Financial stability and income growth in emerging markets

Abstract

In this paper, we examine the extent to which financial stability matters for income growth in emerging markets. Using dynamic panel estimation techniques, we explore both the stock market and banking sector dimensions of the financial system to show that both stock market volatility and non-performing loans are detrimental to income growth in these markets. We, however, find the magnitude of the impact to be relatively more pronounced when the underlying source of instability in the financial system is stock market volatility. Overall, we find the impact of financial stability on income growth to be more statistically relevant when measured using the individual indicators of financial instability as compared to their composite indicator.