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Financial systems and mechanisms of growth in different conditions of country risk

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  • Su-Yin Cheng
  • Han Hou
  • Chia-Cheng Ho
  • Joakim Westerlund

Abstract

This article uses panel data from 1976 to 2003 to investigate the ways in which banking and stock markets influence economic growth in situations of high and low country risk. The mean and Standard Deviation (SD) of country risk are adopted to classify 28 countries into Low Risk Low Volatility (LRLV) and High Risk High Volatility (HRHV) subgroups. Through the technique of error correction-based panel co-integration developed by Westerlund (2007), several results are obtained. First, LRLV countries can expand the capitalization of stock market to enhance long-term economic growth. Second, HRHV countries, on the other hand, use two distinct strategies to promote long-term economic growth. Initially they develop their equity markets, which promote economic growth directly. Strengthened equity markets, in turn, aid in the development of credit markets, which subsequently brings an economic boom. Finally, regardless of selected subgroups, the contribution of stock market capitalization to economic growth appears to be substantially larger than that of bank credit, highlighting the importance of stock markets.

Suggested Citation

  • Su-Yin Cheng & Han Hou & Chia-Cheng Ho & Joakim Westerlund, 2011. "Financial systems and mechanisms of growth in different conditions of country risk," Applied Economics Letters, Taylor & Francis Journals, vol. 18(11), pages 1021-1028.
  • Handle: RePEc:taf:apeclt:v:18:y:2011:i:11:p:1021-1028
    DOI: 10.1080/13504851.2010.522511
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    Cited by:

    1. Amol Gore & Pekka Kess, 2014. "Treading the Risks in International Management," International Journal of Management, Knowledge and Learning, International School for Social and Business Studies, Celje, Slovenia, vol. 3(1), pages 125-141.

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