How does financial development alter the impact of uncertainty?

Policy uncertainty and foreign direct investment

“…In related literature, Hermes and Lensink (2003), Alfaro et al (2004), and Desbordes and Wei (2017) report that a developed financial system plays a crucial role in enhancing the positive effect of FDI on economic growth. When it comes to the literature on uncertainty, Carrière‐Swallow and Céspedes (2013), Choi et al (2018), and Karaman and Yıldırım‐Karaman (2019) using cross‐country data find that less‐developed financial markets amplify the adverse effect of uncertainty on domestic investment. We investigate the role of financial development in ameliorating the adverse effect of policy uncertainty on FDI inflows by including the interaction term between the host country EPU and a measure of financial development.…”

“…We extend the instrument variable framework for reevaluating the role of financial development in mitigating the adverse effect of domestic policy uncertainty on FDI inflows. Following Karaman and Yıldırım‐Karaman (2019), we also treat the mechanism of interest—the interaction term between financial development and policy uncertainty—as endogenous. We then include the interaction terms between financial development and the exogenous election timing in the instrument set (Wooldridge, 2010).…”

“…Second, studies show that these factors determine the effectiveness of FDI in promoting growth (Alfaro et al, 2004; Desbordes & Wei, 2017; Hermes & Lensink, 2003). Third, developed financial markets ameliorate the dampening effect of uncertainty on domestic investment (Carrière‐Swallow & Céspedes, 2013; Choi et al, 2018; Karaman & Yıldırım‐Karaman, 2019). By estimating the interaction effect between policy uncertainty and financial development—measured by domestic private credit to GDP ratio—we confirm that financial deepening can mitigate the adverse impact of policy uncertainty on FDI inflows.…”

Financial prudential behavior and economic growth

“…This research follows the idea that a well-developed financial system facilitates economic activities, provides liquidity, allocates capital to highest-return projects and stimulates specialization (Kivanc and Yildirim, 2019), at the same time that corrects information problems and tends to diminish transaction costs (Levine 1997). On the other hand, a less-developed financial system generates credit constrains, higher costs on financing projects and diminishes the speed at which firms can start a new project (Kivanc and Yildirim, 2019). When there are credit constrains or higher costs on financing, inefficiency appears since allocations of resources in time and space are not happening, in accordance with Merton and Bodie (1995).…”

The macroeconomic determinants and consequences of household financial behavior

“…Several recent studies suggest that a high level of financial development and institutional quality might moderate the influence of policy uncertainty on economic activity and lead to heterogeneous policy uncertainty effects across countries (Ahir et al, 2022;Karaman & Yıldırım-Karaman, 2019;Ma & Hao, 2022;Shabir et al, 2021). What remains unclear is to what degree financial development and institutional quality condition the impact of policy uncertainty on household savings.…”