Revisiting Determinants of Financial Development? The Role of Financial and Monetary Freedom: Empirical Evidence from the Asia-pacific Region

Abstract

This study aims to assess what determines/improves the overall multidimensional nature of the financial development index and its sub-indices. For this purpose, we use data over the period 1998 to 2017 for 9 countries from the Asia-Pacific region. The hypothesis of no long run relationship between variables is tested via the three-panel co-integration test i.e. Kao test, the Pedroni test, and the Johansen test. We also examine the impact of these variables on each index through long-run dynamic estimation. We utilize FMOLS and DOLS for this purpose. All the three-panel co-integration tests suggest a long-run relationship among variables. Findings from long-run dynamic estimation indicate that efficient regulation of financial services and control over prices by the government significantly influences the financial depth, financial efficiency, and financial access indices. The financial freedom index measured by regulation of financial services negatively influences the indices, suggest that too much government regulation could distort the market. Also, an increasing probability of default of the country's banking system adversely affects the sub-indices of financial development. These findings suggest that too much government regulation of financial services and control over prices along with default of country banking system could worsen the country's financial development situation and vice versa. The promulgation of prudent regulatory policies by financial regulatory institutions is the need of the time to ensure full access to financial services, soundness, and stability of the financial sector.