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Financial stability and economic performance

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  • Creel, Jérôme
  • Hubert, Paul
  • Labondance, Fabien

Abstract

This paper aims at establishing the link between economic performance and financial stability in the European Union. We use the seminal framework of Beck and Levine (2004) – both in terms of variables and econometric method – to estimate this causal relationship, independently from but controlling for the level of financial depth. Using a panel GMM with instrumental variables, our contribution involves testing how different measures of financial instability (an institutional index, microeconomic indicators, and our own statistical index derived from a principal component analysis) affect economic performance (or components of aggregate dynamics like consumption, investment and disposable income). We find that financial instability has a negative effect on economic growth.

Suggested Citation

  • Creel, Jérôme & Hubert, Paul & Labondance, Fabien, 2015. "Financial stability and economic performance," Economic Modelling, Elsevier, vol. 48(C), pages 25-40.
    • Handle: RePEc:eee:ecmode:v:48:y:2015:i:c:p:25-40
    DOI: 10.1016/j.econmod.2014.10.025
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    More about this item

    Keywords

    Financial depth; Aggregate dynamics; Financial stability; Banks; Non-performing loans; CISS; Z-score; Principal component analysis;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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