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The Impact of Banking Sector Stability on the Real Economy

Listed author(s):
  • Pierre Monnin
  • Terhi Jokipii

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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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
Handle: RePEc:snb:snbwpa:2010-05
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