Abstract:
1. Introduction
Financial stability is important in ensuring sustainable economic growth,
especially in emerging economies. It has enormous importance in fostering
economic growth, while financial stability in middle-income Asian
economies remains inadequately explored. This study attempted to study
the effect of Financial Stability (FS) on Economic Growth (EG). This topic
has emerged in the academic debate since the crisis (Beck et al., 2014).
The Financial Stress Index was the proxy for FS and Gross Domestic
Product (GDP) as the EG measure. Inflation (Inf), Trade Openness (TO), and
Money Supply (MS) were the control variables.
2. Research Methodology
A quantitative approach was adopted to analyze the causal relationship
through the adoption of a positivist research philosophy. Short panel data
analysis techniques were used to examine the relationship between
explanatory variables and EG while the sample consisted of 17 middle-
income Asian countries, and the sample period was 12 years from 2008 to
2019. The 17 countries were selected based on data availability.
3. Findings and Discussion
The estimated results indicate that FS and TO present a significant positive
effect on (EG) implying a high FS and TO lead to an increase in EG in the
short and long run. Furthermore, there is a significant negative effect of INF
and MS on the EG.
4. Conclusion and Implications
This study empirically reveals that financial stability is a prerequisite for
economic growth in middle-income Asian countries. The findings
underscore that maintaining Financial Stability is a significant factor in
achieving sustainable economic growth. Hence, policymakers must focus
on developing policies to enhance financial stability, foster balanced
economic development, and mitigate inflationary effects.
