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The mechanisms linking the finance-growth relationship in view of the financial crisis: an empirical investigation of the EU countries

Dimitrios Asteriou (Oxford Brookes University, Oxford, UK)
Konstantinos Spanos (Oxford Brookes University, Oxford, UK)

Journal of Economic Studies

ISSN: 0144-3585

Article publication date: 9 December 2021

Issue publication date: 20 September 2022

330

Abstract

Purpose

The paper aims to explore the mechanisms linking the impact of financial development on economic growth and focuses on the long-term post-global financial crisis.

Design/methodology/approach

The study employs panel data for twenty-five European Union countries over the period 1995–2017. Principal Component Analysis is employed to produce two aggregate indices, namely financial banking sector development and stock market sector development. The empirical analysis is based on estimates through the autoregressive distributed lag (ARDL) method.

Findings

The results suggest that the outbreak of the crisis has led to a disruption of the positive finance-growth relationship, and the banking sector dominates in this adverse effect. The foreknowledge of the current study is that the linking mechanisms of the negative impact of financial development on economic growth, ten years after the global financial crisis, are household debt, private debt, and non-performing loans for the banking sector, while for the equity market this is the case through savings. Interestingly, the results reveal that unemployment increase excessively the borrowers' debt level and then the non-performing loans.

Research limitations/implications

An implication is that the increase of credit supply and any monetary expansion along with lack of regulatory control and monitoring can lead banks to a higher risk exposure through household and private debt as well as non-performing loans. Besides, the higher levels of unemployment rates call attention for the trade-off between prudential regulation on the supply of loans and economic activity, since higher unemployment affect the non-performing loans and, as a consequence discourage the demand, increase precautionary savings, and cancel or postpone investment decisions, thus, affecting the equity market.

Originality/value

The paper provides useful insights to economists and policymakers who are interested in understanding the weakness of banking and stock market sectors to promote economic growth for a long time after the global financial crisis.

Keywords

Citation

Asteriou, D. and Spanos, K. (2022), "The mechanisms linking the finance-growth relationship in view of the financial crisis: an empirical investigation of the EU countries", Journal of Economic Studies, Vol. 49 No. 7, pp. 1240-1268. https://doi.org/10.1108/JES-03-2021-0170

Publisher

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Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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