handle: RePEc:wly:ijfiec:v:26:y:2021:i:1:p:949-961
    DOI: 10.1002/ijfe.1829
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    5. Nigo, Ayine R.S. & Gibogwe, Vincent, 2023. "Empirical Research on Financial Efficiency and Economic Growth in Sub-Saharan Africa," MPRA Paper 116041, University Library of Munich, Germany, revised 14 Dec 2022.
    6. Vít Pošta & Aziya Mukusheva & Nurilya Kuchukova, 2022. "Economic Performance and Financial Stability: Case of the Eurasian Economic Union," Journal of Economics / Ekonomicky casopis, Institute of Economic Research, Slovak Academy of Sciences, vol. 1(1), pages 22-35, January.

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