What Matters for Financial Development and Stability?
IMF Working Papers, July 24, 2015
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Bibliographic details
- Authors: Raja Almarzoqi, Akshay Kotak
- Published: July 24, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513501178.001
Study objective and framework
- This study aims to identify policies that influence the development of financial institutions as measured across three dimensions: depth, efficiency, and stability.
- Applies the concept of the financial possibility frontier, developed by Beck & Feyen (2013) and formalized by Barajas et al (2013a), to determine key policy variables affecting the gap between actual levels of development and benchmarks predicted by structural variables.
- Uses dynamic panel estimation to assess policy effects.
Key empirical findings
- Our dynamic panel estimation shows that inflation, trade openness, institutional quality, and banking crises significantly affect financial development.
- The analysis identifies potential complementarities and trade-offs for policy makers, based on the effect of the policy variables across the different dimensions of financial development.
Policy implications and analytical contributions
- Highlights policy variables that matter for financial institution development across three dimensions: depth, efficiency, and stability.
- Provides evidence on complementarities and trade-offs policymakers should consider when designing policies affecting financial development.
- Employs the financial possibility frontier concept to separate structural benchmarks from policy-responsive gaps in financial development.
Subject areas and keywords
- Subject: Banking crises, Commercial banks, Econometric analysis, Estimation techniques, Financial crises, Financial institutions, Financial markets, Financial sector development, Population and demographics
- Keywords: Banking crises, banking sector, Commercial banks, d GMM, difference GMM estimator, Estimation techniques, financial development, financial possibility frontier, Financial sector development, financial stability, Global, real GDP, s GMM, standard deviation, system GMM estimation, system GMM estimator, WP