Income Growth-Financial Stability Nexus: The Role of Institutional Quality in Emerging Economies

Abstract

Motivated by the mixed evidence on growth-finance nexus, we explore the case of 23 emerging countries to offer robust insight on the extent to which financial stability(instability) induce or impede income growth. Exploring a dynamic panel estimation technique using system GMM estimator, we find both the banking segment of the financial system captured as non-performing loan and the non-banking segment measured via stock market volatility as viable underlying sources of financial instability causing declining income growth in emerging markets. Quite an interesting finding, however, is the potential of institutional quality as viable for alleviating the probable adverse effects of financial instability on income growth, particularly via corruption control, political stability, and voice of accountability.

Keywords: Financial stability(instability); Institutional quality; Emerging markets; Dynamic panels; Income growth

JEL Codes: C33, E01, E44, O11, O16

DOI: 10.7176/RJFA/12-14-08

Publication date:July 31^st 2021