Abstract:
Based on panel data from 91 countries over the year of 1983 to 2012, this paper analyzes the effects of financial deleveraging and financial leverage volatility on economic growth and financial stability by using system GMM estimation. The empirical analysis yields the following results: (1) there is a robust negative relationship between financial deleveraging and economic growth and the deleveraging process is generally associated with higher probability of financial crisis; (2) the volatility of financial leverage has a negative impact on both economic growth and financial stability. These conclusions have explicit policy implications for economic growth and financial stability. First, to prevent the excessive leverage of the financial system, preemptive measures should be taken to strengthen the macroeconomic management of financial leverage. Second, in the passive deleveraging process of the post-crisis period, to escape economic recession and financial instability caused by fast financial deleveraging, the policy authority should adopt progressive strategies and fully consider the smoothing operation of policy implementation.
Adrian, T., and N. Boyarchenko, 2015, “Intermediary Leverage Cycles and Financial Stability,” Federal Reserve Bank of New York Staff Reports, No. 567.
[11]
Arellano M., and O. Bover, 1995, “Another Look at the Instrumental-Variable Estimation of Error-Components Models”, Journal of Econometrics, 68: 29~51.
[12]
Arellano M., and S. Bond, 1991, “Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations”, Review of Economic Studies, 58: 277~297.
[13]
Avgouleas, E., 2015, “Bank Leverage Ratios and Financial Stability: A Micro and Macroprudential Perspective”, Levy Economics Institute Working Paper, No. 849.
[14]
Bezemer, D., and L. Zhang, 2014, “From Boom to Bust in the Credit Cycle: the Role of Mortgage Credit”, Working Paper.
[15]
Bhattacharya, S., Goodhart, C., Tsomocos, D., A. Vardoulakis, 2011, “Minsky’s Financial Instability Hypothesis and the Leverage Cycle”, LSE Financial Markets Group Paper Series Special Paper, No. 202.
[16]
Bouis, R., A. Christensen, and B. Cournède, 2013, “Deleveraging: Challenges, Progress and Policies”, Economics Department Working Papers, No. 1077.
[17]
Buttiglione, L., P. Lane, L. Reichlin., and V. Reinhart, 2014, “Deleveraging? What Deleveraging”, Geneva Reports on the World Economy, No. 16.
[18]
Cuerpo, C., I. Drumond, J. Lendvai, P. Pontuch, and R. Raciborski, 2013, “Indebtedness, Deleveraging Dynamics and Macroeconomic Adjustment”, European Economy, Economic Papers,No. 477.
[19]
Dermiguc-Kunt, A.,Karacaovali, B. and L. Laeven, 2005, “Deposit Insurance Around the World: A Comprehensive Database,” World Bank Policy Research Working Paper,No. 3628.
[20]
Devlin, W., and H. McKay, 2008, “The Macroeconomic Implications of Financial Deleveraging”, Working Paper.
[21]
Greenlaw. D., A. Kashyap, and K. Schoenholtz, 2012, “Stressed Out: Macroprudential Principles for Stress Testing”, Chicago Booth Paper No. 12~08.
[22]
Glick, R., and K. Lansing, 2009, “U.S. Household Deleveraging and Future Consumption Growth”, FRBSF Economic Letter, No.16.
[23]
Hinrichsen, S., 2012, “The Deleveraging Cycle”, Working Paper.
[24]
Laeven, L, and F. Valencia, 2012, “Systemic Banking Crises Database: An Update”, IMF Working Paper, No. 12/163.
[25]
Lund, S., C. Roxburgh, and T. Wimmer, 2010, “The Looming Deleveraging Challenge”, McKinsey Quarterly, Working Paper.
[26]
Mian, A., and A. Sufi, 2011, “What Explains High Unemployment? The Deleveraging – Aggregate Demand Hypothesis”, University of California, Berkeley and NBER, Working Paper.
[27]
Roxburgh, C.,S.Lund,T. Wimmer, E. Amar, A. Charles, J.H. Kwek, R. Dobbs, and J. Manyika, 2011, “Debt and Deleveraging: The Global Credit Bubble And Its Economic Consequences”, McKinsey Global Institute, Working Paper.
[28]
Shilling, A., 2012, The Age of Deleveraging, Updated Edition: Investment Strategies for a Decade of Slow Growth and Deflation, New York: John Wiley Press.
[29]
Tepper, A., and K. Borowiecki, 2014, “A Leverage-Based Measure of Financial Instability”, Federal Reserve Bank of New York Staff Reports, No. 688.[30 Valencia, F., 2014, “Monetary Policy, Bank Leverage, and Financial Stability”, Journal of Economic Dynamics and Control, 47: 20~38.
[31]
Windmeijer, F., 2005, “A Finite Sample Correction for the Variance of Linear Efficient Two-Step GMM Estimators”, Journal of Econometrics, 126: 25~51.
