Banking sector stability and economic growth in post‐transition European Union countries

Abstract

Economic growth is considered to be an essential means for poverty alleviation and improving countries' well‐being. Disturbances and instability in the banking sector may jeopardize financial stability and generate adverse, considerable and long‐lasting consequences therefor. This study analyzed the dynamic and causal effects of various indicators of banking sector stability on economic growth by employing new generation panel cointegration and causality tests in post‐transition European Union countries over the period 1998–2016. Taking into account cross‐sectional dependence between countries, the presence of heterogeneity in the errors, endogeneity and structural breaks, the long and short run analyses revealed the cointegration relation between the variables, the statistically significant positive effect of banking sector stability on economic growth and the efficiency of the error correction mechanism. The causality analysis disclosed the opposite causality direction between the particular banking sector stability indicators and economic growth, suggesting that banking sector stability is a complex, hierarchically structured multidimensional construct. Its different dimensions require different policy responses aiming at preventing future shocks and mitigating the adverse effects, while encouraging economic growth.

Financial development and institutional quality among emerging economies

“…Institutional quality index examined in our inquiry is unique to this study because it is an author-constructed index using principal component analysis (PCA) process; additionally, some components of this index, which are later examined separately, are different compared to what can be found in the literature. Furthermore, instead of the contributions of the financial sector to economic growth, which dominates the literature (see Adeel-Farooq et al, 2020;Maciejewski and Głodowska, 2020;Bayar et al, 2021), this study rather focuses on financial development and the role of institutions of governances.…”

“…Furthermore, instead of the contributions of the financial sector to economic growth, which dominates the literature (see Adeel-Farooq et al. , 2020; Maciejewski and Głodowska, 2020; Bayar et al. , 2021), this study rather focuses on financial development and the role of institutions of governances.…”

Identifying the nexus between financial stability and economic growth: the role of stability indicators

“…Khattab et al (2015) for MAGHREB countries, Alsamara et al (2019) for Qatar and Jima and Makoni (2023) for SSA, showed that financial stability plays an important role on encouraging economic growth and vice versa. On the other hand, Boachie et al (2021) and Bayar et al (2021) found only unidirectional causality from economic growth to financial stability.…”

Evaluation of central bank independence, macroprudential policy, and credit gap in developing countries

“…Excessive credit growth is one of the main factors associated with banking or financial crises in developing countries. Even though an increase in credit can positively contribute to economic growth in the long run, in the short run it might lead to poor credit allocation creating economic imbalance [ 16 ]. Excessive credit growth can lead to financial crises via three channels: the first is by generating external macroeconomic imbalances; second, by inflating asset price resulting in bubbles and busts; third, by leading to inefficient use of resources [ 17 ].…”