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The Multidimensional Effect of Financial Development on Total Factor Productivity: Evidence from Cross-country Panel Data

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  • Çağatay Vişne
  • Ramazan Ekinci

Abstract

This paper estimates the impact of financial development on total factor productivity (TFP) using panel data from 2002 to 2019. Employing the Driscoll-Kraay Standard Error (DKSE) approach, we analyze the relationship between financial development and its components (financial institutions and financial markets) with TFP. The results confirm the existence of a positive and significant relationship between financial development and TFP, suggesting that financial development plays a facilitating role in TFP. It was found that financial institutions have a positive and significant effect on TFP, while financial markets do not have a significant effect on TFP. Moreover, while the effect of financial development on TFP is positive and significant in developing countries, there is no clear evidence of such an effect in developed countries. Among the control variables included in the model, trade openness, foreign direct investment, and economic growth have a positive effect on TFP, while human capital has a negative effect. Furthermore, it is confirmed that institutional quality indicators also have a positive impact on TFP when included in the model. Our results suggest that policies favouring financial development should be pursued further in order to correct the mismatch in resource allocation and thus promote TFP growth.

Suggested Citation

  • Çağatay Vişne & Ramazan Ekinci, 2025. "The Multidimensional Effect of Financial Development on Total Factor Productivity: Evidence from Cross-country Panel Data," Journal of Research in Economics, Politics & Finance, Ersan ERSOY, vol. 10(2), pages 568-595.
    • Handle: RePEc:ahs:journl:v:10:y:2025:i:2:p:568-595
    DOI: 10.30784/epfad.1626643
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    Keywords

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    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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