Abstract
Abstract This paper attempts to investigate empirically whether financial and macroeconomic stability of economies are significantly affected by the structure of their financial systems, viz., bank-based and market-based structures. Using panel data estimations based on data from 82 countries for the period of 1996-2012, we find that in general, bank-based financial system contributes significantly to instability of the financial sectors and currency market. We also find some evidence that within the bank-based structure, higher presence of foreign banks is positively associated with currency market pressure. Additionally, the results show that the choice of bank-based versus market-based financial structure is important for low income countries. Banks in low income countries contribute to exchange market pressures whereas stock markets leads to reduction in such pressure. In high income countries, stock markets do not significantly affect banking and currency market instability.
Highlights
Financial systems perform the important function of resource allocation for productive purposes and facilitate enhanced economic activities
Regression with exchange market pressure index as dependent variable In Table 4, we present our last set of regression results where the dependent variable is a measure of currency market pressure, indicating macroeconomic instability
The paper studies the association between financial structure, bank-based and market-based, and financial and macroeconomic stability using empirical panel model estimated on 82 countries for the period of 1996-2012
Summary
Financial systems perform the important function of resource allocation for productive purposes and facilitate enhanced economic activities. On the other hand, act as an intermediary between savers and borrowers, by accepting deposits from savers and by lending these deposits to borrowers for their productive purposes While both stock markets and banks may exist in parallel, many financial systems are found to have a dominant presence of one of the two. Lee (2012) studied the relative merits of bank-based and market-based financial structures from the point of view of long term economic growth and observed differential role played by stock markets and banks in the economic growth of different countries. According to Lee (2012), banking sector may play more important role than stock markets in the early years of growth in an economy
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