Threshold effects of financial depth on domestic savings: Evidence from the EMEA region

This paper examines how financial depth shapes domestic savings across countries in the Europe, Middle East, and Africa (EMEA) region. Using annual data from 2000 to 2021 and applying the System Generalized Method of Moments (GMM) approach, the study addresses endogeneity concerns and captures dynamic effects. Financial depth is measured through mutual fund assets, pension fund assets, insurance premiums (both life and non-life), and domestic credit to the private sector, all expressed as percentages of GDP. The results reveal a nonlinear relationship: initially, greater financial depth boosts domestic savings, with a one-unit increase in the financial depth index raising savings by 0.216%. However, the marginal benefit declines by 0.002% as financial depth continues to grow. Even with this diminishing return, the net effect remains positive at 0.103%, indicating the existence of an optimal level of financial depth. These findings suggest that while expanding financial markets can significantly enhance savings, unchecked growth beyond the threshold could lead to inefficiencies or instability. A balanced approach is therefore essential—promoting financial deepening up to its most effective level while carefully managing the risks of overindebtedness or financial strain.