Measures Of Financial Development Research Articles

The Determinants of Financial Development: Evidence from Bayesian Model Averaging

We examine the determinants of financial development using our global sample and employing different measures of financial development that assess the degree of depth and efficiency of financial intermediaries. We use instrumental variable Bayesian model averaging to test competing theories with this unifying framework. After examining nearly 20 potential determinants of financial development, we find that the rule of law, as well as some of its components, is the most important. In addition, our results suggest that wealth inequality is irrelevant to banking sector development but positively associated with stock market development.

The environmental repercussions of financial development and green energy in BRICS economies: From the perspective of new composite indices

This study is significant because it fills the gap in future literature by looking at the panel of 5 Brazil, Russia, India, China, and South Africa (BRICS) economies regarding the important role of financial development (FD) in environmental deterioration under the holistic measures of FD and environmental quality, something that has been largely overlooked in preceding studies. Consequently, this study explores the environmental effects of FD, employing a composite environmental quality proxy (CEQP) and a composite FD proxy (CFDP). In pursuit of this objective, the continuously updated fully modified (Cup-FM) and continuously updated bias corrected (Cup-BC) procedures are applied. These procedures enabled us to comprehensively explore the dynamic interactions between the combined index for FD and CEQP controlling agricultural activities, economic growth, renewable energy consumption, and nonrenewable energy consumption (NREC) in the panel of 5-BRICS economies from 2005 to 2019. The empirical results show that CFDP appeases environmental deterioration and thus improves environmental quality. The agricultural activities intensify environmental deterioration. The analysis also reveals a U-shaped relationship between the CEQP and economic growth (inverted U-type environmental Kuznets curve hypothesis) for the BRICS nations. Additionally, renewable energy improves environmental quality, whereas NREC decreases it. As supported by the results of the study, BRICS policymakers should encourage the financial sector to support green energy initiatives and achieve environmental stability.

Tourism and financial development: evidence from nonlinear ARDL approach

ABSTRACT This paper investigates the nonlinear effect of financial development on tourism demand, using Japan and Germany as two cases. Two measures, such as liquid-liabilities and credit to the private sector by banks as a percentage of GDP, work as proxies for financial development. Using monthly data over the period 1994:1–2019:12 for Germany and 1996:1–2019:12 for Japan, we have estimated for each country a parsimonious tourism demand function that incorporates both measures of financial development. The findings from the nonlinear ARDL approach show that for each country, tourism demand, price of tourism, and financial development are cointegrated, and the nonlinearity of financial development is mainly a long-run phenomenon. In the long run, a positive change in the level of financial development will positively influence tourism demand and negatively affect it following a negative change. Each country's negative effect appears to be of a slightly smaller magnitude. This might be because Japan and Germany have a better reputation among tourists owing to their higher level of financial development and concomitant lower rate of crime, which in turn minimizes the negative effect of financial development on tourism demand.

The nexus between the shadow economy and financial development in Uganda

This paper examines the nexus between the shadow economy and financial development in Uganda making use of yearly time series data over the period 1991 to 2017 and autoregressive distributed lag (ARDL) method is applied. Findings are quite telling. We find that financial development reduces the shadow economy in a significant manner, in both the long- and short-run. This finding is robust to the use of alternative measures of financial development. Our results have far reaching implications. Firstly, findings indicate that financial structure plays a key role in mitigating the increase of the shadow economy given that the financial sector can provide access to credit that eases financial constraints faced by entrepreneurs. Thus, a well-functioning financial sector could facilitate access to credit by entrepreneurs which reduces their motivation to operate underground. These findings seem to suggest that reforming financial institutions to facilitate improved access to domestic credit could help tackle widespread informality in developing economies. Additionally, minimizing informality also requires reforming the political system, institutional framework and macroeconomic environment to become responsive to the needs of businesses.

Digital finance and sustainable development: Evidence from developing nations.

This paper investigates the role of digital finance in promoting environmental sustainability within a group of 52 developing economies from 2010 to 2019. Specifically, it examines whether digital finance effectively contributes reducing CO2 emissions in these nations. This paper is a quantitative study which employs the IV-GMM (instrumental variable generalized methods of moment) approach that tackles any potential endogeneity. Furthermore, to ensure robustness of results, this paper also utilizes different measures of financial development. Estimation results from this study reveal the presence of inverted U-shaped relationship between digital finance and CO2 emissions. This suggests that the beneficial effects of digital finance may take time to materialize. Additionally, this research also records the presence of the Environmental Kuznets Curve and a significant impact of renewable energy, trade openness, financial development, urbanization, and population on CO2 emissions. It can be concluded that it may take time for digital finance to become beneficial to the environment. Therefore, in addition to digital finance, countries should also adopt other measures simultaneously (use of renewable energy, combination between digital finance and financial development).

Non-linearities Caused by “Too Much Finance Effect”: Exploring the Myth and Reality for Developed and Developing Countries

Existing literature on relationship between financial development (FD) and economic growth (EG) has presented dichotomous observations: a linear relationship by many of the studies and yet an inverted U-shaped relationship observed by number of renowned researchers. Most of the studies used narrow measures like credit to GDP growth ratio for measurement of financial development. Moreover, many of the researches have taken only the post-Global Financial Crisis data or neglected the data pre-1990s and most of the researches related to developing countries are on single-country data. Therefore, this relationship requires re-estimation to arrive at some conclusive results. This paper explores the relationship between financial development and economic for both developed and developing countries based on broader measures of financial development (financial access, financial depth, and financial efficiency). Panel Corrected Standard Error regression model is used to evaluate the relationship for 23 developed and 35 developing countries. Our results observe contrasting facts for developed and developing countries. For developed countries, we observed an inverted U-shaped relationship between FD and EG. The contributing sub-components of FD are financial depth and efficiency. However, financial access is observed to have a U-shaped relationship. However, for developing countries, we don’t observe an inverted U-shaped relationship but linear relationship between FD and EG. The contributing sub-components are financial depth and financial efficiency.

Convergence in Financial Development and Growth

We evaluate the cross-country convergence of financial development and its relationship with GDP growth. Financial inclusion variables have been widely converged across countries, and the catch-up effect of countries with poor financial coverage mainly drives the convergence. In contrast, financial development measures — including domestic credit, liability, mutual fund size, and stock market capitalization — have diverged since 1985 despite the absolute convergence in GDP and financial inclusion. The GDP growth rates strongly correlate with the change in financial development but not the improvement in financial inclusion.

Financial development and central bank bilateral currency swaps: Is there trade effect?

Purpose ― This paper aims to empirically investigate the impact of currency swaps on international trade, given China's differential level of financial development and its currency swap partners. Methods ― The study employes an empirical structural gravity model using datasets encompassing financial development, trade, and intuitive gravity equation variables for 27 countries from 1980 to 2013. The level of financial development and swaps was captured by the interaction term of the disaggregated measure of financial development, such as access, depth, and efficiency, each interacting with currency swaps.Findings ― The findings suggest that currency swaps are essential for trade and exhibit a large trade effect, especially for countries with relatively low levels of financial development. The paper substantiates empirical evidence indicating disparities in financial development across countries, and such differences are important in determining trade patterns. Implication ― Strong financial systems promote trade in advanced economies, whereas the opposite holds true for developing countries. The examination of the influence of financial systems on trade through empirical tests remains important on the research agenda of policymakers and researchers, especially those looking at industry-level import and export data.Originality ― The study delves into the nexus between financial development and trade within the framework of the Central Bank bilateral currency swap network by highlighting the role of financial institutions and market size (depth), activity (access), and efficiency. In addition, it addresses the drawbacks of previous empirical research that largely focuses on the private credit-to-GDP ratio as a key proxy for financial development.

The symmetric and asymmetric effect of financial development on ecological footprint in South Africa: ARDL and NARDL approach

Introduction: The literature on the finance–emission nexus offers conflicting conclusions. This study resolves this inconsistency by investigating the symmetric and asymmetric effect of financial development on ecological footprint in South Africa, using the Environmental Kuznets Curve framework as a guide. Given the coexistence of ecological deficits and world-class financial development systems in South Africa, it is essential to explore and evaluate potential solutions to mitigating these deficits. Our empirical analysis contributes to the body of literature on the impact of financial development and ecological footprint by using a comprehensive measure of financial development and disaggregates it into its sub-indices to provide a nuanced analysis.Method: This study employs the linear auto regressive distribution lag and nonlinear auto regressive distribution lag techniques to explore the complex interactions of financial development and ecological footprint.Results and Discussion: The findings of this research indicate that financial markets and institutions seem to have varying effects on the ecological footprint. Financial market indices promote environmental quality, while financial institutions exacerbate environmental quality. These results call for policymakers to craft a watertight process that will encourage both financial markets and institutions to allocate capital to projects that are pro-environmental.

Legal Systems, Property Rights, and Financial Development in Sub-Saharan Africa

The study aims to determine the effect of legal systems and property rights enforcement on developing financial markets, institutions, and overall financial development in Sub-Saharan Africa. Data for this study were extracted from the Financial Development Index of the World Bank Global financial database, the Economic Freedom database of the Fraiser Institute, and the World Bank Development Indicators database covering 41 Sub-Saharan African countries from 2000 to 2020. The models were estimated using the System GMM and the SURE model as robustness checks to address cross-equation correlations and linkages between financial markets and institutions. Results showed that legal systems and property rights enforcement have an effect on the growth of financial markets, institutions, and overall financial development, regardless of the measure of financial development used. Moreover, trade and GDP positively affect financial development and financial markets, while stringent regulatory trade barriers have a negative effect. The need for governments to prioritize strengthening legal systems and ensuring the enforcement of property rights protection to create a predictable and stable environment for businesses and investors is key. Reducing trade barriers and eliminating restrictions that may discourage foreign investment to increase trade volumes and capital inflows into SSA is also important. JEL Classification: F36; G20; G1, G10; K40; P26

The relationship between finance and growth in Germany and Luxembourg: A timeseries analysis approach

The present paper examines the economic growth and financial development relationship in two of the European Union’s founding countries and Eurozone members, namely Germany and Luxembourg, by taking into consideration a large period, from 1970 to 2019. We motivate the choice of these specific two countries based on the similar rate of GDP per capita growth over the years, and also on the relevance of the financial sector in the total economy. Five different measures of financial development are employed to address the depth and efficiency of the financial sector. We apply Granger causality tests, using the cointegration and Vector Error-Correction (VEC) methodology. The empirical analysis indicates consistent results, as both in the case of Germany and Luxembourg it can be established Granger causality for the economic growth – financial development nexus. There is also evidence of bi-directional relationship.

Does transparency pay? Natural resources, financial development and the extractive industries transparency initiative (EITI)

Natural resources are known to hinder financial development in countries with weak institutions. We hypothesize that the Extractive Industries Transparency Initiative, an international norm aimed at promoting transparency in natural resource management, can mitigate this effect. Using fixed effects and entropy balancing methods, we provide empirical support for this hypothesis in a panel of 71 resource-rich countries between 1995 and 2019. Our results are robust to the use of alternative specifications and alternative measures of financial development. Finally, we provide a discussion of the transmission channels through which the financial resource curse may occur.

Can Religion Explain Cross‐Country Differences in Financial Development? A Global Perspective

Motivated by the limited evidence on the influence of religious beliefs on financial development in the current literature, this article aims to provide significant empirical evidence on the relationship between the two variables. In particular, we examine whether major religious beliefs (Christianity, Judaism, Islam, and Buddhism) have an impact on financial development globally. Using data for 82 developing and developed countries from 1975 to 2015 and controlling for income, openness and polity, our results show significant influence of religion on financial development. In particular, we found that Christianity and Islam have negative impact on financial development, while the impact of Judaism on financial development is positive. In addition, a weak positive effect of Buddhism on financial is also found from the results. This article has also found evidence that the effect of religion varies among different economies characterized by religious diversity. Our findings are robust to different measures of financial development and religious sub‐groups as well as alternative estimators that take care of endogeneity.

The effect of financial development and legal institutions on financial inclusion in Sub-Saharan Africa

Purpose of the studyThis study examines the impact of financial development on financial inclusion and the moderating role of legal institutions in enhancing the effect of financial development on financial inclusion in sub-Sahara Africa. The previous literature does not explain how financial development could improve financial inclusion even though the systems theory of financial inclusion argues so. Design/methodology/approachUsing data from WDI for 41 sub-Sahara Africa countries between, 2000–2020, a two-step system GMM and quantile regression models are used to estimate the objectives of the study. The study takes into consideration the exceptional impact of COVID-19 and the importance of internet usage, along with other macroeconomic factors. FindingsThe sys-GMM shows that financial development positively influences financial inclusion. Across diverse measures of financial development and estimation techniques, a consistent and significant positive relationship is observed. Furthermore, the quantile regression approach reveals that at the 25th,50th, and 75th quantile of financial inclusion, the effect of financial development is positive. In both the sys-GMM and quantile regression, the effect of institutions on financial inclusion is positive and also positively moderate the association between financial development and inclusion. Financial is influenced by other key macroeconomic variables. Recommendations/valueThe study recommends that Governments and policymakers prioritize initiatives aimed at advancing financial development in sub-Saharan Africa. Additionally, enhancing the legal and regulatory environment governing financial services, encompassing aspects such as contract enforcement, property rights protection, and corruption reduction, is crucial for sustained financial inclusion. ImplicationsOpen innovation in the financial sector, particularly in mobile payments, can benefit from the positive impact of financial development on inclusion. Also, open innovation in delivery services can benefit from financial inclusion initiatives, ensuring that individuals and businesses across diverse economic strata have access to efficient and affordable financial delivery services.

Financial development and economic complexity: The role of country stability

AbstractThe aim of this paper is to examine the relationships between financial development (FD), economic complexity and country stability. To achieve this objective, this paper applies a finite mixture model to a sample of 92 developing countries over the period 1995–2018. The study posits that the effect of FD on economic complexity differs across groups of countries with similar but unobserved characteristics. The study finds that the effect of FD on economic complexity varies across four classes of countries, which differ according to their level of economic, political and financial stability. Furthermore, the study argues that stable countries are more likely to be in class 1, including more performing countries – that is, the group of countries where FD spurs economic complexity. This finding remains consistent even when alternative measures of FD and economic complexity are considered. Hence, efforts by developing countries to undertake sound reforms to reduce economic, political and financial risks could help leverage the benefits of FD in fostering the development of sophisticated and complex economies.

Dynamicity and nonlinearity in the association between different facets of financial development and macroeconomic volatility: evidence from the World Economy

ABSTRACT This paper attempts to explore dynamicity and nonlinearity in the association between financial development and macroeconomic volatility, considering different aspects of financial development. The data to this end comprises a panel of 98 countries from 1991 to 2016. This paper uses an objective trichotomous development taxonomy to classify the countries according to their overall financial development and income. Dynamic panel regressions ensure that the role of overall financial development in smoothing macroeconomic volatility dwindles as the level of overall financial development increases. Overall financial development begins to amplify volatility after a certain point. Other aspects of financial development also affect volatility in a similar fashion. Nonlinear estimation results show that most of the measures of financial development are associated with macroeconomic volatility in a U-shaped manner. On the contrary, we find an inverted U-shaped association between financial institution efficiency and macroeconomic volatility. The findings are found to be robust to an alternative country classification system based on income and an alternative measure of volatility. To minimise macroeconomic volatility, policymakers should try to increase financial institution efficiency beyond its threshold point and keep all other aspects of financial development at their optimal level.

How Much Financial Development Accentuates Income Inequality in Central and Eastern European Countries?

Financial development is often associated with significant economic growth, but studies have shown that a high level of financial development can be the cause of deepening income inequality in many countries. The main objective of the proposed study is to identify to what extent financial development influences income inequality in Central and Eastern European Countries (CEEC). Thus, for the model specification we used as dependent variable the Gini coefficient and as independent variable the financial development index. The sample period for the analysis was from 2004 to 2019, restricted by the lack of data on the Gini coefficient in CEECs. Data on the financial development index were collected from International Monetary Fund, and data on the Gini coefficient were extracted from the World Bank’s Poverty and Inequality Platform. The study unravels several contributions. First of all, the use of quantile regression allowed for the examination of the effects of financial development across the entire distribution of income inequality. Second of all, the use of a comprehensive financial development index offered a more robust and comprehensive measure of financial development compared to single indicators. Taking into account that the Gini coefficient must be close to zero, this result was a positive one with, in essence, financial development reducing income inequality in CEECs. Thirdly, the specific focus on CEECs fills a gap in the literature. Finally, the findings of this study have important policy implications. The obtained results indicate a negative causal relationship between financial development and income inequality, emphasizing the fact that the relationship between these two components cannot be generalized for all regions. These might include measures to promote financial inclusion, improve financial literacy, and enhance the stability and efficiency of financial systems. Supporting financial development in CEECs and similar transition economies can be an effective strategy for tackling income inequality.

Does financial inclusion stimulate India's economy: A panel data analysis

The study empirically examines the connections between three different measures of financial inclusion with output growth across the states of India. Applying the panel co‐integration and error correction model for 26 states and 4 union territories, it concludes that all three measures of financial development with gross fixed capital formation enhance real net state GDP significantly in the long run. Further, a significant reduction in the real net state GDP is also observed during the Global Financial Crisis. This study is important for the Indian policymakers to formulate effective financial inclusion policies leading to the overall development of the Indian economy.

Does Financial Development Alleviate Poverty? Empirical Evidence from Indonesia

This study examines the contribution of financial development to poverty reduction in Indonesia using the autoregressive distributed lag (ARDL) bound testing approach to the cointegration framework. It also employs annual data of several financial development measures such as domestic credit, broad money, and financial development indexes from 1986 to 2018. Our findings suggest that financial development and poverty reduction have a cointegration relationship, regardless of the financial development indicators used. Furthermore, we find that domestic credit, broad money, financial institution depth, financial market depth, financial market access, and financial market efficiency reduced poverty. It suggests that financial development reduced poverty through its indirect channel, i.e., the economic growth effect.

Financial development and economic diversification in Qatar: does Islamic finance matters

PurposeThe financial system plays an essential role in facilitating the intermediation process for economic growth. Policymakers stress on achieving a well-developed and regulated financial system to achieve economic development and resiliency. Using data from the State of Qatar, this paper aims to examine the impact of financial development indicator on economic growth; the impact of financial development indicator on hydrocarbon and nonhydrocarbon sector; the impact of Islamic banking on hydrocarbon and nonhydrocarbon economic growth.Design/methodology/approachThe research uses quarterly data from 2007 to 2019 and adopts autoregressive distributed lag cointegration techniques to test the long- and short-run dynamic relationship between various measures of financial development and economic growth.FindingsThe results present evidence of long-term cointegration between overall financial development indicator and economic growth. Furthermore, the authors document the existence of long-term relationship between financial development and nonhydrocarbon sector. However, there is a lack of evidence on the long-run relationship between financial development and the hydrocarbon sector. Notwithstanding, Islamic banking contributes to overall economic development, as well as to the nonhydrocarbon sector.Practical implicationsThis paper offers policymakers with insights to evaluate measures to diversify the economy. It also assists decision-makers in promoting Islamic finance, particularly to the banking sector as a vital contributor to economic growth.Originality/valueTo the best of the author’s knowledge, this paper is the first to evaluate financial development and economic growth for the case of Qatar in light of recent developments in Islamic finance.