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Dynamic effects of financial development on economic activity

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  • Joshua Duarte
  • João Sousa Andrade
  • Pedro Bação

Abstract

In this article, we provide evidence of the dynamic effects of financial development on a group of key macroeconomic variables, namely, output, consumption, investment, inflation, money, the interest rate and the exchange rate. As the measure of financial development we use a new broad measure of financial development instead of the narrow measures usually employed in the related literature. Another novelty is that we estimate the dynamic effects of financial development on economic activity in the context of a panel vector autoregressive model, comprising 36 countries observed in the period 1983–2019. Our results suggest that financial development has a positive impact on output, investment, and consumption. The results reported in this article also support the proposition that the benefits from financial development are larger in economies where the financial system is market-based. These results survive a battery of robustness checks.

Suggested Citation

  • Joshua Duarte & João Sousa Andrade & Pedro Bação, 2023. "Dynamic effects of financial development on economic activity," Applied Economics, Taylor & Francis Journals, vol. 55(29), pages 3329-3346, June.
    • Handle: RePEc:taf:applec:v:55:y:2023:i:29:p:3329-3346
    DOI: 10.1080/00036846.2022.2114994
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