Proxy For Financial Development Research Articles

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.

How do Financial Development and Stability Shape Human Development?

Abstract The crucial role of financial systems in sustainable development has become the center of global and national interest and development strategies, and more developed and stable financial systems are the cornerstone for development finance and achieving the sustainable development goals. This research aims to examine the impact of financial development and stability on human development firstly in a sample of 185 countries worldwide, and secondly in a sample of 21 MENA countries, over the period 1990–2019. This study adopts the Panel Data Econometrics (Fixed Effects and Random Effects Methods) and proxy for human development by exploiting the UNDP’s Human Development Index and its three subindices (Education, Income, and Life expectancy), while it adopts broad money, credit to the domestic private sector, and banking sector deposits (all as a percentage of GDP) to proxy for financial development. Moreover, it represents financial stability by the banking sector Z-score and a dummy variable representing crises. The empirical results reveal the prevailing role of development and stability in the financial systems on human development and its three subcomponents, regardless of the country’s economic development level.

Financial Development and Income Inequality in Nigeria: An Empirical Investigation

This study investigates the impact of financial development on income inequality in Nigeria using secondary data from the World Development Indicators database and the Standardized World Income Inequality Database (SWIIDspanning from 1990- 2021. The methodology employed includes the ADF test for unit root, the Johansen Test for Co-integration, the Ordinary Least Square(OLS) Technique, and diagnostic tests like the normality test, Stability test, Granger causality test.The explanatory variables were financial deepening (FID), credit to the private sector (CPS), bank capital to asset ratio (BCAR), population growth (POP), and trade openness (TOP) while the dependent variable is the Gini coefficient (GINI) proxy for financial development. The unit root test result shows that the variables are in the same order of stationarity, they were all stationary at first difference. The Johansen Test for Co-integration shows that there is a long-run relationship between the variables in the model. The OLS results of the analysis show that financial deepening (FID) and bank capital to asset ratio (BCAR) have a negative relationship with income inequality in Nigeria with financial deepening having a significant relationship with income inequality; and bank capital to asset ratio have an insignificant relationship with inequality. The results also show that Credit to the private sector (CPS), population growth (POP), and trade openness (TOP) maintain a positive and insignificant relationship with income inequality in Nigeria. Based on the findings,the study recommends that policymakers should focus on several key strategies, capable of promoting financial deepening through initiatives like expanding banking services to underserved areas.

The influence of financial development on total fertility rate in Indonesia

This study investigated the impact of financial development on the total fertility rate in Indonesia, hypothesizing that financial development significantly influences fertility rates. The objective was to ascertain the effects of financial development on Indonesia's total fertility rate, utilizing annual time series data from 1980 to 2021 obtained from the official websites of Bank Indonesia, the Central Bureau of Statistics, and the World Bank. The analysis employed the Autoregressive Distributed Lag (ARDL) method to examine the influence of the money supply in circulation (M2), Gross Domestic Product, and household consumption on the total fertility rate, with these variables serving as proxies for financial development. The study utilized a comprehensive data analysis approach, including stationary tests, cointegration bound tests, ARDL Model analysis for long-term and short-term effects, and classical assumption tests. The findings revealed that the money supply (M2) has a negative and significant impact on the total fertility rate, the Gross Domestic Product also negatively and significantly affects the total fertility rate, while household consumption positively and significantly influences the total fertility rate. These results underscore the multifaceted relationship between financial development and fertility trends in Indonesia.

An empiric on geopolitical risk and the tourism–economic growth nexus

Purpose This study empirically examines the moderating role of geopolitical risk on the tourism–economic growth nexus by applying a recent geopolitical risk indicator developed by Caldara and Iacoviello (2022) in a cross-country panel data growth model context for a sample of 24 countries.Design/methodology/approach A Dummy Variable Least Squares panel data model, nonparametric covariance matrix estimator and SYS-GMM estimation techniques are employed for the analysis. The authors capture the GPR moderating effect by disaggregating the cross-country sample according to low versus high country GPR score and through a GPR interaction coefficient. Several controls are included in the models such as gross fixed capital formation and—consistent with Barro (1990)—government consumption. Trade openness is used to account for the export-led growth effect. In line with neoclassical growth theory (e.g. Barro, 1991), the authors also include the real interest rate, to account for policy makers' commitment to macroeconomic stability, financial depth, as a proxy for financial development, population growth and the level of secondary school education. The authors also control for unobserved country-specific and time-invariant effects.Findings The research finds that the interaction term of geopolitical risk significantly contributes to the predictive ability of the regression and provides empirical evidence that confirms that only in low geopolitical risk countries international tourism positively and significantly contributes to economic growth. Important theoretical and policy implications flow from these findings.Originality/value The study not only contributes to advancing academic knowledge on the tourism–growth nexus, it also has impact beyond academia. Many countries have in the past pursued and many continue to pursue, tourism specialization and/or tourism-led growth strategies based on the theoretically well-established and empirically validated positive link between inbound tourism and economic growth. The findings alert policy makers in such countries to the significant moderating role that geopolitical risk plays in affecting the above-mentioned relationship and to the importance of prioritizing geopolitical stability as a policy precursor for the successful implementation of such strategies.

Finding Causality Between Finance and Growth in Bangladesh

The relationship between financial development and economic growth has gained much attention in the last three decades. It has been primarily believed that financial sector development promotes economic growth. A lot of theoretical and empirical research has been done in this field and the results which came out are a kind of mixed relationship between the two. Bangladesh, a country in the SAARC region has taken different financial reform policies in the same line with other developed and developing countries. The main purpose of this paper is to investigate the relationship between financial development and economic growth in Bangladesh. Annual time series data for the period 1976 to 2020 has been taken and the ARDL technique has been used for this purpose. The ARDL bound testing shows that there is a long-run relationship between financial development variables and economic growth. In the short run, all the proxies of financial development were found to have a significant relation to economic growth. The study has found two bidirectional causality and one unidirectional causality between the variables.

Financial Development and Economic Growth

This paper aims to examine the effect of financial developments and economic growth in Nepal employing Autoregressive Distributed lag Model (ARDL) approach of cointegration using the time series data for the period from 1972-2022. Nepal is a unique country for specific case study as it represents the group of landlocked Developing countries and lagging, behind even having lots of natural beauties, and resources within the country. After a recent, significant political shift, Nepal's stable government is currently actively pursuing significant amounts of foreign direct investment. We develop a model with four proxies of financial development (Broad money, Domestic credit by private sectors, Foreign Direct Investment, Gross Capital formation) and econometrically test their contribution in economic growth. And the long bound test suggests that we can reject the null hypothesis of no co-integration and conclude that the variables are co-integrated at all significance levels. Therefore, based on the F-bound test results, we can conclude that there is evidence of co-integration between the variables in the ARDL model.

Shrinking the shadow economy: Experimental insights into the role of financial development

In this experiment-based study, we examined how development in the financial sector influences people’s propensity to participate in the shadow economy. We used a within-subject and between-subject design to examine the impact of various shadow economy structures, with a focus on the credit supply as a common proxy for financial development. Our research shows that people are more likely to operate in the formal economy when the level of financial development is higher, even if it associated with higher tax rate. We also found that the structure of the shadow economy affects people’s propensity toward it only when financial development is sufficiently advanced to create certainty in receiving credit.

Financial development, economic growth, and income inequality: a Toda-Yamamoto panel causality test

This paper examines the causality between financial development, economic growth, and income inequality using panel data for 23 European Union countries over the period 1987-2017. The empirical study employs a trivariate setting of Granger non-causality test of heterogeneous panels adopting the Toda and Yamamoto approach using several proxies of financial development capturing different dimensions of the banking system and stock markets. The findings suggest mixed evidence for the causality direction between financial development and economic growth and financial development and income inequality. In addition, the results support bidirectional causality between economic growth and inequality and one-way causality from inequality to growth. The policymakers can focus primarily on economic growth to raise the demand for financial services and encourage income distribution.

Understanding the Relationship Between Foreign Direct Investment and Economic Growth in BRICS: Panel ARDL Approach

Foreign direct investment (FDI) has gained prominence in international economics over the past three decades. Primarily, the belief that FDI influences economic growth of the host country, set the stage for the empirical research focused on the FDI–growth nexus. The growth literature, however, reveals mixed evidence regarding the role of FDI in promoting growth. Despite the conflicting evidence, developed and developing economies have attached immense economic and political importance to FDI. It is noteworthy that BRICS (Brazil, Russia, India, China and South Africa) economies are representative developing economies and have emerged as significant FDI destinations, having witnessed an immense surge in inward FDI over the past few decades. It is against this backdrop that the present study attempts to assess the impact of FDI inflows and select macroeconomic variables, namely macroeconomic stability, human capital, financial development and trade openness (TO), on the economic growth of developing BRICS economies. The study examines both short-run and long-run relationships between FDI inflows, select macroeconomic variables and economic growth by employing the dynamic panel autoregressive distributed lag (ARDL) model, unlike most of the previous studies. For this study, secondary data covering a reference period of 32 years (1987–2018) were used. The data on GDP growth (GDPG), FDI inflows, inflation (INF), human capital, private sector bank credit (proxy for financial development) and TO have been collected from the World Investment Reports published annually by United Nations Conference on Trade and Development (UNCTAD) and World Bank (World Development Indicators). The findings revealed a long-run cointegration among FDI, host country characteristics (TO, human capital, financial development and macroeconomic stability) and economic growth in BRICS.

Does Financial Development Drive Private Investment? An Econometric Study with reference to Cote d’Ivoire

This study examines the impact of financial development on domestic investment in Cote d’Ivoire. Using the Autoregressive Distributed Lag (ARDL) bounds testing approach and domestic credit to private sector as share of GDP as proxy for financial development along with the other control variables, we estimate a private investment function for the 1975-2019 period. The main finding of the study is that domestic credit to private sector has a negative effect on private investment rate. Further, the results show that real GDP per capita and trade openness are positively related to private investment rate.

Revisiting the finance-growth nexus in sub-Saharan Africa: Does the level of income inequality matter?

In this paper, the modulating effect of income inequality in the finance–growth nexus using data from 29 sub-Saharan African (SSA) countries is examined. The study examines i) whether financial development still spurs economic growth in the studied countries, and ii) whether income inequality modulates the effect of financial development on economic growth. Three proxies of financial development and four income inequality indicators are used. The financial development indicators used include the financial development index, financial institutions index, and financial markets index, while income inequality is measured by the Palma ratio, the Gini coefficient, the Atkinson index, as well as the composite inequality (Comp) derived from the principal component analysis (PCA). The Generalised Method of Moments (GMM) has been used to examine this linkage. The study found that, on the whole, the beneficial effect of financial sector development on economic growth in the studied countries is weak, at best. This finding has been corroborated by the results of the interaction models, which show that income inequality interacts with financial development to yield a net negative effect on economic growth in four specifications, but a net positive effect in only two specifications. This finding is not surprising given the high level of income inequality that is currently ravaging some of the SSA countries. Policy implications are discussed.

The impact of oil prices, financial development and economic growth on renewable energy use

PurposeThe purpose of this study is to verify all factors that promote renewable energy (RE) consumption. Past studies have shown that financial development (FD) and economic growth (EG) are the major drivers toward RE development, while oil prices had mixed outcomes in different regions by different studies.Design/methodology/approachGlobal warming effects have been the major reason of the transition by nations from fossil fuel use to RE sources that are considered as friendly to the environment. This research uses the fixed effects and random effects techniques, to ascertain the factors which impact RE development. The generalized linear model is also used to check the robustness of the Fixed Effects and Random Effects models’ results, while the Kao, Pedroni and Westerlund tests are used to check cointegration in the specified model.FindingsThe major findings of this study show the importance of EG and FD in promoting RE development. Oil prices, inflation rate and public sector credit present a negative effect on RE development, while foreign direct investment does not significantly impact RE development.Practical implicationsThis research recommends the use of FD in promoting RE sources, as well as the stabilization of oil prices and consumer prices.Originality/valueThis research is important because it specifies the three proxies of FD, together with foreign direct investment inflation rate, EG and oil prices, in modeling RE. By investigating the impact of oil prices on RE in the emerging seven economies, this research becomes one of the few studies done in this region, as per the authors’ knowhow.

The contribution of bank intermediation to economic growth: Empirical evidence from CESEE countries

The financial system is the crucial supporter of economic growth, as it is said to be the “blood” of economic activities. Many studies reveal the role and importance of the financial system in promoting economic development by raising growth through the accumulation and utilization of savings for productive investments (Levine, 2005). However, some studies highlight a negative or non-significant relationship which may differ depending on the sample of countries and the applied methodology, proxy of financial development, time period, etc. Based on the relevance of the topic and on the ongoing debate, the aim of this study is to explore the nexus and contribution of banking intermediation in the economic growth of some Central Eastern and South-Eastern European (CESEE) countries for the period 2010–2020. We use regression methods, ordinary least squares (OLS), and a fixed effect model to investigate the relationship between economic growth and bank intermediation. We measure the development of banking intermediation using banks’ credit to the private sector, credit to government and state-owned enterprises. The research results show that credits provided by banks do not affect economic growth and are in fact negatively related to economic growth, whereas the return on equity is positively related to economic growth.

Foreign Direct Investment and Financial Development in Selected MENA Region Countries: Panel ARDL Approach

This article empirically examines the linkage between foreign direct investment (FDI) and financial development (FD) in 16 selected countries of the MENA region (Algeria, Bahrain, Egypt, Iran, Israel, Jordan, Kuwait, Lebanon, Malta, Mauritania, Morocco, Oman, Qatar, Saudi Arabia, Tunisia, and the United Arab Emirates) over the period 2000–2018. The research investigates the long- and short-run effects of FD on FDI inflows using panel ARDL. This model is based on the dynamic fixed effect (DFE) estimator. The article employs three proxies of FD as developed by the IMF, namely, the overall financial development (OFD), financial markets’ development (FM), and financial institutions’ development proxy (FI). The purpose was to analyze the impact of FD by covering the depth, efficiency, and access to financial markets and their institutions. The findings suggest that even though no significant relationship is established in the short run, the long-run coefficients of the overall FD proxy and FM proxy are positive and statistically significant. The estimates suggest that a 1% increase in the overall FD proxy and FM proxy results in an increase of 172% and 150% of FDI inflows to MENA region countries, respectively. JEL Classification F21, F23, G15, O16

중국의 금융발전이 경제성장에 미친 영향에 대한 실증 분석

In this paper we examine the dynamic causal relationship between financial development and economic growth in China-using the newly developed ARDL-Bounds testing procedure. We use four proxies of financial development, namely M2/GDP, the ratio of private sector credit to GDP, the ratio of stock market capitalization to GDP and the ratio of bond market to GDP in order. The analysis period used annual data from 1978 to 2019. For analyzing the long term equilibrium relationship between the desired variables, we have employed Autoregressive Distributed Lag(ARDL) Bound testing approach. ARDL being a new approach is an improvement over the other traditional techniques of cointegration. Further, using the technique of bound testing approach, we have tried to estimate the impact in the short run also. The findings suggest that there exist an equilibrium relationship in long run between financial development and economic growth. The results suggested that financial development causes economic growth in the long run, however not statistical significance in the short term.

DOES TOURISM INFLUENCE FINANCIAL DEVELOPMENT IN KENYA?

Objective: In this study, we investigate the impact of tourism on financial development in Kenya using time series data from 1995 to 2017. The study uses the autoregressive distributed lag (ARDL) bound testing approach to cointegration and error correction model to examine this connection. To increase the robustness of the results, the study uses two proxies of financial development, namely broad money (bank-based financial development proxy) and total value of stocks traded (market-based financial development proxy). Results show that tourism has an insignificant impact on financial development in Kenya – both in the short run and in the long run. The results are relevant regardless of whether the financial development is proxied by a bank-based financial development indicator or by a market-based financial development indicator. This finding points to the fact that, although tourism is one of the main sources of foreign exchange in Kenya, it has no direct impact on financial development. The findings from this study add value to policy makers in Kenya by revealing the insignificant impact that tourism has on financial development, although this is in contrast to other studies that found a positive contribution. Based on the findings, Kenya may not anchor its financial development policies on tourism.

The impact of a dual banking system on macroeconomic efficiency

The rapid growth of Islamic banking around the globe has led to questions about its role in the economy. In this paper, we examine whether Islamic banking acts as a substitute or complement to conventional banking in promoting macroeconomic efficiency in countries with a dual-banking system. Using a one-stage Stochastic Frontier (SF) approach, we find evidence that similar to conventional banking, Islamic banking positively contributes to a country's macroeconomic efficiency. However, Islamic banking acts as a substitute not as a complement to conventional banking in contributing to macroeconomic efficiency. The results are robust to using both credit and deposit ratios as proxies of financial development. The findings are consistent with growing evidence that despite the apparent philosophical differences between the two banking systems, Islamic banking is increasingly converging in its operations to conventional banking.

Oil Resource Earnings and the Nigerian Economy: Does Financial Development Matter?

The study investigates the role of the financial sector in the mobilization of oil resources for the development of the Nigerian economy. While the period covers between 1981 and 2019, the research utilizes the principal component analysis (PCA) approach to construct a composite proxy for financial development from five variable indicators. Also, the study deploys the fully modified ordinary least squares (FMOLS) to estimate the impact of oil revenue and financial development on Nigeria’s economic growth. The study found that oil revenue has a positive and significant effect on economic growth. In addition, the impact of financial development on economic growth is negative and significant. But, the interacted effect of oil revenue and financial development is positive and significant. Hence, the study concludes that, while the resource curse theory does not apply to Nigeria during the period, the part of oil proceeds that is channeled to financial development positively impacts the economy. Thus, the study recommends more robust development-related measures to improve financial development in the country and an improved articulation approach for the investment of the earnings from the Nigerian oil sector. JEL Classification: G20 O16 O43 Q32 Keywords: Oil revenue, Financial Development, Economic Growth, Principal Component Analysis (PCA), Fully Modified Ordinary Least Squares (FMOL) DOI: 10.7176/DCS/12-4-03 Publication date: April 30 th 2022

Causality between financial development, economic growth, and income inequality in EU countries

This study investigates the causality between financial development, economic growth, and income inequality using panel data for 23 European Union countries over the period 1987-2017. Various proxies of financial development are chosen to represent the depth, efficiency, and stability of the banking system and stock markets. For the empirical analysis, the study performs the Granger non-causality test in heterogeneous panels. The findings are contradictory and sensitive to the measures of financial development. Most importantly, the results reveal a one-way causality from financial development to economic growth when private credit, stock market capitalization, net margin interest rate, and Z-score are chosen as financial development indicators. In addition, a two-way causality exists between bank assets, liquid liabilities, non-performing loans, and economic growth, and a one-way causality from economic growth to value traded and turnover ratio. However, the results show no causality between stock price volatility and economic growth. The results indicate a one-way causality running from income inequality to economic growth. Finally, a one-way causality runs from income inequality to financial development for most measures of financial development except for a one-way causality running from private credit to income inequality, a two-way causality between bank assets and inequality, and an absence of causality between income inequality and turnover ratio, Z-score and stock price volatility.