Financial Development Policy Research Articles

Financial Development, Monetary Policy, and the Monetary Transmission Mechanism—An Asymmetric ARDL Analysis

This paper’s objective is to examine the asymmetric cointegration and asymmetric effects of financial development and monetary policy on monetary transmission mechanisms in the Nigerian context using annual data spanning the period from 1986 to 2023. This study pushes the frontiers of knowledge by providing information on the nonlinear impacts of monetary policy and financial sector innovations on monetary transmission mechanisms in Nigeria to help policymakers tailor their strategies to local conditions, enhancing the effectiveness of monetary interventions in the economy. To achieve this, this paper adopted nonlinear ARDL models to understand how changes in the direction of monetary policy and developments in the financial system induce changes in the transmission of monetary policy. The findings document the existence of asymmetries in both the short and long run, revealing that the impacts of financial development and monetary policy on the different monetary policy channels are not uniform. These asymmetries indicate that the responses of various economic variables to monetary policy actions differ depending on the level of financial development. These findings underscore the complexity of the monetary transmission mechanism and the necessity for a nuanced understanding of how financial development and monetary policy interact in different contexts. Consequently, this finding is symptomatic of some characteristics of those financial markets on their way toward advanced developments. As the financial system matures, monetary policy may have a greater impact on the cost of short-term funding for banks without having any discernible effect on the rates at which businesses and households access funding. Therefore, this paper recommends focusing on the policies that will foster the financial system across the banking sector, capital market, bond market, and overall financial sector to improve the efficiency of the monetary transmission process.

Intersecting Dynamics: The Influence of Macroeconomic Factors and Financial Development on Interest Rate Spreads in Uganda

The study investigates the factors influencing interest rate spreads in Uganda's banking sector, focusing on inflation, GDP, Real Effective Exchange Rate (REER), private sector credit, and financial development. Using an Autoregressive Distributed Lag (ARDL) model on data from 2001 to 2022, it examines short and long-term dynamics between these variables and interest rate spreads, within the liquidity preference theory framework. In the short run, inflation and GDP have marginally significant positive impacts on interest rate spreads, indicating that initial increases may widen spreads due to heightened liquidity demand and economic activity. Conversely, in the long run, these factors exhibit significant negative effects, suggesting a stabilizing influence of monetary policy and increased market efficiency. The REER's short-term impact reflects currency value fluctuations affecting risk premium adjustments, which diminish in the long run as markets adapt. The study also explores the interaction between inflation and financial development, represented by private sector credit, on interest rate spreads. Short-term results show a non-significant negative moderation by financial development, while long-term analysis suggests a potential amplification of inflation's effects as the financial sector matures, requiring nuanced financial development policies. Policy recommendations stress the importance of stabilizing inflation and exchange rates to control interest rate spreads in the short term. Long-term strategies include enhancing banking sector efficiency and promoting competitive practices to mitigate the negative effects of economic growth on interest rate spreads.

Role of natural resources, renewable energy sources, eco-innovation and carbon taxes in carbon neutrality: Evidence from G7 economies

Global warming has created problems for human life, and it has been increasing for a few years. All the developing and developed countries are establishing policies to attain zero carbon status. This study extends the ongoing debate on carbon emissions. It examines the effect of natural resources and RE (Biofuel and other renewable sources) on greenhouse gas (CO2 emission and PM2.5) emissions while using data over 22 years (1999–2021) from G7 countries. In addition, this study has investigated the effect of carbon taxes, financial development, and environmental policies on carbon neutrality. The cross-sectional-ARDL, the Common correlated effect means group (CCEMG), and the Augmented mean group (AMG) cutting-edge model have been employed. Quantile regression has been employed for robustness. The study results demonstrate that biofuel and other renewable energy (RE) sources, carbon taxes, environmental policy, and eco-innovation decrease greenhouse gas emissions (CO2 emissions). Meanwhile, financial development, and natural resource dependence positively impact carbon neutrality. The robustness result also verifies the findings from CS-ARDL, AMG, and CCEMG methods. The empirical findings are used to infer policy implications for G7 economies.

Japanese stock market sectoral dynamics: A time and frequency analysis

AbstractThis study examines the Japanese stock market connectedness across different sectors, focusing on both the time and frequency dimensions. The dataset used spans from January 1999 to April 2022 and employs various methodologies, including time‐varying parameter vector autoregressions, TVP‐VAR frequency dependency, and Quantile coherency. The empirical findings reveal that cyclical or aggressive stocks predominantly act as net transmitters of shocks across sectors. Moreover, short‐term spillovers are more significant compared to intermediate‐term spillovers, indicating that Japanese sectors are more pronounced to market shocks in the short run. The spillover effects are also asymmetric and vary over time. Additionally, the real estate sector exhibits diversification benefits across different time horizons, while the energy sector provides protection primarily in the short run. This research contributes to the development of financial policies aimed at reducing sectoral imbalances and promoting stable growth. Furthermore, it offers insights for investors seeking to devise optimal portfolio diversification strategies.

Совершенствование трансформации финансовой политики в Российской Федерации в условиях экономической ситуации

The picture of the Russian economy in 2024 is quite bright and optimistic, and the vision for 2030 is fully expressed in the message of the President of the Russian Federation to the Federal Assembly dated 02/29/2024 with commitments on some decisions and huge financial investments. The article examines the concept of financial security of the country in the current economic situation. The development strategy of the Russian Federation, which allows for transformational changes in the country’s financial system, is studied. The development of financial policy is an important economic factor. Due to the growth of the global financial market, the system of assessment and sustainability of the country’s financial security is becoming increasingly important. The indicators of the budget forecast and public debt are considered. The features of digital changes in the financial environment are formulated. The practical significance of the work lies in the possibility of applying the directions of improving the financial policy of the Russian Federation in the context of economic transformation.

ПОЛИТИКА РАЗВИТИЯ ЦИФРОВЫХ КОММУНИКАЦИЙ НА ФИНАНСОВОМ РЫНКЕ

It is determined that the implementation of strategic vectors will make it possible to realize the main tasks of developing the financial services market and digitalizing the financial market, improving the quality of financial services and accessibility of financial products and services for the population and business of the Russian Federation. The key directions of the development of financial policy in the field of digital communications in the period 2024 are the strategic regulation of the turnover of large databases, the formation of new ecosystems and the development of already formed ecosystems, the development of new forms and types of non-bank payment service providers, improving the quality of electronic document management and interaction between financial market participants, government, business. The Central Bank of the Russian Federation continues to actively develop and implement technologies in the field of information security in order to implement strategically important policy directions for the development of digital communications in the financial market. A systematic list of digital communications in the financial market is presented, the main results of scientific research are systematized and the main factors of the development of digital communications are highlighted, which will allow taking into account these factors for the development of a set of measures when forming a policy for the development of digital communications. The key policy directions for the development of digital communications in the financial market have been identified, which will become the basis of the financial market development strategy in the near future and include the main directions of state policy, which is regulated by the Central Bank of the Russian Federation.

Impact of Financial Development on Economic Growth during the Subprime Mortgage Crisis: Evidence from BRICS

The progress and advancement of any country rely significantly on the optimal functioning of its financial sector. Much of the literature is devoted to the analysis of developing countries regarding the impact of financial development on economic growth. However, in the wake of the global financial crisis, the issues and implications needed to be rethought. This study explores the impact of financial development on economic growth with respect to the mortgage crisis using 5 BRICS countries over the period of 1990–2019. The study follows the Interactive regression to find the impact of financial development on the economy with respect to the crisis. The paper employs both random effects and fixed effects to draw conclusions. The results demonstrate that before the crisis, stock market capitalization, liquid liabilities and stock market turnover had a significant impact on economic growth. Furthermore, stock market turnover helps to stabilize the economy in the ongoing crisis. BRICS states should consider the significance of these results as part of their potential financial development policy and strategy necessary to strengthen the economy.

Financial development, resource richness, eco-innovation, and sustainable development: Does geopolitical risk matter?

Financial development and geopolitical risks can significantly affect sustainable development. However, the roles of these factors in sustainable development are rarely investigated. Thus, this study takes into account the role of geopolitical risk while exploring the effects of financial development, natural resource rents, and eco-innovation on sustainable development in the Organization for Economic Co-operation and Development (OECD) countries. To this end, yearly data from 1990 to 2019 is analyzed using advanced econometric tests. The Common Correlated Effects Mean Group (CCEMG) results indicate that financial development and eco-innovation are significantly and positively related to sustainable development. Natural resource rents have a detrimental impact on sustainable development which confirms the presence of the resource curse hypothesis in OECD countries. Furthermore, the results revealed that controlling geopolitical risk is useful in fostering sustainable development. Lastly, the panel Granger causality test unveiled one-way causality from financial development, eco-innovation, natural resource rents, and geopolitical risk to sustainable development. Moreover, causalities are found from geopolitical risk to financial development, eco-innovation and natural resources. These findings suggest that OECD countries should prioritize financial development and eco-innovation policies for sustainable development while mitigating the negative effects of natural resource rents. The geopolitical risk can harm sustainable development, so policymakers should promote international cooperation and risk-sharing.

Evaluating the influence of green growth, institutional quality and financial inclusion on financial stability: evidence by sustainable finance theory.

Financial stability is essential for economic growth because it fosters confidence and trust and promotes investment in green development. However, it is a dilemma for the world economies to create an equilibrium between financial stability and environmental sustainability. In the extent of these challenges, the present study aims at grabbing the link of financial inclusion to attain financial stability. Further, the present study investigates the association of institutional quality, renewable energy, green growth, environmental sustainability, and financial inclusion with financial stability. Two basic econometric models are applied that focused on the basic and interaction term outcomes. In addition, principal component analysis (PCA) is analyzed to design an index for five proxies of financial inclusion. Additionally, the research inspected the interaction term of institutional quality and financial inclusion (FIN*INSQ) and determined the multiplied impact on financial stability in a separate model. This research employed the linear autoregressive distributed lag approach from 1990 to 2020 for long- and short-term dynamics. Theoretically, the research supports the sustainable finance and financial development theory. Hence, results showed that financial inclusion and institutional quality are positively associated with financial stability, while green growth, environmental sustainability, and renewable energy mechanisms are achieved through financial stability. Following our findings, the government should establish consistency between financial development and economic policies to maintain financial instability and ensure financial soundness. Furthermore, countries require viable financial institutions prioritizing green growth and institutional quality to achieve financial stability and long-term development.

IMPACT OF EXTERNAL DEBT ON FINANCIAL DEVELOPMENT: AN EMPIRICAL ANALYSIS OF SELECTED EAST ASIAN AND PACIFIC COUNTRIES

This article explores the impact of external debt on financial development in a group of fifteen selected East Asian and Pacific countries from 1992 to 2021. These countries include Cambodia, China, Fiji, Indonesia, Lao PDR, Mongolia, Myanmar, Papua New Guinea, the Philippines, Samoa, the Solomon Islands, Thailand, Tonga, Vanuatu, and Vietnam. Data were extracted from the World Bank and International Monetary Fund databases. This study employs random effects and fixed effects models, Driscoll-Kraay standard errors, and the generalized method of moments to test two hypotheses. The results indicate that external debt has a positive impact on the financial development of these East Asian and Pacific countries, where economic growth plays a vital role in promoting financial development. Additionally, a nonlinear impact of external debt on the financial development of these East Asian and Pacific countries is observed. Based on these findings, it is recommended that appropriate financial development policies be implemented in the identified countries.

Does financialization enhance renewable energy development in Sub-Saharan African countries?

This study examines the influence of financial development, fiscal policy, and foreign capital on renewable energy development in 21 Sub-Saharan African nations from 2000 to 2021. The aim is to address the dearth of information on how the financial sector affects renewable energy. Using panel data and the Panel Quantile Autoregressive Distributed Lag (PQARDL) technique, we analyze the short- and long-term impacts of these factors while considering industrialization and institution quality. Our findings indicate that financial development and fiscal policy pose significant obstacles to renewable energy development across all quantile distributions in the long run. However, foreign capital positively contributes to renewable energy development across most quantiles, except the 70th quantile. We also observe a declining trend in Sub-Saharan Africa's share of renewable development due to industrialization and institutional quality in the long term. Furthermore, the interactive roles of fiscal policy and institutional quality hinder renewable advancement in the region over time. These empirical outcomes provide valuable insights on how to attract foreign capital and allocate investments in renewable development. By doing so, we can offer consumers cost-competitive choices and strive towards extending high-value-added facilities within a sustainable environment.

The Nexus Between Green Entrepreneurship and Sustainable Development: An Econometric Study

Rising industrialization helps with economic growth and is responsible for environmental pollution as well as global warming. Here, green entrepreneurs play a significant role in the reduction of this environmental pollution and sustainable development. Although the study of green entrepreneurship and its relationship with economic, social and financial growth is limited and at a nascent stage. Therefore, this study examines the relationships among green entrepreneurship and credit policy, financial development, sustainable development goals and trade openness using the ‘Environmental Kuznets Curve (EKC) hypothesis’. From this perspective, 114 countries worldwide are considered and subdivided into three sub-categories, including lower-income, middle-income and higher-income countries, based on panel data collected from the World Bank’s database. Descriptive statistics, a cross-sectional dependence test, a unit root test, long-run estimations and a multicollinearity test have been used for the data analysis. The findings of the study show that green entrepreneurship decreases environmental pollution throughout the world and enhances financial development and credit policy around the world. Likewise, income per capita helps with credit policy, economic development and green entrepreneurship. Moreover, environmental factors are positively associated with financial development and sustainable development goals. Finally, the EKC hypothesis supports the relationship for all variables throughout panel and subpanel data. Additionally, these findings could help policymakers improve policies for managing environment-friendly products and enhance green funding, considering clean investment and other green aspects of sustainable development.

Do financial technology and financial development lessen shadow economy? Evidence from BRICST economies using heterogenous bootstrap panel causality

This study examined the role of financial technology (FinTech) and financial development in determining the shadow economy in the BRICST countries, using data from 2004 to 2018. The study also analyzed the moderating impact of financial technology on the financial development and shadow economy nexus. The study employed Breusch-Pegan LM (1980) and Pesaran (2004) tests for investigating cross-sectional dependency, followed by Pesaran's (2007) CADF panel unit root test. The study applied Westerlund's (2007) panel cointegration and CS-ARDL approach for examining cointegration and estimating long-run relationships. Moreover, Konya's (2006) panel causality is also applied to examine the possible causal relationship among the variables. The study explored that financial sector development and using financial technology are negatively related to the shadow economy. The study also found the significant moderating role of financial technology in the financial development and shadow economy nexus. Furthermore, the results highlighted a bidirectional causal relationship between economic growth and the shadow economy in South Africa, India, and Russia. A bidirectional causality between financial technology and the shadow economy is also identified in India and Russia. Finally, based on empirical results, financial development, and technology-related policies are suggested for policymakers to curtail the shadow economy.

Exploring the linkage between financial development and ecological footprint in APEC countries: A novel view under corruption perception and environmental policy stringency

Balancing economic growth and a sustainable environment has been a concern for governments. However, it has been observed that sustainable development is related to economic factors, the institutional environment, and the effectiveness of environmental regulatory policies. This study empirically investigates the relationship between financial development, strict environmental regulations, corruption, foreign direct investment, trade openness, renewable energy consumption, and ecological footprint. We used annual panel data of Asia-Pacific Economic Cooperation countries from 1994 to 2018 to fill the research gap. The present study follows a perspective that produces reliable and robust results using Fully Modified Ordinary Least Squares and panel fisher causality analysis. The long-run flexibility estimates calculated with the Fully Modified Ordinary Least Squares approach explain the inverted U relationship between financial development and ecological footprint. Long-run elasticity estimates suggest that strict environmental policies, renewable energy consumption, financial development and corruption, and the interaction of financial development and strict environmental policies reduce the ecological footprint. In addition, foreign direct investment and trade openness are found to increase the ecological footprint. This confirms the pollution haven hypothesis in Asia-Pacific Economic Cooperation countries. According to the causality test results, bidirectional causality relationships were discovered between ecological footprint and financial development, strict environmental policies, corruption, renewable energy sources, foreign direct investment and trade openness. We suggest that institutional financial framework and financial development for APEC countries will reduce environmental degradation in the long run, and sustainable development can be achieved through the institutional environment and the effectiveness of environmental regulatory policies.

How do financial development and environmental policy stringency affect renewable energy innovation? The Porter Hypothesis and beyond

Multiple studies have examined the effects of financial development on renewable energy consumption, but little is known about its impact on renewable energy innovation. The validity of the Porter Hypothesis (PH) in renewable energy industries—that is, whether stricter environmental policies promote innovation—remains unclear. This study explores the effects of financial market development and environmental policy stringency on renewable energy innovation, as well as whether renewable innovation differs with levels of stringency of environmental policy and levels of development of the financial market. We apply a nonlinear panel threshold model to the 37 member countries of the organization for Economic Co-operation and Development (OECD) from 1990 to 2019. The results show that as financial development increases, its impact gradually declines, and that as environmental policy becomes more stringent, its impact rapidly increases. This finding implies that financial development is associated with greater increases in renewable innovation in countries with a medium level of financial development, and that stricter environmental policies can be used by OECD countries to increase innovation. This study therefore confirms the validity of the PH as well as the financial development effect on renewable innovation in OECD countries. It also finds that international oil prices and the level of research and development expenditure have significantly positive effects on renewable innovation. Policy suggestions for developing financial markets and increasing policy stringency are proposed.

Women Entrepreneurs in East Africa: How Women Integration can boost Entrepreneurial Solutions to Sustainable Development. A Review of Literature

Women’s contributions to sustainable development and trade development are recognized at the national level in the East African community nation’s Frameworks for financial development and trade policy. This paper focuses on examining how women’s Integration can boost Entrepreneurial Solutions to Sustainable Development in the East African Community member states of Burundi, the Democratic Republic of Congo (DRC), Kenya, Rwanda, South Sudan, Tanzania, and Uganda. The researcher employed secondary data to conduct a thorough literature search. On how Women’s Integration can boost Entrepreneurial Solutions to Sustainable Development in the East African community context. The findings indicated that overcoming obstacles including inadequate market access, market competition, Poor business education, inadequate infrastructure, a lack of resources, a lack of access to raw materials, an unreliable electricity supply, and a lack of marketing knowledge, production restrictions, and a lack of storage space. Additionally, having few contacts outside of prejudice and class bias, lack of social acceptance, relationships with the workforce, attitudes of other workers, and society’s low opinion of women are the bigger social hurdles for them to choose entrepreneurship in the East African community Fellow Countries. As a result, the report suggests that governments of East African Community Member States improve state subsidies, create welcoming workplaces, and The East African community region as a whole needs to embrace gender and strengthen the position of women in the advancement of culture, society, politics, the economy, and technology. Member Nations should encourage gender equality and women, effective assimilation, engagement in sustainable growth at all levels, especially in the outcome; eradicate discrimination laws and customs; support efficient education awareness programs aimed at changing negative attitudes toward women, and develop or embrace new technology that will ensure the security of occupation and certified success for females.

The financial Kuznets curve of energy consumption: Global evidence

In this study, we explore the simultaneous existence of a Financial Kuznets Curve -an inverted U-shape relation between financial development and energy consumption- and Income Kuznets Curve -an inverted U-shape relation between income and energy consumption-for a panel of 85 countries. In terms of the financial Kuznets relation, we compare the effects of three stock market development indicators (i.e., stock market capitalization ratio, stock market value traded, and stock market turnover ratio) with the counterpart effects of three credit market indicators (i.e., domestic credit provided by the banking sector, liquid liabilities, and broad money supply. Drawing on the existing literature, we control for changes in country openness, natural resource endowments, and inflation by applying four methods in parallel: the parametric analysis (dynamic system GMM), and the non-parametric (panel quantile regression) as a robustness check. The results for both Kuznets curves are robust to all four methods. They indicate a simultaneous existence of an income Kuznets curve and a Financial Kuznets Curve when the indicators of the stock market development are considered. However, no Financial Kuznets Curve exists with respect to the credit markets’ development. When the credit markets are considered, only the income Kuznets curve is detected. The existence of a relationship between the stock market development and energy consumption has implications for national energy policies. Stock markets should be used actively for the promotion and funding of “green finance” industrial projects, encouraging innovation and new technologies for cleaner production. Our findings are also useful for crafting different financial development policies for countries that are seeking to encourage or discourage energy consumption.

Quantity or quality? The impact of financial geo-density on firms' green innovation.

Green innovation is an essential support for environmentally sustainable development. However, little attention has been given to the impact of financial expansion on green innovation in the existing literature, and there is a lack of studies based on the perspective of the financial geographical supply structure. This study uses latitude and longitude information to construct firm-level financial geo-density data in China. It examines the impact of financial geo-density on a firm's green innovation and mechanisms. The results reveal that as financial geo-density increases, green innovation quantity increases, but green innovation quality decreases. The findings of the mechanism test indicate that an increase in financial geo-density decreases the cost of financing and boosts bank competition in the vicinity of the firm, hence resulting in a rise in the firms' green innovation quantity. Nevertheless, the degree of bank competition increased by financial geo-density increase negatively affects firms' green innovation quality. Heterogeneity analysis shows that financial geo-density has a more significant positive impact on a firm's green innovation quantity in high environmental regulation areas and high-pollution industries. Firms with low innovation capabilities are the main group responsible for the decline in green innovation quality. For firms located in low environmental regulation areas and medium- to light-pollution industries, financial geo-density has a more significant inhibition effect on green innovation quality. Further tests have shown that the extent to which financial geo-density enhances a firm's green innovation quantity diminishes as market segmentation increases. A new concept of financial development policies based on green development and innovation is presented in this paper for developing economies.

How does financial development change the effect of the bank lending channel of monetary policy in developing countries?—Evidence from China

This study investigates the relationship between financial development (FD) and monetary policy effectiveness in developing countries using China as a case. The traditional view argues that the relationship between FD and the role of the bank lending channel (BLC) of monetary policy has an inverted U shape. However, in this study, we find that this may not be the case. The results depend on how the types of FD indicators are classified. For developing countries such as China, financial reform does not necessarily improve the financial marketization level. Therefore, FD produces two effects: the market-oriented effect (FDM) and scale effect (FDS). The effect of the former is an inverted U-shape while that of the latter is a U-shape. Previous studies mainly focused on FDM thus ignoring FDS. In our, study, we find that the relationship between FD and the role of BLC is affected by the heterogeneity of enterprises.

How renewable energy investment, environmental regulations, and financial development derive renewable energy transition: Evidence from G7 countries

Renewable energy transition is an imperative agenda of the Conference of the Parties. It has a tremendous role in limiting carbon emissions, and environmentalists have recently highlighted the critical need to identify the factors influencing the energy transition. By evaluating the evidence of the G7 from 2000 to 2020, this study broadens the scope of this argument by providing potential determinants of the energy transition. This study explores the dynamic influence of renewable energy investment, financial structure, and environmental regulation on renewable energy transition. The study applied the cross-section autoregressive distributed lag (CS-ARDL) model to resolve the issues of slope heterogeneity and cross-section dependency in panel data analysis. The results exhibit that green energy investment, financial development, and environmental policy stringency stimulate sustainable energy transition in the long run. Manifestly, the interaction term of financial development and ecological regulations offer comparatively stronger influence than their individual effects, implying that effective environmental regulations direct the movement of financial resources toward the renewable energy transition. Similar results are also affirmed through the augmented mean group estimator. It suggests that the policymakers would formulate integrated policies to strengthen the ecological regulations and financial sector development, reducing financial barriers and introducing new green financial products.