Threshold Effects of Inflation on the Banking Sector Performance in the ASEAN-6 Countries

Ngo Nu Dieu Khue () and Ya-Wen Lai ()
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Ngo Nu Dieu Khue: Graduate Program, Department of Finance, National Formosa University, Taiwan.
Ya-Wen Lai: Corresponding author. Associate Professor, Department of Finance, National Formosa University, Taiwan.

Journal for Economic Forecasting, 2020, issue 1, 117-133

Abstract: This study examines the influence of inflation on the banking sector performance in the ASEAN-6 countries, with a focus on the threshold effect of inflation. The empirical study is based on the threshold regression models estimated using the panel data of the ASEAN-6 countries including Cambodia, Indonesia, Malaysia, Philippines, Thailand, and Vietnam over the 1996-2016 period. Using various indicators for the banking sector performance, the results provide strong evidence of the inflation-threshold effect in the relationship between inflation and the banking performance. We find that inflation has a negative effect on each of the size indicators of the banking performance when inflation is below their individual threshold rates, around 4-7%, while this negative effect vanishes as inflation rises above these thresholds. However, the asset-quality indicator worsens only when inflation exceeds 3%. Therefore, the findings would be useful for the policy makers in the ASEAN-6 countries to identify a target-inflation regime that is compatible with their banking systems development.

Keywords: inflation; banking performance; threshold effect; panel data; ASEAN-6. (search for similar items in EconPapers)
JEL-codes: C33 E31 G21 (search for similar items in EconPapers)
Date: 2020
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