Financial globalization, institutions and economic growth impact on financial sector development in fragile countries using GMM estimator

Abstract

Purpose- The aim of the research is to predict the impact of financial globalization, institutional quality and economic growth on financial development in fragile economies. In this paper the panel data consists of Turkey, Brazil, India, South Africa, Indonesia, Argentina, Egypt, Pakistan’s annual data from 1995-2017. Methodology –System GMM dynamic panel data approach has been applied to deal with simultaneity bias and endogeneity bias when the explanatory variable is correlated with the residual disturbance term. The System GMM estimator combines regression in differences with regression in levels to get rid of the individual specific effects and along with it any time invariant regressor. The models are estimated by using one step system GMM estimator in other words Arellano and Bover /Blundell and Bond System Generalized Moments Method. Findings- The results show that economic growth and financial development are positively related. Thanks to financial development interest rates can be determined by market conditions and financial intermediaries can minimize transaction costs and information acquisition costs can be minimized. Empirical findings suggest policy guidelines for developing financial sector by using economic growth as an economic instrument. Conclusion- The paper concludes that economic growth have significant impact on financial development so both financial institutions and financial markets development in fragile countries. For less developed countries, developments in institutions are likely to have far greater direct effects on growth than financial development itself. When the financial system is developed, Institutional improvements can also deliver more growth. Since global standards for institutions such as International Country Risk Guide, Global Government Indicators increase, it seems also developing ountries are aware of the importance of institutional quality on economic growth. The findings suggest that financial development is affected by economic growth, inflation and population in fragile countries.