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The Impact of Banking Sector Stability on the Real Economy

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  • Pierre Monnin
  • Terhi Jokipii

Abstract

This article studies the relationship between the degree of banking sector stability and the subsequent evolution of real output growth and inflation. Adopting a panel VAR methodology for a sample of 18 OECD countries, we find a positive link between banking sector stability and real output growth. This finding is predominantly driven by periods of instability rather than by very stable periods. In addition, we show that an unstable banking sector increases uncertainty about future output growth. No clear link between banking sector stability and inflation seems to exist. We then argue that the link between banking stability and real output growth can be used to improve output growth forecasts. Using Fed forecast errors, we show that banking sector stability (instability) results in a significant underestimation (overestimation) of GDP growth in the subsequent quarters.

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File URL: http://www.snb.ch/n/mmr/reference/working_paper_2010_05/source/working_paper_2010_05.n.pdf
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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2010-05.

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Length: 31 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:snb:snbwpa:2010-05

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Keywords: Banking sector stability; real output growth; output growth forecasts;

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References

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  1. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
  2. Romain Ranciere & Aaron Tornell & Frank Westermann, 2002. "Systemic Crises and Growth," Working Papers 190, Barcelona Graduate School of Economics.
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Cited by:
  1. Dimitrios P. Louzis & Angelos T. Vouldis, 2013. "A financial systemic stress index for Greece," Working Papers 155, Bank of Greece.
  2. Louzis, Dimitrios P. & Vouldis, Angelos T., 2012. "A methodology for constructing a financial systemic stress index: An application to Greece," Economic Modelling, Elsevier, vol. 29(4), pages 1228-1241.

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