Since the seminal works of McKinnon and Shaw were published, the finance-growth nexus — how financial development and economic growth interact with each other — has been extensively assessed but the empirical results on this issue have not been reconciled yet. On the other hand, as more economies — in particular those known as emerging economies — have been increasingly exposed to severe financial disturbances over the last few decades, financial crisis has emerged as one of the hottest topics in the literature, highlighting crucial damages on crisis-hit economies. This article attempts to integrate these two subjects or to examine the “finance-growth-crisis” nexus in India, Indonesia, South Korea (hereafter Korea), Malaysia and Thailand. All the countries are known as emerging economies with rapid financial deepening, high economic growth and financial crisis episodes. Since the Chakravarty Committee Report (Report of the Committee to Review the Working of the Monetary System) was announced in April 1985, India was in the process of (partial) financial liberalization experiencing credit boom and high GDP growth over the late 1980s. Then the severe crisis hit that country in early 1991. As described by the term “East Asian miracle”, the high economic achievements of Indonesia, Korea, Malaysia and Thailand had been praised. Their success stories, however, suddenly ended as the Asian crisis came over the period 1997 to 1998. These stories prompt us to examine the “finance-growth-crisis nexus” in these countries. In addition, since the structural break literature was put forward by Perron, the presence of structural break(s) in the growth process (GDP series) is rationally assumed. And inspired by the fact that financial systems in these economies have been controlled to various extents, we are concerned with financial repression. In searching for more plausible estimates, these two elements should be taken into estimation. Payday Loans Online
Two inherent problems in the literature are pointed out. First, although the relationship between financial deepening and economic growth potentially relates to the incidence of financial crisis, the trivariate linkage of finance-growth-crisis has not been mattered yet, especially in the framework of cointegration and Granger causality. Second, in the empirical literature of finance-growth nexus, the leading evidence — finance exhibits a positive impact on growth — has been drawn from cross-country and panel data models. These models, however, implicitly presume homogeneity in different countries’ growth patterns and thus mask country-specific factors in estimation.
The goal of this article is to analyse the cointegration and causality between financial development, economic growth and financial crisis in the five Asian countries through the techniques of the vector error correction model (VECM) and autoregressive distributed lag (ARDL). This article contributes to the literature in three ways. First, we present country-by-country estimates of the finance-growth-crisis nexus in the five Asian countries. Evidence from our study, which takes into account country-specific conditions, will be more plausible than that from a cross-country and panel data study that looks for a single generalized result by averaging and pooling sample countries’ data. Second, the use of VECM and ARDL, which are based on different concepts of cointegration, is an invention that helps attach robustness to our analysis. Third, most importantly, we extend the finance-growth nexus — the empirical results on this topic have not been reconciled yet — to the finance-growth-crisis nexus. By doing so, more accurate estimates on the finance-growth nexus will be detected as the interaction between finance, growth and crisis must be crucial to determine the effect of finance/growth on each of them. That is, how does financial crisis — as one of endogenous variables in the system — exhibit a background effect on the finance-growth nexus that can be either finance-growth or growth^-finance or finance-growth (bilateral)? We are also concerned with how both finance and growth influence crisis (finance^crisis and growth^-crisis) having either a positive or negative impact. In particular, assuming that financial boom typically precedes a severe crisis, we predict that the increasing level of financial development has an impact on financial crisis. The remainder is structured as follows. In Section 2, the data used for this article are described. Econometric models and procedures are provided in Section 3. Empirical results are reported in Section 4. And conclusion and policy implications come in the end. We employed the data from the IMF’s International Financial Statistics (IFS), the World Bank’s Financial Structure Dataset (FSD) and World Development Indicators (WDI), and the publication of the Reserve Bank of India (only for India).