Abstract
The intrinsic property of modern economic development is financial deepening in the light of incremental spearheading financial innovation opportunities. The paper deals with the relationship between financial depth, financial innovation, and economic growth among 22 OECD economies over 2007–2018 by applying pooled OLS and fixed effect panel data regression analysis. The purpose of the paper is to empirically test whether the economic growth depends on financial depth, financial innovation, and institutional environment (Worldwide Governance Indicators). The findings shed light on the recent discussion on the pros and cons of financial innovation. The estimation results show that while financial depth is a strong predictor of economic growth across high- and upper-middle-income economies, financial innovation is a slightly weaker predictor. Despite the identified positive impact of financial innovation on economic growth, it is asserted that the negative effect of financial depth may indicate oversaturated financial market in developed countries. Сonsistent with the general notion that the institutional framework promotes the capacity of the financial sector for financial innovations implementation, this paper states that financial depth and financial innovations are better prerequisites of economic growth than institutional development. AcknowledgmentThe paper was funded as a part of the “Relationship between financial depth and economic growth in Ukraine” research project (No. 0121U110766), conducted in the State Institution “Institute for Economics and Forecasting of the NAS of Ukraine”.
Highlights
Financial deepening plays a vital role in economic growth, since it helps to mobilize liquidity in financial markets and direct it into financing for innovation, leading to economic growth
Financial depth, which is represented by do- tries during 2007–2018, the study empirically tests mestic credit to the private sector in relation whether the economic development depends on fito GDP; nancial depth, financial innovation, and to some or all of the Worldwide Governance Indicators, which
The obtained results show that, in comparison to financial innovation, financial depth is a stronger predictor of economic growth
Summary
Financial deepening plays a vital role in economic growth, since it helps to mobilize liquidity in financial markets and direct it into financing for innovation, leading to economic growth. Financial depth depends on implementing financial innovations that stimulate the transformation of relationships between central banks, depository corporations, and population. Widespread economic-related uncertainty has brought up the role of financial innovation in minimizing the effects of the economic instability after the COVID-19 pandemic. Over the last decade, a trend towards rapid development of financial innovations (blockchain and related applications, mobile money, etc.) has led to the appearance of new types of financial instruments and intermediaries, explicitly changing payments, savings, borrowing, and investments. Lower funding levels with research and development and lower incentives for innovation investments by private entities characterize developing countries
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