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Financial conditions and economic growth

Author

Listed:
  • Inekwe, John Nkwoma
  • Jin, Yi
  • Valenzuela, Maria Rebecca

Abstract

This paper relates cross-country growth in real gross domestic product (RGDP) to ex-ante financial distress. For each of the 45 countries covered in the study, we first develop country indices of ex-ante financial distress from firm-level data and then employ an autoregressive model to examine the short and long-run implications of ex-ante financial distress on RGDP. The econometric analysis of over 590,000 firm-year observations over the period 1987–2011/2014 reveals that ex-ante financial distress has a strong negative relationship with growth in RGDP. In particular, we find that ex-ante financial distress lowers growth in RGDP in the short run and this effect persists in the long run. The short-run impact is valid across alternative weights used in the constructed country-level indices. In addition, a standard deviation increase in financial distress generates 0.11 standard deviation decrease in economic growth.

Suggested Citation

  • Inekwe, John Nkwoma & Jin, Yi & Valenzuela, Maria Rebecca, 2019. "Financial conditions and economic growth," International Review of Economics & Finance, Elsevier, vol. 61(C), pages 128-140.
    • Handle: RePEc:eee:reveco:v:61:y:2019:i:c:p:128-140
    DOI: 10.1016/j.iref.2019.02.001
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    Cited by:

    1. Inekwe, John Nkwoma, 2021. "Finance and European regional economy," International Review of Financial Analysis, Elsevier, vol. 78(C).
    2. Seuk Wai Phoong & Seuk Yen Phoong & Shi Ling Khek, 2022. "Systematic Literature Review With Bibliometric Analysis on Markov Switching Model: Methods and Applications," SAGE Open, , vol. 12(2), pages 21582440221, April.

    More about this item

    Keywords

    Finance; Distress; Risk; Panel; Economic growth;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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