Estimating the Nonlinear Effect of Financial Liberalization and Macroeconomic Variables on Bank Productivity: Evidence from Selected Developing Countries

Abstract

This study was carried out aimed to examine the effect of financial liberalization and macroeconomic variables (inflation, economic growth, institutional factors, human capital and business environment) on bank productivity in 15 selected developing countries during the period 2006 to 2017 using Markov switching econometric technique. According to the estimation results, the financial liberalization index in the first regime (boom period) has a positive effect on the number of bank branches, but in the second regime (bust period), has a negative effect. In both regimes, inflation and business environment have a negative effect on the number of bank branches, but economic growth and human capital have a positive effect on the number of bank branches. The hybrid index of institutional factors in the first regime has a negative effect on the number of bank branches, but in the second regime, it has a positive effect on the number of bank branches.