Abstract
Motivated by the unprecedented high levels of recent economic policy uncertainty, the current study examines the influence of economic policy uncertainty, institutional quality, and corruption level on the Indian banking stability and the growth of digital financial services. Using the Baker et al.’s economic policy uncertainty index and nonlinear autoregressive distribution lag model on the data set of banking variables from 2004 to 2019, we infer the following findings. The unit root and the structural break tests confirm the presence of structural breaks and mixed order of integrations. Besides, the long-run nonlinear autoregressive distribution lag results substantiate a long-run asymmetric relationship between the explanatory variables (economic policy uncertainty, institutional quality, corruption level) and the outcome variables (digital banking services and banking stability). The study reveals that a 1 percent increase in the economic policy uncertainty increases nonperforming loans (proxy to measure banking stability) by 1.48 percent and decreases Z-score (proxy to measure banking stability) by −1.12 percent. Likewise, a 1 percent increase in policy uncertainty reduces the progress of digital financial services by −1.23 percent in India. In addition, the study also depicts a long-run cointegration between the explanatory and the outcome variables. Overall, the study shows significant evidence that policy uncertainty, corruption, and institutional regulation hampers Indian banking stability and digital growth. The study offers several policy implications to understand the adverse effects of economic policy uncertainty on the Indian banking sector.
Highlights
Over the years, the financial crisis has garnered the attention of researchers to investigate the influence of macroeconomic instabilities on the countries’ economic and banking structures [1]
Policy uncertainties weaken institutional regulation and increase corruption, promoting the chances of banking instability in the economy [12]. This current study examines the influence of institutional variables (EPU, institutional regulation, and corruption levels) on Indian banking stability and the growth of digital banking services
In addition to studying the impact of economic policy uncertainty on banking stability and digital financial services, we have examined the influence of institutional regulation and corruption level on banking stability and digital financial services
Summary
The financial crisis has garnered the attention of researchers to investigate the influence of macroeconomic instabilities on the countries’ economic and banking structures [1]. The novelty of this paper relies on the following aspects To begin with, this is the first study, as per the authors’ knowledge, which investigates the influence of economic policy uncertainty on the Indian banking stability and digital financial services. Previous studies have concluded that the growth in digital financial services enhances financial inclusion and contributes toward banking sector stability We can collaborate this from the case of developed countries [19]. To measure the corruption level, unlike previous studies, we have employed the newly developed corruption index of the International Country Risk Guide (ICRG), which is more robust and precisely captures the financial corruption level in the economy This will add to the existing literature on the nexus between EPU, institutional regulation, corruption level, banking stability, and digital financial services. The last section covers the concluding remarks and policy implications
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