Harnessing AI and technological innovation for financial development: the mediating effect of government effectiveness in G20 economies

As technological advancements reshape financial systems globally, understanding their impact on financial market efficiency, depth, and access is crucial for policymakers. Building on the framework of Endogenous Growth Theory, this study investigates the role of Artificial Intelligence (AI) and Technological Innovation (TI) in fostering financial development within the context of G20 economies from 2010 to 2022. Additionally, this study assesses how AI and TI influence these dimensions of financial development, while also examining the mediating role of government effectiveness. Employing a quantitative approach, we utilize baseline regression, two-step system GMM, and Methods of Moments Quantile Regression (MMQR) to analyze the relationships among variables. The findings reveal that both AI and TI significantly enhance financial development, with AI showing a stronger effect in developing countries and TI being more impactful in high-income nations. Government effectiveness is identified as a critical mediator, amplifying the benefits of AI and TI in enhancing financial systems. These results have important implications for policymakers, suggesting that investments in AI and TI should be accompanied by efforts to strengthen governmental institutions. This study contributes to the literature on financial development by highlighting the necessity of integrating technological innovations within robust governance frameworks, thereby fostering sustainable economic growth in the context of evolving technological landscapes.