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The intertwining of financialisation and financial instability

Author

Listed:
  • Jerome Creel

    (OFCE - Sciencespo & ESCP-Europe)

  • Paul Hubert

    (OFCE-Sciencespo)

  • Fabien Labondance

    (OFCE-Sciencespo & CRESE-Université de Franche Comté)

Abstract

This paper aims to quantify the link between financialisation and financial instability, controlling for the financial and macroeconomic environment. Our main identification assumption is to represent these two concepts as a system of simultaneous joint data generating processes whose error terms are correlated. Based on panel data for EU countries from 1998, we test the null hypotheses that financialisation positively affects financial instability -a vulnerability effect- and that financial instability has a negative effect on financialisation -a trauma effect-, using Seemingly Unrelated Regressions and 3SLS. We find a positive causal effect of credit/GDP on non-performing loans - a vulnerability effect- in the EU as a whole, in the Eurozone, in the core of the EU but not at its periphery, and a negative effect of non-performing loans on credit/GDP - a trauma effect - in all samples. Even when relaxing our identification assumption, both opposite effects hold.

Suggested Citation

  • Jerome Creel & Paul Hubert & Fabien Labondance, 2015. "The intertwining of financialisation and financial instability," Documents de Travail de l'OFCE 2015-14, Observatoire Francais des Conjonctures Economiques (OFCE).
    • Handle: RePEc:fce:doctra:1514
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    File URL: http://www.ofce.sciences-po.fr/pdf/dtravai/WP2015-14.pdf
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    Cited by:

    1. Christophe Blot & Paul Hubert & Fabien Labondance, 2018. "Reforming the European Central Bank," Sciences Po Economics Publications (main) hal-03471743, HAL.
    2. repec:spo:wpmain:info:hdl:2441/70np5j7s548spqcrolr0airgm6 is not listed on IDEAS

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    Keywords

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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