Easing economic vulnerability: Multidimensional evidence of financial development

Abstract

This study is the first proper attempt to investigate the influence of financial development as a component of an institutional framework on economic vulnerability. Using a global sample of 76 countries from 1997 to 2017 and a series of econometric panel estimates, the findings are robust and consistent. The development of the financial system is found to have a significant negative impact on economic vulnerability, as demonstrated through investigations on the global sample and two sub-samples of 39 low- and lower-middle-income economies and 37 upper-middle and high-income economies. The analysis of three dimensions (financial depth, financial access, and financial efficiency) and two sub-sectors (financial institutions, and financial markets) also shows consistent negative impacts of financial development on economic vulnerability. Notably, the study documents a U-shaped effect of financial development on economic vulnerability. The findings are believed to warrant policymakers’ interest in the positive aspects of the financial system in easing economic vulnerability.