Financial Development Indicators Research Articles

ICT diffusion and financial development: Comparing high, middle, and low-income countries.

Given the importance of ICT diffusion in the development of the financial sector, this analysis is an effort to analyze the transmission channels between the two in high-income and middle and low-income economies over 2001-2019. We have used three variables, including the ICT index, individuals using the internet, and mobile subscribers, to represent ICT and three indices, including the financial development index, financial institution index, and financial market index, to make our results reliable and robust. We utilized a GMM method for conducting the empirical analysis. Generally, our results imply that ICT diffusion positively impacts financial development in high-income economies and negatively impacts middle and low-income economies. Our findings suggest that middle- and low-income-economy policymakers should follow the footprint of the high-income economies and increase the role of ICT in the financial sector for its development.

Financial development and declining growth volatility: explanations and an empirical study with the latest FD index

Growth is liked, but volatility is not. Volatility implies uncertainty, as up and down are often large unpredictable fluctuations. In fact, according to the financial literature, people pay a price to reduce it. Some studies found a trend that macroeconomic volatility has been changing and proposed some structural changes that are responsible for its decline. Many studies have found that financial development helps growth. And relatively few studies have shown that financial development also explains structurally varying macroeconomic volatility. In this panel study, we investigated the relationship between financial development and growth volatility using the Financial Development Index with recent data from eighty-six countries. We also looked at its relationship with consumption and investment fluctuations using its sub-indices. The index is the result of many dimensions of financial development such as access and efficiency, not just the size of credit. We find that financial development reduces growth variability across various horizons, with some signs of heterogeneity and nonlinearity. Institutional development (polity index) and volatility in global economic growth are other important consistent variables.

Workers’ Remittances to Sub-Saharan Africa: Do Institutional Quality and Financial Development Matter?

This paper examines the effects of institutions and financial development on workers’ remittances in sub-Saharan Africa. To achieve the objectives, a two-step system generalized method of moment (GMM) was utilized on a panel dataset of 38 countries in the region from 2005 to 2022. Empirical findings from the study reveal that some institutional indicators, namely, control of corruption, government effectiveness, political stability and rule of law have a significant impact in attracting remittances to SSA. Further evidence reveals that financial development indicators notably domestic credit to the private sector and domestic credit to the private sector by banks have a significant impact on remittances inflow in the region. Financial development indicators are found to complement some of the institutional indicators, such as control of corruption, political stability, government effectiveness, and rule of law on the inflow of remittances to the region. Government efforts should be geared toward improving the institutional framework and ensuring financial market development to increase the amount of remittances inflow to the region.

Environmental performance, financial development, systemic risk and economic uncertainty: What are the linkages?

The paper studies the relationships among the composite indicators of environmental performance, financial development, systemic risk and economic uncertainty for a balanced panel of 57 countries during 2010–2020. The analysis builds on panel local projections by Jordá (2005). In addition to the whole panel, this technique also applies to two sub-panels obtained via the K-means clusterization conditional on a set of composite indicators of environmental performance. We underscore a two-way relationship between systemic risk and environmental performance. An increase in systemic risk improves the environmental quality, albeit to the detriment of economic growth and energy consumption, whereas ex ante higher values of the key composite indicators of environmental performance mitigate systemic risk. Financial development adversely affects environmental performance. Contrary to the prevailing view, this effect is mostly related to the development of financial markets compared to the development of financial institutions. Economic uncertainty is found totally unrelated to the composite indicators of environmental performance. The aforementioned key findings generally hold after splitting the whole panel into the two sub-panels. Overall, our results induce policymakers to treat with caution certain policy recommendations aimed at improving environmental quality, since reducing systemic risk, increasing financial development as a whole or shifting towards a market-based financial system do not necessarily help accomplish this goal.

Nonlinear effects of financial openness on financial development in ASEAN

This study examines the nonlinear effects of financial openness on financial development in the representative ASEAN member states: Indonesia, Malaysia, the Philippines, Singapore, and Thailand. It reveals that with a low (high) level of financial openness, the assets and liabilities of foreign direct investment increase (decrease) equity market capitalization and the financial development, institution, and market indices. We identify a threshold of financial openness where its positive impact begins to diminish; beyond this point, excessive financial openness may become detrimental to financial development. By reassessing the risks associated with financial openness after the Asian financial crisis, we can understand that the potential toxicity amplified by financial openness may pose threats to financial development.

Linking energy-based circularity with environment in high-income economies.

A circular economy is a regenerative approach that emphasizes resource efficiency, waste reduction, and the reuse of materials for a sustainable world. By adopting circular practices, we can reduce the negative impact of traditional linear economic models on the environment. According to the International Renewable Energy Agency (IRENA), the world is generating only 26% of total energy production from circular practices, which positively impacts environmental health. Therefore, this study aims to evaluate the empirical estimation of circular practices regarding energy on the environment. The current study focuses on the association between the circular economic index, economic growth, trade, digitization, energy use, and the financial development index on the environment in 29 high-income countries from 1990 to 2019. The study employs the second-generation econometric technique Driscoll-Kraay to empirically estimate the association among the variables of interestafter confirming cross-sectional dependencywithin the data set. The study findings reveal that circular practices improve high-income countries' environmental conditions. Furthermore, the study confirms the association between economic growth, financial development index, energy use, trade, and digitization on the environment, and it leads to a more sustainable situation. Policies are drawn based on findings for policymakers toward a sustainable world.

Renewable Energy in the Eurozone: Exploring Macroeconomic Impacts via FMOLS

This article examines the relationship between macroeconomic variables and the share of renewable energy in Eurozone countries from 2006 to 2020. Using the Fully Modified Ordinary Least Squares (FMOLS) method, we analyze the impact of Gross Domestic Product (GDP) per capita, unemployment rate, Financial Development Index (FDI), inflation, government efficiency, and corruption control on the proportion of renewable energy. Focused on the Eurozone, our study fills a gap in existing research. We compile diverse findings from the literature review on this topic. Our analysis reveals that higher GDP per capita positively influences the proportion of renewable energy, while unemployment, lower financial development, higher inflation, inefficient governance, and corruption negatively impact renewable energy adoption. These findings underscore the importance of addressing economic development alongside sustainable energy initiatives. Policymakers should prioritize improving GDP per capita, and addressing barriers such as unemployment and corruption to facilitate the transition to a more sustainable energy landscape in the Eurozone.

Geopolitical risk, financial development, and renewable energy consumption: empirical evidence from selected industrial economies.

The rapid rise in climate and ecological challenges have allowed policymakers to introduce stringent environmental policies. In addition, financial limitations may pose challenges for countries looking to green energy investments as energy transition is associated with geopolitical risks that could create uncertainty and dissuade green energy investments. The current study uses PTR and PSTR as econometric strategy to investigate how geopolitical risks and financial development indicators influence energy transition in selected industrial economies. Our findings indicate a non-linear DCPB-RE relationship with a threshold equal to 39.361 in PTR model and 35.605 and 122.35 in PSTR model. Additionally, when the threshold was estimated above, financial development indicators and geopolitical risk positively impacts renewable energy. This confirms that these economies operate within a geopolitical context, with the objective of investing more in clean energy. We report novel policy suggestion to encourage policymakers promoting energy transition and advance the sustainable financing development and ecological sustainability.

Attaining global peace and tourism competitiveness: linkages between tourism, security measures and economic stability

PurposeThe Sustainable Development Goal (SDG) 16 outlines sustainability as associated with peace, good governance and justice. The perception of international tourists about security measures and risks is a key factor affecting destination choices, tourist flow and overall satisfaction. Thus, we investigate the impact of armed forces personnel, prices, economic stability, financial development and infrastructure on tourism.Design/methodology/approachThis research used data from 130 countries from 1995 to 2019, which were divided into four income groups. This study employs a two-step generalized method of moments (GMM) technique and a novel tourism index comprising five relevant indicators of tourism.FindingsA 1% increase in armed forces personnel expands tourism in all income groups – 0.369% High Income Countries (HICs), 0.348% Upper Middle Income Countries (UMICs), 0.247% Lower Middle Income Countries (LMICs) and 0.139% Low Income Countries (LICs). The size of the tourism-safety coefficient decreases from high to low-income groups. The impact of inflation is significantly negative in all panels, excluding LICs. The reduction in tourism was 0.033% in HICs, 0.049% in UMICs and 0.029% in LMICs for a 1% increase in prices. The increase in the global tourism index is more in LICs (0.055%), followed by LMICs (0.024%), UMICs (0.009%) and HICs (0.004%) for a 1% expansion in the gross domestic product (GDP)/capita growth. However, the magnitude of the growth-led tourism impact is greater in developing countries. A positive impact of foreign direct investment (FDI) inflow was found in all panels like 0.016% in HICs, 0.050% in UMICs and 0.119% in LMICs for a 1% increase in FDI inflow. The rise in the global tourism index is 0.097% (HICs), 0.124% (UMICs) and 0.310% (LMICs) for a 1% rise in the financial development index. The increase in the global tourism index is 0.487% (HICs), 0.420% (UMICs) and 0.136% (LICs) for a 1% rise in the infrastructure index.Research limitations/implicationsEmpirical analysis infers important policy implications such as (a) establishment of a peaceful environment via recruitment of security personnel, use of safe city cameras, modern technology and law enforcement; (b) provision of basic facilities to tourists like sanitation, drinking water, electricity, accommodation, quality food, fuel and communication network and (c) price stability through different tools of monetary and fiscal policy.Originality/valueFirst, it explains the effect of security personnel on a comprehensive index of tourism instead of a single variable of tourism. Second, it captures the importance of economic stability (i.e., economic growth, financial development and FDI inflow) in the tourism–peace nexus.

The Relationship Among Trade Openness, Financial Development and Economic Growth Indicators and Income Distribution Inequality: Testing the Kuznets, Financial Kuznets, and Stolper-Samuelson Hypotheses

The Relationship Among Trade Openness, Financial Development and Economic Growth Indicators and Income Distribution Inequality: Testing the Kuznets, Financial Kuznets, and Stolper-Samuelson Hypotheses

The potential of Islamic financing in making financial development more entrepreneurship friendly

Purpose Literature has pointed that conventional financial development theories have inconclusive role on motivating new businesses. New ventures often consider the conventional system that passes through risk and provides fixed-interest lending as a burden. Comparatively, Islamic finance contributes using participative and equitable substitute for startups and has a potential in promoting new businesses. This study aims to investigate the holistic financial development index quadratic effect on entrepreneurship and include the moderating role of Islamic financing at national level. Design/methodology/approach Islamic banks of 21 nations constitute the unbalanced panel data. Financial development and entrepreneurship indices were developed using factor analysis and panel median regression to estimate the nonlinear financial market development effects and Islamic financing moderation model. Findings The results indicated that low financial market development is entrepreneurship deterring because of interest burden effect, which could be eased with a proportional increase in the Islamic financing, which is participative. The moderating effect has led to the categorization of the sample countries into entrepreneurship promoting and entrepreneurship discouraging with respect to the current incidence of financial market development and Islamic financing, which can help policymakers in understanding the entrepreneurship promoting combination of financial development and Islamic financing. Research limitations/implications Central banks and Shari’ah advisory councils can adopt Islamic financing transition in the national financial inclusion policy for new business facilitation. Originality/value This study is instrumental in exploring the assessment of introducing Islamic financing while developing the financial sector on multidimensional entrepreneurship.

Foreign Direct Investment and Financial Development: Evidence from Selected Arab League Countries

This study examined the impact of foreign direct investment on financial development in selected Arab League countries (Algeria, Comoros, Egypt, Jordan, Kuwait, Lebanon, Mauritania, Oman, and Qatar) for the period from 2010 to 2021. The study used one explanatory variable — financial development — and one explained variable — foreign direct investment. To obtain reliable and valid results, panel data were analyzed, and various tests were carried out, including the Chow test, Breusch-Pagan Lagrange multiplier test, Hausman test, Jarque-Bera normality test, Wooldridge test, generalized least squares, and ordinary least squares. The robust model of the study revealed a positive and significant relationship between foreign direct investment and the financial development index, human development index, and interest rate. Also, there is a negative and significant relationship between foreign direct investment and the consumer price index and domestic credit to private sector. Based on these findings, the study recommends that Arab League countries’ policies and strategies should attract foreign investors to maintain and sustain economic developmental goals for healthy, literate, and wealthy lives.

Total Factor Productivity and Financial Development

The main objective of this study is to explore the relationship between total factor productivity and financial development for a group of Latin American countries consisting of Brazil, Colombia, Costa Rica and Mexico covering the period from 1996 to 2019. Total factor productivity, which is considered as one of the main drivers of sustainable economic growth, especially for emerging economies, is the measure of productive efficiency given by the ratio of aggregate output to aggregate inputs. Financial development refers to the development of financial institutions and financial markets. Latin American countries exhibit different levels of both total factor productivity and financial development mainly due to the emerging nature of their economies, which explains the motivation of choosing four of these countries as the sample to analyze the association between total factor productivity and financial development. Data for total factor productivity is taken from the Penn World Table while the Financial Development Index Database provided by the IMF is used in order to examine financial development. The results of this study indicate that countries with higher levels of total factor productivity also have higher levels of financial development. This finding can be interpreted as the outcome of the fact that there are macroeconomic and financial factors determining or similarly influencing both total factor productivity and financial development. Significant policy implications for emerging countries can be inferred from this close connection between total factor productivity and financial development, which constitutes the major contribution of this study to the literature.

Yenilenebilir Enerji Tüketimi ve Piyasa Kapitalizasyonu ile Karbon Emisyonu Arasındaki İlişki: G20 Ülkeleri Örneği”

The research question of whether carbon emissions affect the economic growth and financial development of countries is discussed in the literature. Based on this, this study examines the relationship between carbon emissions (CO2) market capitalisation and renewable energy consumption, which are financial development indicators. The model established with the carbon emissions, renewable energy consumption, market value, fixed capital investments and gross domestic product indicators of the G20 countries between 1992 and 2018 was tested with panel data cointegration analysis and panel causality analysis. As a result of the empirical analysis, it has been found that there is a statistically significant and negative relationship between renewable energy consumption, market capitalisation and carbon emissions, and there is a bidirectional causality relationship between market capitalisation and carbon emissions. The results are that the effective use of energy and the developments in the financial system will contribute to sustainable development policies.

Greening wallets or worsening landscapes: Exploring carbon footprints of renewable energy, tourism, and financial development indices

AbstractSustainable development goals (SDGs) 7 and 13 of the United Nation's 2030 Agenda for Sustainable Development emphasize cheap and clean energy and climate action, respectively. The relentless pursuit of sustainable development has spurred a growing interest in understanding the intricate relationships between carbon footprints, renewable energy practices, tourism, and financial development indices. This research embarks on a comprehensive exploration of the interplay among these critical factors, aiming to unravel the nuanced dynamics that shape our environmental and economic landscape of the top 10 tourist countries from 1991 to 2021. This investigation was conducted through quantile‐based modeling, where the long‐run estimates are achieved through lower, middle, and higher quantiles. Nevertheless, findings suggest that a 1% increase in tourism development will approximately result in a 0.109% to 0.298% increase in carbon footprint in the lower quantile quantiles, that is, the 10th to 30th quantile. In the middle and higher quantiles (40th to 60th and 70th to 90th), 0.313% to 0.565% and 0.721% to 1.369%, respectively. However, renewable energy and financial development index are the significant sources of reducing carbon footprints from the 10th to the 90th quantiles. Still, the intensity of their impacts is heterogeneous among different quantiles. Empirical findings demonstrate that financial development stimulates a growing demand for environmentally sustainable energy sources. Utilizing renewable energy decreases the presence of greenhouse gases in the environment in contrast to the use of fossil fuels. However, renewable energy, tourism, and financial development indices are concluded to be the cornerstones concerning carbon footprints through their distinct impacts. This study's quantile slope equality and symmetric quantile tests further corroborated the findings. Upon the conclusion of the current study, this research has offered policy implications for regulatory bodies and has deliberated on potential avenues for future investigation.

Effect of Economic Growth on CO2 Emission in Africa: Do Financial Development and Globalization Matter?

Carbon emissions are a global issue that has drawn policymakers' and scholars' attention. This study delved into examining the effect of globalization and financial development on carbon emissions within 52 African economies from 1997 to 2002. Energy consumption and population size were also considered controlling factors influencing carbon emissions. The study employs a two-step system-generalized method of moment (GMM) to analyze the effects, using the KOF Globalization Index and the IMF's Financial Development Index. The results indicate that carbon emissions increase with economic growth, energy consumption, and population size. Moreover, this study supports the Environmental Kuznets Curve (EKC) hypothesis. The study also reveals that globalization and its sub-indices, financial development, and financial institutions exhibit a linearly increasing role in carbon emissions. However, financial markets have a negligible effect. Nonlinearly, the squared of globalization and its sub-indices of economic and social dimensions, squared financial development, and its sub-indices exhibit a negative impact, portraying an inverted U-shaped association with carbon emissions. Meanwhile, political globalization follows a U-shaped trend. Additionally, globalization, financial development, and their sub-indices moderate carbon emissions. The implications of these findings underscore the importance of sustainable practices, green financing, and collaborative partnerships for a more environmentally sustainable path.

Financial Development and Real Sector Growth: An Empirical Investigation of Nigerian Economy (1970-2022)

The implementation of several banking sector reforms in Nigeria were undertaken to enhance accessibility of finance to especially, the real sector of the Nigerian Economy, but surprisingly the sector is still bedevilled with inadequate access to finance especially from the deposit money banks that warehoused about 90% of the total financial sector assets. High nominal interest rate is the major cause for many firms to avoid bank-borrowing. These myriad financing challenges facing the real sector calls for the assessment of finance-growth nexus in Nigeria. In this regard, this study examines the long run relationship between selected financial development indicators and real sector growth in Nigeria over the period 1970-2022. Based on the nature of the study, correlational research design was adopted while secondary data source was mainly employed. Johansen and Juselius’ (1990) approach to cointegration and Vector’s Error Correction Modelling (VECM) was used to determine the extent of the relationship between the variables. The findings of the study revealed that in the short-run, liquid liabilities of deposit money banks, trade openness and credit to the private sector exert statistically significant influence on the real sector of Nigerian Economy while in the long-run, liquid liabilities of deposit money banks, trade openness, credit to the private sector, interest rate spread and government expenditure exert statistically significant influence on the real sector of Nigerian Economy. Conclusively, the study affirmed that the Mckinnon and Shaw (1973) theory of Financial Liberalisation can explain the paucity of funding to the real sector of the Nigerian economy. The policy implications of the study are; financial reforms should focus providing low-cost credit and liberalising the interest rate. Also, government and deposit money banks should direct their on-lending activities and credit facilities towards encouraging and financing entrepreneurs to increase investment and in turn real sector growth.

Beyond the resource curse: The multifaceted impact of mineral resources, financial systems, and workforce competence

This research provides a fresh perspective by examining the impact of natural resources and the financial development index on the economic growth of the USA from 1983 to 2021. It utilizes foreign direct investment (FDI) and the human capital index as control variables. Several methodological approaches were employed, including DF-GLS and ADF with breaks for unit root testing, Bayer-Hanck for long-run co-integration, and FMOLS, DOLS, and CCR to ascertain the long-run elasticities among the variables. Robustness checks were performed using various techniques, including least squares regression—with and without breaks—robust least squares and quantile regression as non-parametric methods. To determine the causality, Granger causality analysis was employed. Results identified stable differences in the variables, confirming long-run equilibrium. Principal findings suggest that natural resources positively and significantly impact long-term economic growth, underscoring the ‘resource blessing’ effect in the USA. Moreover, the financial development index was found to stimulate economic growth. Findings from control variables notably affirmed the economic growth in the USA. These outcomes remained consistent and valid across both parametric and non-parametric robustness checks. Causality analysis revealed that FDI, the financial development index, and total natural resources have an uni-directional effect on economic growth, while human capital has a bi-directional causality with economic growth. This study suggests policies to utilize natural resources in tangible sectors further, emphasizing the role of financial development, human capital enhancement, and FDI stimulation.

Causality between Financial Development and Foreign Direct Investment: Evidence from Tanzania

This study investigates the causal relationship between Foreign Direct Investment (FDI) and Financial Development during the period 1990-2020 in Tanzania. The study aims to shed light on whether FDI inflows have a significant impact on the financial development of the country and vice versa. The analysis employs time series data including GDP, Inflation rate, Formation (capital and Investment), Trade Openness, Country Population size, and Financial Development, to explore the causal links. Using the Granger causality test, the study finds no evidence of causality between FDI and Financial Development, indicating that FDI inflows do not significantly predict changes in financial development, and vice versa. Similarly, the study does not find significant causality between FDI and other control variables such as GDP, Inflation, Formation, and Country Population size. However, there is a significant bi-directional relationship between FDI and Trade Openness, indicating complementarity between FDI and international trade. The results imply that FDI inflows might not be the sole determinant of financial development or other macroeconomic indicators. Policymakers should not solely rely on FDI as a solution to enhance financial development but should focus on creating a conducive environment for FDI and supporting measures that foster financial development independently. The study recommends that policymakers should prioritize strengthening institutions and regulatory frameworks to attract and retain FDI effectively. They should also promote trade liberalization and enhance the domestic financial system to stimulate both FDI inflows and domestic investment.

Panel Granger Causality Between Financial Development and Economic Growth

This paper uses panel Granger causality estimations with the approaches developed by Nair-Reichert and Weinhold (2001), and Bangake and Eggoh (2011) to analyse the causality relations between all the nine IMF financial development indices, and the real GDP growth considering a sample of 46 countries spread by all continents over the interval 1990-2017. The results revealed the dynamic character of these causality relations. Overall, no significant differences were found when comparing the results obtained for the financial institutions indices with those regarding the financial markets indices. The results confirm the existence of bidirectional causality, although not with the same statistical robustness for all the IMF indices addressing relevant aspects of financial development: access, depth, and efficiency of the financial institutions and markets.