Financial Institution Development and Economic Growth: Dynamic Panel Evidence from the Developing Economies

Abstract

This study aims to explore the impact of financial institution development (FID) on economic growth for the world and 54 developing economies from 2000 to 2019 with dynamic panel system GMM estimation. With regard to FID, this study considers 4 different indicators: access, depth, efficiency, and stability. Estimation results are as follows. First, the FID indicators (access, depth, and efficiency) have positive impact on economic growth for the world group and developing economies with stronger effect of access in developing economies. Second, the stability as another FID indicator, liquid assets, is negative only for the developing economies. It means that the higher ratio of liquid assets, the more incentive for financial institution to take on risk. These results were also maintained in the robustness check. Overall, this study suggests that developing economies should enhance their access to financial institution and put in place the measures to manage liquid assets.