Abstract
PurposeDespite numerous evidence of policy trade-off in financial inclusion-stability nexus, little is known about the role of governance quality to align policy goals and maximizing the social benefits. Therefore, to fill the gap, this study focuses to investigate the moderating effect of country governance (CG) in the interplay between financial-inclusion (FI) and financial-stability (FS), using a large panel of 84 economies covering the years 2004–2017.Design/methodology/approachFor attaining this objective, the study constructs several indexes for FI, FS and CG using principal component analysis (PCA) and examines how FI influences FS at different CG levels applying advanced econometrics. FindingsThe results show that CG plays a very crucial role in eradicating the trade-off and strengthens the synergy between FI and FS. The findings are insensitive to several robustness validations and could be constructive for policymakers to devise policies and to ensure financial stability.Originality/valueAs far as the authors are aware, this is the only paper that empirically explains CG's role in FI-FS nexus.
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