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