Impact of Financial Development on Economic Growth during the Subprime Mortgage Crisis: Evidence from BRICS

Abstract

The progress and advancement of any country rely significantly on the optimal functioning of its financial sector. Much of the literature is devoted to the analysis of developing countries regarding the impact of financial development on economic growth. However, in the wake of the global financial crisis, the issues and implications needed to be rethought. This study explores the impact of financial development on economic growth with respect to the mortgage crisis using 5 BRICS countries over the period of 1990–2019. The study follows the Interactive regression to find the impact of financial development on the economy with respect to the crisis. The paper employs both random effects and fixed effects to draw conclusions. The results demonstrate that before the crisis, stock market capitalization, liquid liabilities and stock market turnover had a significant impact on economic growth. Furthermore, stock market turnover helps to stabilize the economy in the ongoing crisis. BRICS states should consider the significance of these results as part of their potential financial development policy and strategy necessary to strengthen the economy.