Economic growth, financial market, and twin crises

ABSTRACT

In this study, we look not only to provide empirical evidence to investigate the direct impact of financial crises on economic growth, but also to examine the roles of insurance development, financial liberalization, financial institution, and crisis intervention policies on the relationship between the two. We employ a panel data framework from 50 countries by applying the dynamic panel generalized method of moments model. Our main empirical results show that financial crises do have a significantly negative impact on economic growth. In addition, governments or authorities are encouraged to further enhance their insurance sector in order to help spur economic growth when financial crises arise. The government intervention policy choice is also an important factor influencing economic growth during crises.

KEYWORDS:

• Financial crises
• economic growth
• financial liberalization
• intervention policy
• financial institution

JEL Classifications:

• G22
• C33
• F43
• O43

Acknowledgements

We would like to thank the Editor and the anonymous referees for their highly constructive comments.

Disclosure statement

No potential conflict of interest was reported by the authors.

ORCID

Chien-Chiang Lee http://orcid.org/0000-0003-0037-4347

Notes

1 For example, Aghion et al. (2009), Bordo, Meissner, and Stuckler (2010), Furceri and Mourougane (2012), Ben Salha, Bouazizi, and Aloui (2012), Bekhet and Yasmin (2014), and Hubrich and Tetlow (2015).

2 The choice of the period and sample size has been dictated by considerations of data availability; the selected countries are in Table A1 in Appendix.

3 Hutchison and Noy (2005) as well as Lee and Lin (2016) apply the GMM approach to robust evidence in their studies. They both highlight that a more efficient GMM procedure relies on utilizing more available moment conditions to obtain a more efficient estimation by controlling for time-invariant unobserved heterogeneity and simultaneity. Hutchison and Noy (2005) also provide results using the Blundell and Bond (1998) GMM framework and show that their coefficients do not change noticeably when compared to the benchmark estimates.

4 Laeven and Valencia (2013) define twin crises in year t as a banking crisis in year t together with a currency crisis during the period [T−1, T+1].

5 Rancière et al. (2006) and Laeven and Valencia (2013) define “twin crises” by the simultaneous occurrence of a banking crisis and a currency crisis.

6 Table A1 lists countries with episodes of crisis intervention policy implementation.

7 The estimation result is available upon request.

8 The list of countries for each country group is presented in Appendix Table A2.

9 For simplicity, we only report the main estimation results of insurance, financial institutions, and crisis intervention policy conditional proxies in the robust tables. The interaction terms of financial liberalization with twin crises still remain insignificant. Full estimation results are available upon request.

Additional information

Funding

This work is supported by the Ministry of Science and Technology , Taiwan [MOST 105-2410-H-110-006-MY2].