Impact of Domestic Public Borrowing on Financial Development: Evidence from EU Transition Economies

Yilmaz Bayar () and Emre Sakar
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Yilmaz Bayar: Department of Public Finance, Bandirma Onyedi Eylul University, Turkey
Emre Sakar: Department of Public Finance, Usak University, Turkey

Asian Journal of Applied Economics/ Applied Economics Journal, 2021, vol. 28, issue 1, 18-42

Abstract: Improvements inthefinancial sector have been suggested as a significant factor of economic growth. For that reason, it is crucial to reveal the determinants of financial sector development to ensure appropriatepolicymaking. In this regard, this paper explores the influence of public borrowing from domestic money banks together with FDI inflows and remittances on the development ofthefinancial sector over the period 1996–2017 in 11 EU transition economies with second-generation cointegration and causality analysis. The causality analysis disclosesthat domestic public borrowing had a significant influence on financial development. On the other side, the cointegration analysis revealed findings supporting both the safe asset view andthelazy bank view. Furthermore, a positive weak influence of FDI inflows and remittances on financial sector development was revealed in the long run.

Keywords: domestic public borrowing; FDI inflows; remittances; financial development; panel cointegration and causality analyses (search for similar items in EconPapers)
JEL-codes: C23 F24 G10 G20 H60 (search for similar items in EconPapers)
Date: 2021
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