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Finance, Growth And Fragility

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  • Panicos O. Demetriades
  • Peter L. Rousseau
  • Johan Rewilak

Abstract

We utilise a new international database of financial fragility indicators for 124 countries from 1998 to 2012 to investigate the effects of fragility on the finance-growth nexus. Cross-country growth regressions suggest that both financial fragility and private credit have negative effects on GDP growth over this period. The results are robust to controlling for systemic banking crises, confirming that financial fragility has additional negative effects on growth, even if a banking crisis is avoided. We also present results using interactions which suggest that (a) a large volume of impaired loans can amplify the negative effects of private credit on growth and (b) a sufficiently high z-score can eradicate the negative effects of private credit on growth.

Suggested Citation

  • Panicos O. Demetriades & Peter L. Rousseau & Johan Rewilak, 2017. "Finance, Growth And Fragility," Discussion Papers in Economics 17/13, Division of Economics, School of Business, University of Leicester.
    • Handle: RePEc:lec:leecon:17/13
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    References listed on IDEAS

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    1. Loayza, Norman V. & Ranciere, Romain, 2006. "Financial Development, Financial Fragility, and Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 1051-1076, June.
    2. Svetlana Andrianova & Badi Baltagi & Thorsten Beck & Panicos Demetriades & David Fielding & Stephen Hall & Steven Koch & Robert Lensink & Johan Rewilak & Peter Rousseau, 2015. "A New International Database on Financial Fragility," Discussion Papers in Economics 15/18, Division of Economics, School of Business, University of Leicester.
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    7. Jean Arcand & Enrico Berkes & Ugo Panizza, 2015. "Too much finance?," Journal of Economic Growth, Springer, vol. 20(2), pages 105-148, June.
    8. Demetriades, Panicos O. & Hussein, Khaled A., 1996. "Does financial development cause economic growth? Time-series evidence from 16 countries," Journal of Development Economics, Elsevier, vol. 51(2), pages 387-411, December.
    9. Andrianova, Svetlana & Demetriades, Panicos & Shortland, Anja, 2008. "Government ownership of banks, institutions, and financial development," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 218-252, February.
    10. Deidda, Luca & Fattouh, Bassam, 2002. "Non-linearity between finance and growth," Economics Letters, Elsevier, vol. 74(3), pages 339-345, February.
    11. World Bank, 2016. "World Development Indicators 2016," World Bank Publications - Books, The World Bank Group, number 23969, December.
    12. Jaremski, Matthew & Rousseau, Peter L., 2018. "The dawn of an ‘age of deposits’ in the United States," Journal of Banking & Finance, Elsevier, vol. 87(C), pages 264-281.
    13. Svetlana Andrianova & Panicos Demetriades & Anja Shortland, 2012. "Government Ownership of Banks, Institutions and Economic Growth," Economica, London School of Economics and Political Science, vol. 79(315), pages 449-469, July.
    14. Demetriades, Panicos O. & Rousseau, Peter L., 2016. "The changing face of financial development," Economics Letters, Elsevier, vol. 141(C), pages 87-90.
    15. Christiane Kneer, 2013. "Finance as a Magnet for the Best and Brightest: Implications for the Real Economy," DNB Working Papers 392, Netherlands Central Bank, Research Department.
    16. Enrico Berkes & Ugo Panizza & Jean Louis Arcand, 2015. "Too Much Finance or Statistical Illusion: A Comment," IHEID Working Papers 12-2015, Economics Section, The Graduate Institute of International Studies.
    17. Rousseau, Peter L., 1998. "The permanent effects of innovation on financial depth:: Theory and US historical evidence from unobservable components models," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 387-425, July.
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    Cited by:

    1. Layal Mansour-Ichrakieh, 2021. "The Impact of Israeli and Saudi Arabian Geopolitical Risks on the Lebanese Financial Market," JRFM, MDPI, vol. 14(3), pages 1-24, February.
    2. Jérôme Creel & Paul Hubert & Fabien Labondance, 2023. "Credit, banking fragility, and economic performance," Oxford Economic Papers, Oxford University Press, vol. 75(2), pages 553-573.
    3. Maxime Fajeau, 2020. "The Adverse Effect of Finance on Growth," Working Papers hal-02549422, HAL.
    4. Mansour-Ichrakieh, Layal, 2020. "The impact of Israeli Geopolitical Risks on the Lebanese Financial Market: A Destabilizer Multiplier," MPRA Paper 99376, University Library of Munich, Germany.
    5. repec:hal:spmain:info:hdl:2441/2qqgdhhldi83pq6n0hl9nrguki is not listed on IDEAS
    6. Chletsos, Michael & Sintos, Andreas, 2021. "The effect of financial fragility on employment," Economic Modelling, Elsevier, vol. 94(C), pages 104-120.
    7. Yeþim Helhel, 2019. "Kýrýlgan Beþli Ülkelerde Hisse Senedi Piyasasý Geliþimi ve Ekonomik Büyüme Ýliþkisi," Isletme ve Iktisat Calismalari Dergisi, Econjournals, vol. 7(1), pages 19-29.
    8. Stewart, Robert & Chowdhury, Murshed, 2021. "Banking sector distress and economic growth resilience: Asymmetric effects," The Journal of Economic Asymmetries, Elsevier, vol. 24(C).
    9. Ijirshar, Victor Ushahemba & Andohol, Jerome, 2022. "Investment-growth nexus in West Africa: An assessment of whether fragility matter," International Review of Economics & Finance, Elsevier, vol. 81(C), pages 1-17.
    10. Svetlana Andrianova & Panicos O. Demetriades, 2018. "Financial Development and Financial Fragility: Two Sides of the Same Coin?," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 60(1), pages 54-68, March.

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