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Financial systems and mechanisms of growth in different conditions of country risk

journal contribution
posted on 2011-07-01, 00:00 authored by S Y Cheng, H Hou, C C Ho, Joakim WesterlundJoakim Westerlund
This article uses panel data from 1976 to 2003 to investigate the ways in which banking and stock markets influence economic growth in situations of high and low country risk. The mean and Standard Deviation (SD) of country risk are adopted to classify 28 countries into Low Risk Low Volatility (LRLV) and High Risk High Volatility (HRHV) subgroups. Through the technique of error correction-based panel co-integration developed by Westerlund (2007), several results are obtained. First, LRLV countries can expand the capitalization of stock market to enhance long-term economic growth. Second, HRHV countries, on the other hand, use two distinct strategies to promote long-term economic growth. Initially they develop their equity markets, which promote economic growth directly. Strengthened equity markets, in turn, aid in the development of credit markets, which subsequently brings an economic boom. Finally, regardless of selected subgroups, the contribution of stock market capitalization to economic growth appears to be substantially larger than that of bank credit, highlighting the importance of stock markets.

History

Journal

Applied economics letters

Volume

18

Issue

11

Pagination

1021 - 1028

Publisher

Routledge

Location

Abingdon, England

ISSN

1350-4851

eISSN

1466-4291

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal

Copyright notice

2011, Taylor & Francis

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