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Financial Development in Uncertain Economies: A Pathway to Sustainability

Author

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  • Xin Ling
  • Muhammad Atif Khan
  • Hammad Qadeer

Abstract

This study is the first to explore the effect of Economic Policy Uncertainty (EPU) on multidimensional financial development. Using data from 22 countries over 20 years (2002-2021) and employing fixed effects regression and two-step dynamic system GMM estimators, the results reveal a significant negative impact of EPU on financial development. This adverse effect spans both key dimensions: financial institutions and financial markets development. The analysis further highlights how EPU hampers key dimensions of financial institutions and markets\' performance - depth, access, and efficiency. Importantly, the study highlights the positive moderating role of institutional quality, which mitigates EPU\'s negative impact, reinforcing its importance in enhancing financial resilience. Furthermore, this study differentiates between elevated and mild EPU regimes, highlighting the capacity of the latter to significantly hinder financial development. These findings underscore the vital role of strong institutions in stabilizing financial systems amid policy uncertainty.

Suggested Citation

  • Xin Ling & Muhammad Atif Khan & Hammad Qadeer, . "Financial Development in Uncertain Economies: A Pathway to Sustainability," Politická ekonomie, Prague University of Economics and Business, vol. 0.
    • Handle: RePEc:prg:jnlpol:v:preprint:id:1495
    DOI: 10.18267/j.polek.1495
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