One issue in the empirical literature is that there is no single indicator that sufficiently captures all aspects of financial deepening. As a result, most studies — including pioneering works of King and Levine and Demetriades and Hussein and recent ones — separately examine the relationship between economic growth (mostly real per capita GDP) and each of several financial development variables (e.g., liquidity liabilities (M3) and domestic credit provided to the private sector). Another issue is that banking and stock market — two major constituents of financial development — have been independently assessed in the literature. Such studies as Levine and Zervos and Arestis et al. investigated the effect of stock market development on economic growth. Meanwhile, there are few studies that consider financial development as an integrated phenomenon consisting of banking and stock market, despite the increasing proportion of the latter in a financial system. Taking into account these issues, we argue that financial development — as a single phenomenon — should be measured by combining several elements. And five elementary variables of financial development, which are commonly used in the empirical literature, are selected and integrated to make the financial development indicator (FD) (see Appendix 1) (Note 4). The ratio of money supply to GDP (MTG) is picked up to measure the degree of financial depth in the simplest manner. We are also concerned with the financial size- and activity (liquidity) proxies (BATG, PCTG, SKTG and SVTG) suggested by Beck et al.. With these proxies, the impacts of two financial channels (banking and stock market) and their two aspects (size and activity) are approximated. Sales personnel
Financial Crisis Indicator
In creating the financial crisis indicator (FC), we provide the following two points. First, financial crisis should be measured by a rich set of macroeconomic indicators. The rationale is that although financial crises are generally classified into currency- and banking crises, we consider financial crisis as a combined macroeconomic phenomenon consisting of both currency and banking crises (Kaminsky and Reinhart, 1999); in fact, each type of crisis is influenced by several macroeconomic factors (Note 5). Second, obtaining a hint from the ongoing debate in the macroeconomic volatility literature, we consider that while financial fragility — as a continuous phenomenon — can be measured as changing volatility in an economy, financial crisis is identified as an “extreme” volatility in that process (Note 6) (Note 7). Based on these arguments, we calculate the volatility in each of 16 elementary variables of financial crisis (see Appendix 2) by the squared returns.
Then we compute a 4-quarter rolling average of Xt2 as the volatility values in level are too uneven to find more correlations among financial crisis variables for making FC. Since the availability of financial crisis variables and the results of the principal component analysis differ for each of the sample countries, we have created the FCs that consist of different numbers and combinations of financial crisis variables (see Appendix 3). Finally, as described in Appendixes 5 to 9, the plots of the five countries’ FCs exhibit the peak or extreme volatility over the crisis periods (i.e., the period 1990 to 1991 for India and the period 1997 to 1998 for the other four countries).