Dynamic effects of financial development on economic activity

Joshua Duarte, João Andrade and Pedro Bação

Applied Economics, 2023, vol. 55, issue 29, 3329-3346

Abstract: In this article, we provide evidence of the dynamic effects of financial development on a group of key macroeconomic variables, namely, output, consumption, investment, inflation, money, the interest rate and the exchange rate. As the measure of financial development we use a new broad measure of financial development instead of the narrow measures usually employed in the related literature. Another novelty is that we estimate the dynamic effects of financial development on economic activity in the context of a panel vector autoregressive model, comprising 36 countries observed in the period 1983–2019. Our results suggest that financial development has a positive impact on output, investment, and consumption. The results reported in this article also support the proposition that the benefits from financial development are larger in economies where the financial system is market-based. These results survive a battery of robustness checks.

Date: 2023
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DOI: 10.1080/00036846.2022.2114994

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