The Importance of Financial Stability for Economic Growth: Second Generation Panel Cointegration Test on Fragile Five Countries

Şerife Özşahin

doi:10.64086/SusWel.2025.24

Şerife Özşahin, Çiğdem Karter

Year : 2025
Vol : 3
Issue : 2
Page : 87-102

DOI : 10.64086/SusWel.2025.24

In the aftermath of the 2008 Global Financial Crisis, financial stability, which has been declared one of the common objectives of central banks along with price stability, has become a more frequently discussed topic in economic literature. Financial development, through the reduction of transaction costs and time, provides a framework for interactions between financial institutions and market participants. The dependency between these components of the financial system can cause a problem in one of the institutions to become a systemic risk. It is therefore very important to be able to identify financial instability in advance or to determine its extent. It is not possible to find a single and generally accepted criterion for financial instability in the existing literature. While some studies attempt to measure financial instability on the basis of some macro variables, other studies try to predict instability within the framework of some components of the financial system. In this context, some variables of the banking sector and the stock market as well as some measures of the balance sheets of monetary institutions are important criteria for the instability of the financial system. The aim of this study is to investigate the existence of long-run effect of financial instability on economic growth in the countries defined as the "Fragile Five". Financial instability is measured by three different indicators: non-performing loans, stock market volatility and the Z-score, while economic growth is measured by the rate of increase in real income per capita. The econometric analysis uses second-generation panel data methods, which allow for cross-sectional dependence and heterogeneity, on data compiled by the IMF and the World Bank for the period 2000-2020. The long-run estimates of the cointegration coefficients using AMG approach show that various indicators of financial instability have a significant impact on economic growth in the Fragile Five.

Cite this Article As : Özşahin, Ş., & Karter, Ç. (2025). Finansal istikrarsızlığın ekonomik büyüme için önemi: Kırılgan Beşli ülkeler üzerine ikinci nesil panel eşbütünleşme testi. Sustainable Welfare, 3(2), 87-102.

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The Importance of Financial Stability for Economic Growth: Second Generation Panel Cointegration Test on Fragile Five Countries, Research Article,
2025, Vol. 3 (2)

Received : 21.11.2024, Accepted : 08.12.2025 , Published Online : 29.12.2025