The FESSUD Working Paper Series No 35, ‘Financial Stability and Economic Performance‘, co-written by Jérôme Creel, Paul Huberta and Fabien Labondance was recently published in ‘Economic Modelling’.
This paper aims at establishing the link between economic performance and financial stability in the European Union. It uses the seminal framework – both in terms of variables and econometric method – of Beck and Levine (2004) to estimate this causal relationship, independently from but controlling for the level of financial depth. Using a panel GMM with instrumental variables, this contribution is to test how different measures of financial instability (an institutional index,
microeconomic indicators, and our own statistical index derived from a
Principal Component Analysis) affect economic performance (or components
of aggregate dynamics like consumption, investment or disposable income).
It is found that financial instability has a negative effect on economic growth.