Determinants of Financial Stress: Panel Data Analysis of Emerging Countries

Abstract

This study explores the potential determinants of financial stress in the panel of emerging middle-income countries from 2000-2016. A variety of driving factors of financial stress classified into domestic, global, and institutional factors besides international linkages and regional dummies are taken. The study uses Principal Component Analysis to develop composite indices for the quality of institutions and financial stress. The authors apply various static and dynamic panel data techniques for robustness analysis. Findings underline the role of institutional quality in mitigating financial stress in these countries. Also, the authors conclude that deterioration in country characteristics and external factors stimulate financial stress in the selected countries. The study calls for strengthening the institutional setup that helps reduce political uncertainty, hence financial stress. It further suggests coordination in fiscal policy and mitigating recessionary trends to manage financial stress. It would have been insightful to evaluate the key drivers of financial stress in future through refined measures of political risk.