Influence of Macroeconomic Stability on Financial Development in Developing Economies: Evidence From West African Region

Abstract

This paper examines the effects of macroeconomic stability on financial development in the West African region. Macroeconomic stability is measured based on five Maastricht Criteria’s variables namely inflation rate, real exchange rate, government debt, fiscal deficit and real interest rate. The study employs dynamic models on the panel data. We find that macroeconomic stability has significant effects on financial development in the region. Specifically, inflation rate, real exchange rate and fiscal deficit have negative effects, while the effects of government debt and real interest rate are positive. The implication of this study is that macroeconomic stability variables are determinants of financial development. Hence, developing economies should strive to achieve macroeconomic stability in order to drive financial development, with a view to achieving sustainable economic development.

Rethinking the impact of GDP on financial development: Evidence from heterogeneous panels

“…Kim and Lin (2010) employed the PMG technique, and revealed that GDP accelerates financial development in 82 countries. Ibrahim and Sare (2018) used the dynamic GMM approach to reveal that GDP promotes financial development in 46 African countries, while Ehigiamusoe et al (2020) showed that GDP has a positive impact on financial development in 16 West African countries.…”

“…Kim and Lin (2010) reported that inflation has a long‐run negative effect on financial development, albeit the short‐run effect is positive in 87 countries. Bittencourt (2011) also examined the impact of inflation on financial development and reported that inflation has a detrimental effect on financial development in Brazil, while Ehigiamusoe et al (2020) showed that inflation has a negative impact on financial development in the West African region.…”

“…Furthermore, the impact of GDP on financial development could be moderated by the level of inflation since the latter is dynamically related to both GDP and financial development. For instance, the theoretical literature asserts that persistent increases in inflation rate interfere with the capacity of the financial system to allocate resources efficiently and effectively (Boyd et al, 2001; Ehigiamusoe et al, 2020). A rise in inflation rate reduces the real rate of return on money (and assets in general), which aggravates credit market frictions.…”

Do Transparency and Anti-Monopoly Policies Matter for Financial Development? Evidence from a Panel ARDL-PMG Approach

“…Based on the aforementioned arguments, we argued that macroeconomic stability is essential for financial stability and market development. Using Maastricht Criteria and PMG estimations, Ehigiamusoe et al (2020) found a significant influence of macroeconomic stability on financial market development in West African countries. Similarly, utilizing two-step system GMM model, Abubakar and Kassim (2018) analyzed OIC countries while Aluko and Ibrahim (2020) selected sub-Saharan region to corroborate that financial institutions perform more effectively in the presence of stable macroeconomic environments such as more government expenditures, income, trade openness, financial openness, high institutional quality, and low inflation.…”

“…Considering the role of government transparency and anti-monopoly policy in promoting macroeconomic stability and financial market development, this study extends the related literature at the global level using a Panel ARDL-PMG approach. First, we estimate the underexplored effect of macroeconomic stability on financial market development using the sub-indexes of Global Competitive Index (GCI) as the evidence from disaggregate macroeconomic variables are largely mixed (Abubakar & Kassim, 2018;Aluko & Ibrahim, 2020;Ehigiamusoe, Lean, & Chan, 2020;Garcia & Liu, 1999). Macroeconomic stability fosters the financial development by reducing the vulnerability to the influence of external shocks (Vasylieva et al, 2018) and stimulating fairly constant output growth (Bourguignon, 2020).…”