The determinants of financial instability in emerging countries

Abstract

Financial integration has greatly contributed to economic growth and development around the globe, in particular for developing countries. However, this process of financial integration has also provided threats in the form of instability which threaten the progress of economic growth and development. The objective of this study is to examine a set of indicators which are valid and indicative of financial instability in the case of developing countries. A panel data of 17 developing countries during the period 2000–2017 is utilized. The credit growth is used as a proxy of financial instability. Standard methods such as the pooled OLS, fixed effect model and random effect model are considered to ensure robustness. Empirical findings from this study indicate that the key determinants of financial instability in developing countries including Vietnam include the GDP growth rate, inflation rate, the growth rate of base money, the change in foreign exchange reserves, lending interest rate, returns in the stock market and the return on equity ratio of the banking sector. Findings from this study appear to support the views of Post-Keynesians in relation to the mechanism leading to financial instability, in particular for developing markets.