Finance-Growth-Crisis Nexus In Emerging Economies: Evidence From India, Indonesia And Mexico

Abstract

This paper documents the “finance-growth-crisis nexus” in India, Indonesia and Mexico while controlling for those factors of financial openness (capital account liberalization), trade openness (trade liberalization) and financial structure (stock market development relative to banking sector) as additional variables. Our sample countries are large emerging economies of different regions with high economic growth, various extents of financial deepening and major crisis episodes. The finance-growth-crisis nexus in each of the three countries is examined through the system-based analysis of cointegration in line with Johansen (1988). We also take the element of structural break into estimation by performing the Lagrange multiplier endogenous break test of Lee and Strazicich (2003; 2004). The key findings are: (1) the causal direction of the finance-growth nexus is a country-specific matter; (2) the increasing level of financial deepening significantly causes financial crisis; and (3) the effects of financial openness, trade openness and financial structure on output/finance/crisis are not clear-cut.