Measures Of Financial Development Research Articles

Finance, talent and income inequality: Cross-country evidence

This paper investigates the relationship between financial development and income inequality by taking the role of individuals' talent into account. We measure talent using the direct observations of individuals’ achievements before entering the labor force by using the Program for International Student Assessment (PISA) scores. We employ the FE, IV-RE, 2SLS and System GMM models to a panel data of 46 developed and developing countries for the period 1998–2012. We also use principal component analysis (PCA) to construct a reliable measure of financial development. The paper finds that financial development is negatively associated with income inequality. The paper also shows that countries with higher PISA scores experience lower income inequality while the marginal effect of financial development on income inequality varies by the level of PISA scores. Moreover, the results do not suggest evidence of nonlinearity between financial development and income inequality.

Global Imbalances: The Role of Institutions, Financial Development and FDI in the Context of Financial Crises

This paper examines the role of the quality of institutions, financial development and FDI on current account imbalances, which narrowed during the Global Financial Crisis. In doing so, we utilize (i) a sample of 49 advanced and emerging economies during 1984–2014; (ii) a novel three-clustered indices of institutional quality and (iii) two measures of financial development, the share of FDI and a measure of financial crisis in addition to standard determinants of the current account. We find that the better the quality of institutions and the greater the financial development, the larger are current account deficits; meanwhile, FDI contributes to boost current account balances. Moreover, financial crisis episodes tend to improve current account balances, particularly for countries that are highly open to trade and to receive FDI, as in the case of advanced economies and East Asian countries.

Financial Development, Financial Openness and Economic Growth in Nigeria

This study examined the impact of financial development and financial openness on economic growth in Nigeria between 1981 and 2019. This was done through the use of the Auto-Regressive Distributed Lag (ARDL) model. In doing this, the ratio of credit to the private sector to the GDP and broad money to narrow money were used as measures of financial development and financial openness respectively. The study found that financial development has a positive and insignificant impact on economic growth in Nigeria in the long and short-run. The study also found that financial openness has a negative and insignificant impact on economic growth in Nigeria in the long-run. The results of the study further revealed that simultaneous existence of financial development and financial openness has an insignificant but positive impact on economic growth in Nigeria in the long-run. Based on the findings, the study recommended that the CBN should increase its efforts towards the regulation and supervision of the financial sector to reduce the incidence of financial distress. The study also recommended that efforts to develop the mortgage and insurance sector and the capital market should be intensified through regulatory improvements, improvements in the instruments in use in the market as well as public enlightenment programs to increase awareness of the potentials of the mortgage, insurance and capital markets. The final recommendation made by the study is that more restrictions should be placed on the inflow of capital in and out of the country to guard against sudden capital flow reversals.

Is there a nonlinear relationship between financial development and poverty in Africa?

PurposeThe paper examines whether there is a threshold between financial development and poverty in African economies.Design/methodology/approachThe study adopts the innovative dynamic panel threshold model of Seo and Shin (2016) made practicable by Seo et al. (2019)–the model estimates threshold relationship even in the presence of endogeneity. Also, following the recommendations of Cihak et al. (2013) and Sahay et al. (2015), we also adopt a robust measure of financial development based on the four pillars of financial deepening, stability, efficiency and access derived from the principal component analysis (PCA).FindingsThe empirical results show that there exists a threshold level of financial development necessary for poverty reduction in Africa.Research limitations/implicationsOur result is important for policy formulations. First, individual African country must discover the level of financial development necessary for spurring poverty reduction. Second, policymakers, especially in lower-income countries, must keep improving their financial sector development to achieve the threshold level necessary for achieving poverty reduction even though financial development might seem less relevant at its present level.Practical implicationsThe policymakers in Africa should note that there exists a threshold level of financial development that reduces poverty. Hence, the present level of financial development might have not yielded a considerate effect on poverty. Still, the policymakers must keep pushing on until the threshold is achieved.Social implicationsFinancial development reduces poverty level but it must reach a certain threshold level before it does so. So, we advise African policymakers to continue to develop their financial sector to achieve this threshold.Originality/valueThis seems to be the first work to document the threshold relationship using the dynamic panel threshold. Besides, the study specifically concentrates on Africa dividing the continent into different income levels. Moreover, we adopt a robust measure of financial development unlike extant studies on Africa.

Financial development and economic growth in SADC countries: a panel study

PurposeThe impact of financial development on economic growth has received considerable attention since the 2008/2009 global financial crisis. High levels of credit to the private sector were partly to blame for the crisis, and this has re-ignited the debate on whether the growth-enhancing effects of financial development outweigh the retarding effects associated with financial crises. This paper therefore examines the financial development–growth nexus in SADC countries during the period 1990–2015.Design/methodology/approachThe empirical analysis is conducted using the pooled mean group estimator. Furthermore, financial development indices are created due to the strong correlations between the individual financial development indicators using principal component analysis.FindingsThe results show that financial development, captured by the indices or the individual financial development indicators, has a negative impact on economic growth in the long term.Research limitations/implicationsDue to the unavailability of data, the study only focussed on banking sector development. The researcher would have preferred to incorporate stock market development.Practical implicationsDue to financial vulnerabilities emanating from an inadequate monitoring and supervisory framework, further enhancement of financial development should be undertaken with caution in SADC countries. Therefore, institutional quality should be enhanced in order for SADC countries to benefit from the development of the financial sector.Originality/valueMost studies investigating the financial development–growth nexus in SADC countries utilise the individual measures of financial development which often produce contradicting results. This study constructs financial development indices to capture the impact of various banking sector development indicators on growth.

Legal origin and financial development: A propensity score matching analysis

AbstractWe revisit the impact of legal origin on financial development using propensity score matching and a new financial development index on a sample of 178 countries over 1980–2016. German civil law countries are found to have the strongest positive impact on financial development. English common law countries follow. French and Scandinavian civil law countries have a negative impact on financial development while Socialist legal origin records no significant effect. When decomposing the measure of financial development into financial markets and financial institutions' development, we find that German civil law promotes both while English common law promotes only financial institutions development.

Internet adoption and financial development in sub-Saharan Africa

Information and communications technology (ICT) adoption, and its penetration and use, in sub-Saharan Africa (SSA) have steadily grown since the turn of the century. Subsequently, studies have sought to investigate several of its benefits, particularly for economic growth and entrepreneurial activities. However, little attention has been paid to SSA, human capital development and economic freedom within studies on ICT and financial development. Using data from the Global Financial Development and the World Bank Development Indicator databases for the period 2000–2016 on 42 countries in SSA, we found evidence of the positive impact of internet use on different measures of financial development. Further analysis reveals that sub-samples of SSA countries differ on their levels of human capital development and economic freedom. Our results are robust to different estimations and specifications that account for heteroscedasticity in our sample and potential endogeneity. Implications of the study are also highlighted.

Recovering the finance-growth nexus

We show that the finance-growth nexus can be recovered by using quality adjusted measures of financial development. Specifically, we utilize three World Bank financial fragility indicators – the Z-score, a measure of liquidity and a measure of impaired loans – to construct quality adjusted measures of private credit to GDP. Our findings suggest that the finance-growth nexus is alive and kicking, as long as banks use sound lending practices to prevent the buildup of non-performing loans. We also show that our results hold in Sub-Saharan Africa — a region where the finance-growth nexus could potentially make a big difference

Financial sector development and Investment in selected countries of the Economic Community of West African States: empirical evidence using heterogeneous panel data method

This study investigated the impact of financial sector development on domestic investment in selected countries of the Economic Community of West African States (ECOWAS) for the years 1985–2017. The study employed the augmented mean group procedure, which accounts for country-specific heterogeneity and cross-sectional dependence, and the Granger non-causality test to test for causality in the presence of cross-sectional dependence. The results show that (1) The impact of financial sector development on domestic investment depends on the measure of financial sector development utilised; (2) Domestic credit to the private sector has a positive but insignificant impact on domestic investment in ECOWAS, whereas banking intermediation efficiency (i.e., ability of the banks to transform deposits into credit) and broad money supply negatively and significant influence domestic investment; (3) Cross-country differences exist in the impact of financial sector development on domestic investment in the selected ECOWAS countries; and (4) Domestic credit to the private sector Granger causes domestic investment in ECOWAS. The study recommends careful consideration in the measure of financial development that is utilised as a policy instrument to foster domestic investment. We also highlight the importance of employing country-specific domestic investment policies to avoid blanket policy measures. Domestic credit to the private sector should be given priority when forecasting domestic investment into the future.

Does Bank Profitability Stimulate Economic Growth in the Arab Region?

AbstractThis study empirically investigates the impact of bank profitability, as a complementary measure of financial development, on growth in the Arab countries between 1985 and 2016. Using a generalized method of moments (GMM) estimation to test the impact of the bank profitability on growth, this study utilises two variables in the econometric model which are return on assets and return on equity. This study reveals that both variables of bank profitability are positive and significant. This confirms that the bank profitability, beside other financial development variables, has positive impact on the growth. This study points out some important implications based on this result.

Panel threshold models with interactive fixed effects

This paper studies estimation and inference in a panel threshold model in the presence of interactive fixed effects. We study the asymptotic properties of the least squares estimators of the regression parameters in the shrinking-threshold-effect framework. We find that under some regularity conditions, the threshold parameter estimator possesses super-consistency in the sense that its estimation error has an asymptotically negligible effect on the asymptotic properties of the slope coefficients. The inference on the threshold parameter can be conducted based on a likelihood ratio test statistic as in the cross-sectional or time series setup. We also propose a test for the presence of the threshold effect. Monte Carlo simulations suggest that our estimators and test statistics perform well in finite samples. We apply our method to study the effect of financial development on economic growth and find that there is indeed a turning point in the effect for all three measures of financial development when the cross-sectional dependence is properly accounted for.

The Finance-Investment-Growth Causal Connection: Evidence from the Republic of Congo

This paper examines the causal relationship between financial development and investment in the Republic of Congo for the period 1960 to 2017. The causal relationship between financial development, investment and economic growth is examined using four multivariate Granger-causality models. The study found that the finance-investment-growth causal relationship is highly dependent on the choice of the financial development indicator used. In addition, all financial development indicators, except domestic credit provided to the private sector, were found to Granger cause investment in the short run. Furthermore, investment has been found to Granger cause economic growth in the short run when domestic credit provided by the financial sector and the composite financial development index are included as measures of financial development in subsequent models. Therefore, dependent on the policy focus, economic policy through financial development should take into account the financial indicator so as to predict and/or achieve the resultant policy objectives.

The Impact of Credit on Income Inequality in Vietnam

This paper examines the impacts of credit on income inequality in Vietnam. Though it is one of the most common measures of financial development, there is a dearth of research in this area. Unlike previous studies, the paper disaggregates the impact of each type of credit on income inequality, looking at the Gini coefficient. We employ the Generalized Method of Moment (GMM) to solve the endogenous problem. The primary data set contains a panel of 60 Provincial observations, from data collected from the General Statistics Office of Vietnam from 2002 to 2016. The empirical findings show that, while commercial credit increases income inequality, policy credit contributes to reducing income inequality in Vietnam. The results also confirm the important roles of education, institutional quality and foreign direct investment in fighting against income inequality in Vietnam. However, the paper does not provide adequate evidence to support the inverted U-shaped relationship between credit and income inequality. Based on the findings, we argue that the government should direct flows of credit to real economic activities rather than speculative investment; more bank credit should be allocated to rural areas and agriculture; and favorable credit programs should be designed to promote education, especially of those living in rural areas.

Financing renewable energy development: Insights from 55 countries

This research note examines the effects of financial development on the deployment of renewable energy (RE). We apply a two-step system generalized method of moments (GMM) approach to a global sample of 55 countries in 2005–2014. Our results indicate that financial sector development is a significant determinant of RE deployment. This implies that policy makers should pursue policies that facilitate financing for RE firms. The positive effect of financial development on RE appears to be statistically significant for high-income countries but insignificant for low- and middle-income countries. The findings seem to be robust to different measures of financial development. Investing in RE requires not just more finance but also sophisticated finance that can address the complex risks associated with an evolving technology.

The Effects of Bank Regulation on Financial Development in the MENA Countries: The Supporting Role of Supervision

T his study investigates the impact of bank regulation on financial development in the MENA countries for the period 1995-2014. Restrictions on activity, foreign banks, and capital were used as proxies for bank regulation. Also, bank supervisory power, independence, private monitoring, and moral hazard were used as proxies for bank supervision. Liquid liabilities, private credit, and z-score were chosen as proxies for financial development. They represent, consecutively, size, activity, and stability of the financial sector. A positive and significant impact of bank regulation was observed on all measures of financial development. The most important contribution of the present study is that, it gives evidence of an important supporting role of supervision on bank regulation, to realize its desired impact on financial development. This final result is important for the MENA countries, since data analysis shows that financial sector reform is more concentrated on regulation than supervision. Policy makers in the MENA countries need to focus more, in their financial sector reform, on bank supervision to realize the expected impact of bank regulation on financial development.

Financial development, natural disasters, and economics of the Pacific small island states

Natural disasters have become more frequent and devastating as a result of global climate change in recent years. The economic impacts of natural disasters are significant and more relevant to small island states, given their location and size of economy. This paper studies Pacific small island states and investigates how natural disasters affect sustainable development in these states, with a highlight on the role of financial development in alleviating the negative impacts of natural disasters on the local economic growth. We empirically estimate the direct and indirect roles of financial development on these states and explicitly distinguish the economic effects from a battery of measures of financial development. A more important role played by internal financing factors than by external financing sources is found, which suggest that enhancing internal financing capabilities can help these states better use financial resources and build disaster resilience more effectively. Relevant policy suggestions are proposed based on these findings.

INFORMATION AND COMMUNICATION TECHNOLOGY, ENERGY CONSUMPTION AND FINANCIAL DEVELOPMENT IN AFRICA

The study investigated the impact of information and communication technology (ICT) and energy consumption on financial development in Africa using dynamic Generalised Methods of Moments (GMM) with secondary annual data spanning from 2001 to 2015. Literature is unanimous that ICT and energy consumption separately contributes towards financial development although there are so far scarce case studies which focused on the African continent. When domestic credit to private sector (% of GDP) was used as a measure of financial development, ICT and energy consumption were found to had a non-significant negative influence on financial development, a finding that contradicts majority of literature on the subject matter. When broad money (% of GDP) was used as a proxy of financial development, both ICT and energy consumption had a significant positive effect on financial development. The finding generally resonates with Kirmani et al (2015) whose study argued that ICT increases efficiency, reliability, effectiveness, performance and other characteristics of modern-day commercial operations through the way transactions are catered for in any financial system. African nations are therefore urged to increase their use of modern ICT technology and increase energy consumption in order to boost financial development. Future studies can also focus whether ICT and energy consumption influence financial development through other channels such as economic growth, among others.Keywords: Information and Communication Technology; Energy Consumption; Financial Development; AfricaJEL Classifications: N7, Q4, E44, O55DOI: https://doi.org/10.32479/ijeep.8721

The role of nonlinearity on the financial development–economic performance nexus: an econometric application to Italian banks

Using data for Italian banks over the 2001–2012 period, we assess the existence of a nonlinear relationship between finance and growth, through the application of alternative measures of financial development. We show that both branch density and aggregate credits over GDP positively contribute to economic performance. While the relationship between branch density and economic activity is shown to be monotonic, an inverted U-shape is found once aggregate credits to GDP are employed as the main measure of financial development. Evidence presented in this paper further reveals that concentrated markets, that is, monopolistic and oligopolistic markets, facilitate economic growth, especially when credits to GDP are employed. Several robustness checks confirm our findings.

Financial Sector Development and Investment in Selected ECOWAS Countries: Empirical Evidence using Heterogeneous Panel Data Method

This study investigated the impact of financial sector development on domestic investment in selected Economic Community of West African States (ECOWAS) countries for the years 1985 to 2017. The study employed the Augmented Mean Group procedure which accounts for country specific heterogeneity and cross sectional dependence, and the Granger non-causality test robust to cross sectional dependence. The result reveals that (1) the impact of financial sector development on domestic investment depends on the measure of financial sector development utilized, (2) domestic credit to the private sector has a positive but insignificant impact on domestic investment in ECOWAS while banking inter-mediation efficiency (i.e. ability of the banks to transform deposits into credit) and broad money supply negatively and significant influence domestic investment, (3) cross country differences exist on the impact of financial sector development on domestic investment in the selected ECOWAS countries, and (4) domestic credit to the private sector Granger causes domestic investment in ECOWAS. The study recommends cautiousness in terms of the measure of financial development which is being utilized as a policy instrument to foster domestic investment as well as the importance of employing country-specific domestic investment policies in order to avoid blanket policy measures. Also, domestic credit to the private sector should be given priority when forecasting domestic investment into the future.

Do Remittances Enhance Financial Development in Transitional Markets?

The paper explored (1) the impact of remittances on financial development and (2) whether the interaction between remittances and human capital development had an influence on financial development in transitional economies using the dynamic GMM approach, with data ranging from 1996 to 2014. Remittances were found to have had a non‑significant positive influence on financial development in transitional economies when stock market turnover, stock market value traded, domestic credit to the private sector by banks, and public bond sector development were used as measures of financial development. When stock market capitalisation, domestic credit to the private sector by financial sector, and private bond sector development were used as measures of financial development, remittances had a non‑significance negative effect on financial development. Using all other measures of financial development except stock market capitalisation (which produced a negative sign), the interaction between remittances and human capital development had an insignificant positive influence on financial development. Transitional economies are therefore urged to avoid over‑relying on remittance inflow and human capital development as sources of financial development.