The efficacy of financial stability on economic growth: the experience of developing countries with large financial sectors

Abstract

Recent years have attracted the attention of policymakers about the effect of financial stability on economic growth. These developments raise more concern for developing countries with large financial sectors. From a recent history of financial crises, we learn that countries highly exposed to international financial markets experience adverse economic trajectories. The focal countries for this study are Brazil, India, Indonesia, Malaysia, Mexico, and South Africa. This empirical study has a sample period from 1996 to 2022, capturing the most recent quantifiable events. The study considers aggregate measures of financial stability from the financial system. We make use of the random effects panel data methodology which captures the heterogeneity associated with the developing countries in variegated continents. The implication of this study is that financial stability policies that aim to stabilize financial institutions and their functions will significantly affect economic growth. This study finds that financial stability has a significant and negative effect on economic growth.