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Jugnu Ansari and Sarat Dhal
''Macroeconomic implications of financial stability and prudential banking indicators in india: evidence from wavelets and granger causality analyses''
( 2013, Vol. 33 No.4 )
In this study, we demonstrate the relationship of financial stability, as characterised with Basel prudential indicators pertaining to capital adequacy, asset quality, management quality, earnings and liquidity of banks (CAMEL), with economic stability and price stability as reflected in growth and inflation conditions, respectively. Our empirical exercise involves wavelets and Granger causality analysis over time-scale dimensions of the variables. We use quarterly data pertaining to public sector banks group in India, which play a dominant role in the banking system. We find that CAMEL indicators could share statistically significant bi-directional Granger causal relationship with growth and inflation over medium-longer horizons. However, their causal relationship with growth and inflation could not be significant in the short run. Secondly, in terms of smoothed components, banking indicators are not similar with respect to their underlying relationship with growth and inflation. Some indicators including asset quality, management efficiency and liquidity can show non-linear relationship and some others (capital adequacy and earnings) can show linear positive association with growth. Thirdly, the relationship of banking indicators with inflation could be opposite to their relationship with growth. These findings have implications for policy and regulation purposes.
Keywords: Wavelet Analysis, Macroprudential regulation
Manuscript Received : Dec 25 2013 Manuscript Accepted : Dec 30 2013

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