Financial structure on growth and volatility

• Published in: Economic modelling Vol. 35; pp. 391 - 400
• Main Authors: Yeh, Chih-Chuan, Huang, Ho-Chuan (River), Lin, Pei-Chien
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.09.2013; Elsevier Science Ltd
• Subjects: Cointegration analysis; Economic fluctuations; Economic growth; Estimating techniques; Financial structure; Financial systems; Growth volatility; Indicators; Manycountries; Panel data; Pooled mean group estimator; Studies; Volatility; Financial structure; G20; C23; O16; Economic growth; Growth volatility; G10; Pooled mean group estimator
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2013.07.034

By applying the pooled mean group estimator to a large panel up to 40 countries over the 1960–2009 period, this study finds that financial structure is significantly cointegrated to both economic growth and its volatility. In particular, the relationship is positive in nature, suggesting that more market-based countries enjoy faster economic growth but suffer more from economic fluctuations in the long run. Accordingly, in sharp contrast to the existing evidences, we conclude that the architecture of an economy's financial system matters for real sector performance. Moreover, the findings are robust to a variety of sensitivity checks, including the problem of endogeneity, the use of different financial structure (and growth volatility) indicators, the inclusion of extra growth (volatility) determinants, and the control of cross-sectional dependence in the panel data. •This study finds that financial structure is significantly cointegrated to both economic growth and its volatility.•The long-run equilibrium relationship is positive in nature.•We conclude that the architecture of an economy's financial system matters for real sector performance.•The findings are robust to a variety of sensitivity checks.