NEW INSIGHTS ON FINANCIAL DEVELOPMENT: THE IMPORTANCE OF FINANCIAL REGULATORY TRANSPARENCY IN MIDDLE-LOW INCOME COUNTRIES

Abstract

The purpose of this paper is to examine the relationship between financial regulatory transparency and financial development. To achieve this goal, we collect data for 33 middle-low-income countries over the period 1998–2014 and estimate a dynamic panel by the two-step system generalized method of moments. We find that, beyond the standard factors, a higher disclosure of information about macroprudential data of financial institutions is a prerequisite for a well-developed financial system. The positive association between financial regulatory transparency and financial development implies that a transparency-based policy is mandatory to ensure the development of financial systems in middle-low-income economies. We further analyze the potential mediating role of two proxies of financial instability (banking crisis and non-performing loans (NPLs)) in explaining the effect of financial regulatory transparency on financial development. In doing so, our paper provides new evidence and insights into the long-standing discussion of the determinants of financial development.