Credit Buildups and the Stock Market in Four East Asian Economies

Abstract

We examine the relationship between intermediaries, stock markets, and real activity in four East Asian crisis economies (Indonesia, Korea, Malaysia, and Thailand) using a series of comparative vector autoregressive and error correction models with quarterly data from 1995 through 2010, thus including both the financial crises of 1997-98 and 2008-9. We often find negative effects of traditional measures of financial development on growth and investment, while the effects of stock market development and liquidity are generally positive. The results from these economies suggest that credit can build up to the point of “saturation,” and that a well-functioning stock market can serve as a growth-promoting outlet for funds as a financial system expands and evolves.