Financial System Risk Tolerance Capacity and Economic Growth: Evidence from a Cross-country Analysis

Ling Zhang, Sheng Zhang and Na Tao

Global Economic Review, 2016, vol. 45, issue 2, 97-115

Abstract: This article develops a new indicator of financial system risk tolerance capacity to see how the financial risk management function mechanism reacts to economic growth by applying a system generalized method of moments estimation technique. Based on a sample of 49 countries for the period 1998--2011, we find that both bank and stock market risk tolerance capacity can significantly promote long-run economic growth through absorbing and bearing real economic risks. These findings indicate that financial system risk tolerance capacity, which provides a powerful trial and error system, has a positive effect on long-term growth. Therefore, the policy implication is that releasing controllable financial risks actively and moderately beforehand may support scientific and technological innovation, maintain financial stability and, finally, promote long-run economic growth.

Date: 2016
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DOI: 10.1080/1226508X.2015.1124343

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