Abstract
The paper tests the existence of long-term relations between all the IMF financial development indices and some macroeconomic performance indicators applying panel cointegration tests in a panel with 46 countries, and in a panel including only the sub-sample of the 27 EU countries over the interval 1990-2019. Overall, there are no significant differences between the results obtained for the whole sample and the panel including only the EU countries. The results obtained clearly point to the existence of cointegration between the financial development indices and the real Gross Domestic Product, as well as with the inflation, the unemployment rate, the current account, and the net international investment position. The results also show that there are no significant differences between the results obtained for the financial institutions and for the financial markets indices. Moreover, the results related to the specific aspects addressed by the IMF indices very well demonstrate that much more important than the simple access to or the depth of the financial institutions and markets is the efficiency of these institutions and markets.
Highlights
Well-functioning banking institutions and financial markets are usually considered important and necessary to ensure that credit sectors play their specific role in the processes of economic development, contributing to economic growth, namely by decreasing transaction2021, Vol 11, No 4 costs and the problems connected to asymmetric information.There is a large strand of literature, going back to at least to Schumpeter (1911), who maintained that the services provided by financial intermediaries are essential to economic innovation, productive investment, and economic growth
This paper contributes to the literature confirming the existence of long-term relationships between all the nine indices, representing different aspects of the financial development, that are provided by the International Monetary Fund (IMF) and the five indicators that were chosen to measure macroeconomic performance in a sample of 46 countries over the period 1990-2019
Applying two of the most popular panel cointegration tests the paper provides robust evidence of the existence of cointegration between the overall Financial Development Index, as well as of the Financial Institutions Index and the Financial Markets Index with the real Gross Domestic Product (GDP) and with the other macroeconomic performance indicators, namely the deflator, the unemployment rate and the two indicators related to the international performance: the current account and the net international investment position
Summary
Well-functioning banking institutions and financial markets are usually considered important and necessary to ensure that credit sectors play their specific role in the processes of economic development, contributing to economic growth, namely by decreasing transaction2021, Vol 11, No 4 costs and the problems connected to asymmetric information.There is a large strand of literature, going back to at least to Schumpeter (1911), who maintained that the services provided by financial intermediaries are essential to economic innovation, productive investment, and economic growth. Well-functioning banking institutions and financial markets are usually considered important and necessary to ensure that credit sectors play their specific role in the processes of economic development, contributing to economic growth, namely by decreasing transaction. Despite the overall accepted consensus that financial development is relevant to economic growth, several studies (at least since Khan and Senhadji, 2000) underline that the size of the effects may vary with the estimation methods, data frequency, the defined functional forms of the relationships and very with the variables chosen as financial development indicators. The new financial development index includes nine indices reflecting three dimensions: the depth, the access, and the efficiency of the financial markets and institutions and is nowadays provided by the International Monetary Fund (IMF)
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