Abstract
This research paper investigates the determinants of financial development. Credit to private sector is used as proxy of financial development in this study. Panel data from 1990 to 2012 on 27 developed and 30 developing countries has been used. The main interest of the research paper is to explore how different variables or indicators affect the credit to private sector as percentage of GDP (CPS) (We use credit to private sector as percent of GDP (CPS) as proxy of financial development.). The Hausman test is used to check weather fixed effect model is more appropriate or random effect model. Hausman test is in favor of Fixed Effect Model. The role of different important variables which effect the financial development have been found by using fixed effect model. It is concluded from empirical results that all exogenous variables except NFDI and RL have significant effect on financial development.
Highlights
The importance of financial development and economic growth have become more pronounced in recent years; in addition to other vital factors, the long term economic growth and welfare are correlated with the degree of financial development
The credit to private sector can be taken as a proxy of development in financial sector
The overall statistics shows in all panels mean of credit to private sector as a percentage to GDP (CPS) is 172.1862, standard deviation 960.9384 units, minimum value 1.166 and maximum value is 15788.26
Summary
The importance of financial development and economic growth have become more pronounced in recent years; in addition to other vital factors, the long term economic growth and welfare are correlated with the degree of financial development. A strong financial system guarantees the high capital accumulation (the rate of investment), trading, hedging, insurance services, diversified saving and portfolio choices etc. The greater financial development leads to poverty reduction, income inequality, mobilization of savings, better access of the poor to finance, high return investment, promotion of sound cooperate governance and enhancement of economic growth as well as welfare. The key importance of financial development and economic growth is generally acknowledged in the literature. The public debt is often seen as a burden for both developing and developed countries. Since the early 1990s, there has been a fiscal improvement in both developing and developed countries due to restricted public debt; the fiscal adjustment in developed countries has been more noticeable than developing countries (World Economic Outlook, 2001)
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