Abstract
Education regarding money and banking always tells us that banking is a critical point for macroeconomics. However, there is not enough evidence to further prove the relationship between banking and volatility. In our view, an integration of small and medium-sized enterprises (SMEs) with serious financing constraints, small open economy and bank-based financial system can provide the best opportunity to explore bank-volatility nexus. Fortunately, Taiwan is the most notable case to offer the key to an understanding of banking and volatility for our students of finance. There is sufficient evidence based on panel data analysis with spatial dependency to support the significance of regional bank lending (credit supply) rather than the stock market (credit demand) in explaining volatility. It is clear that the role of bank system in volatility in Taiwan deserves explicit emphasis.
Highlights
The financial-growth nexus stems from the traditional economic wisdom that the financial system can help to overcome market frictions and to improve the allocation and flow of capital more efficiently as a lubricant for promoting economic growth (King and Levine, 1993; Jayaratne and Strahan, 1996; Beck and Levine, 2004)
In order to account for the link between regional employment volatility (VVVVVV_eeeeee) and two kinds of factors, namely, national factors (NF) and regional factors (RF), this study proposes the following model in (1): VVVVVV_eeeeeeiiii = ff(RRRRiiii, NNNNtt)
We provide three indices to control the status of regional economics and it is unnecessary for these variables to be transformed into volatility measures since the industrial structure and demographics are used to control regional economy
Summary
The financial-growth nexus stems from the traditional economic wisdom that the financial system can help to overcome market frictions and to improve the allocation and flow of capital more efficiently as a lubricant for promoting economic growth (King and Levine, 1993; Jayaratne and Strahan, 1996; Beck and Levine, 2004). To convince our students of accepting this viewpoint, we find that Taiwan itself is an excellent case to emphasize the importance of banking in economic volatility on the grounds that Taiwan is an integration of SME-based, bankbased and small open economy and these characteristics all points to critical role of banking in national development. Taiwan’s successful experience as an SME-based economy has been regarded as a unique role model for the developing world (Hu and Schive, 1998). Wu and Huang (2002) have further described these unique characteristics in several ways: (1) Taiwan’s SMEs are more concentrated in the manufacturing sector, which faces more global than domestic competition; (2) Taiwan’s FDI flows come primarily through SMEs, which are different from those in other countries where large multinational corporations are mainly involved, and (3).
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