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This paper studies the relationship between the degree of banking sector stability and the subsequent evolution of real output growth and inflation. Adopting a panel VAR methodology for a sample of 18 OECD countries, the authors find a positive link between banking sector stability and real output growth. This finding is predominantly driven by periods of instability rather than by very stable periods. In addition, they show that an unstable banking sector increases uncertainty about future output growth. No clear link between banking sector stability and inflation seems to exist. They then argue that the link between banking stability and real output growth can be used to improve output growth forecasts.
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