Financial Development in Uncertain Economies: A Pathway to Sustainability

Xin Ling, Muhammad Atif Khan and Hammad Qadeer

Politická ekonomie, vol. preprint

Abstract: This study is the first to explore the effect of Economic Policy Uncertainty (EPU) on multidimensional financial development. Using data from 22 countries over 20 years (2002-2021) and employing fixed effects regression and two-step dynamic system GMM estimators, the results reveal a significant negative impact of EPU on financial development. This adverse effect spans both key dimensions: financial institutions and financial markets development. The analysis further highlights how EPU hampers key dimensions of financial institutions and markets\' performance - depth, access, and efficiency. Importantly, the study highlights the positive moderating role of institutional quality, which mitigates EPU\'s negative impact, reinforcing its importance in enhancing financial resilience. Furthermore, this study differentiates between elevated and mild EPU regimes, highlighting the capacity of the latter to significantly hinder financial development. These findings underscore the vital role of strong institutions in stabilizing financial systems amid policy uncertainty.

Keywords: Economic policy uncertainty; financial development; institutional quality (search for similar items in EconPapers)
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DOI: 10.18267/j.polek.1495

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