Impact of Domestic Public Borrowing on Financial Development: Evidence from EU Transition Economies
Article Sidebar
Main Article Content
Abstract
Improvements in the financial sector have been suggested as a significant factor of economic growth. For that reason, it is crucial to reveal the determinants of financial sector development to ensure appropriate policy making. In this regard, this paper explores the influence of public borrowing from domestic money banks together with FDI inflows and remittances on the development of the financial sector over the period 1996–2017 in 11 EU transition economies with second-generation cointegration and causality analysis. The causality analysis discloses that domestic public borrowing had a significant influence on financial development. On the other side, the cointegration analysis revealed findings supporting both the safe asset view and the lazy bank view. Furthermore, a positive weak influence of FDI inflows and remittances on financial sector development was revealed in the long run.
Article Details
The paper is published under CC BY-NC-ND, in which the article is freely downloaded and shared in its original form non-commercially and its citation details are identified.
References
Abubakar, A., & Kasim, S. (2018). Institutional and macroeconomic determinants of financial development in the OIC countries. Global Business and Economics Review, 20(4), 410-424.
Abzari, M., Zarei, F., & Esfahani, S.S. (2011). Analyzing the link between financial development and foreign direct investment among D-8 group of countries. International Journal of Economics and Finance, 3, 148–156.
Acemoglu, D., Johnson, S., & Robinson, J. A. (2001). The colonial origins of comparative development: An empirical investigation. American Economic Review, 91(5), 1369-1401.
Acemoglu, D., Johnson, S., & Robinson, J. (2004). Institutions as the fundamental cause of long-run growth (NBER Working Paper No.10481). Cambridge: National Bureau of Economic Research.
Aggarwal, R., Demirgüç-Kunt, A., & Pería, M. S. M. (2011). Do remittances promote financial development? Journal of Development Economics, 96(2), 255-264.
Akinci, G., Akinci, M., & Yilmaz, Ö. (2014). Financial development-economic growth nexus: A panel data analysis upon OECD countries. Hitotsubashi Journal of Economics, 55(1), 33-50.
Alexiou, C., Vogiazas, S., & Nellis, J. G. (2018). Reassessing the relationship between the financial sector and economic growth: Dynamic panel evidence. International Journal of Finance & Economics, 23(2), 155-173.
Ali, A., Ahmed, F., & Rahman, F. U. (2016). Impact of government borrowing on financial development (A case study of Pakistan). Bulletin of Business and Economics (BBE), 5(3), 135-143.
Altayligil, Y.B., & Akkay, R. (2013). The effect of the domestic debt on the financial development: A case study for Turkey. International Journal of Economics and Finance, 5(5), 64-74.
Arellano, C., Bai, Y., & Zhang, J. (2012). Firm dynamics and financial development. Journal of Monetary Economics, 59(6), 533-549.
Ayadi, R., Arbak, E., Naceur, S.B., & Groen, W.P.D. (2015). Determinants of financial development across the Mediterranean. In R. Ayadi, M. Dabrowski, & L. D. Wulf (Eds.), Economic and social development of the southern and eastern Mediterranean countries (pp. 159-181). Cham: Springer International Publishing.
Baltagi, B. H., Demetriades, P. O., & Law, S. H. (2009). Financial development and openness: Evidence from panel data. Journal of Development Economics, 89(2), 285-296.
Beck, T., Demirguc-Kunt, A., & Levine, R., (2003). Law and finance: Why does legal origin matter? Journal of Comparative Economics, 31(4), 653-675.
Beck, T., Demirguc‐Kunt, A., Laeven, L., & Levine, R. (2008). Finance, firm size, and growth. Journal of Money, Credit and Banking, 40(7), 1379-1405.
Bekaert, G., Harvey, C. R., & Lumsdaine, R. L. (2002). Dating the integration of world equity markets. Journal of Financial Economics, 65(2), 203-247.
Benayed, W., & Gabsi, F.B. (2020). Domestic public debt and financial development in Sub-Saharan Africa: Is there an inverted-U relationship? Economics Bulletin, 40(1), 846-854
Berdiev, A. N., & Saunoris, J. W. (2016). Financial development and the shadow economy: A panel VAR analysis. Economic Modelling, 57, 197-207.
Bernanke, B., Gertler, M., & Gilchrist, S. (1999). The financial accelerator in a quantitative business cycle framework (NBER Working Paper 6455). Cambridge, MA: National Bureau of Economic Research.
Bhaduri, S., & Bhattacharya, A. (2018). Financial liberalization and allocation of capital: Dark side of the moon. Journal of Quantitative Economics, 16, 163-185.
Bhattacharya, M., Inekwe, J., & Paramati, S.R. (2018). Remittances and financial development: empirical evidence from heterogeneous panel of countries. Applied Economics, 50(38), 4099-4112.
Bist, J. P. (2018). Financial development and economic growth: Evidence from a panel of 16 African and non-African low-income countries. Cogent Economics & Finance, 6(1), 1449780.
Blackburn, K., Bose, N., & Capasso, S. (2012). Tax evasion, the underground economy and financial development. Journal of Economic Behavior & Organization, 83(2), 243-253.
Boyd, J. H., Levine, R., & Smith, B. D. (2001). The impact of inflation on financial sector performance. Journal of monetary Economics, 47(2), 221-248.
Breusch, T. S., & Pagan, A. R. (1980) The Lagrange multiplier test and its applications to model specification in econometrics. Review of Economic Studies, 47(1), 239-253.
Brown, R. P., Carmignani, F., & Fayad, G. (2013). Migrants’ remittances and financial development: Macro‐and micro‐level evidence of a perverse relationship. The World Economy, 36(5), 636-660.
Bua, G., Pradelli, J. & Presbitero, A.F. (2014). Domestic public debt in low-income countries: Trends and structure. Review of Development Finance, 4(1), 1-19.
Caballero, R.J. & Krishnamurthy, A. (2004). Fiscal policy and financial depth growth (NBER Working Paper 10532). Cambridge, MA: National Bureau of Economic Research.
Capasso, S., Jappelli, T. (2013). Financial development and the underground economy. Journal of Development Economics, 101, 167-178.
Chinn, M. D., & Ito, H. (2002). Capital account liberalization, institutions and financial development: Cross country evidence (NBER Working Paper 8967). Cambridge: National Bureau of Economic Research.
Chinn, M.D., & Ito, H. (2006). What matters for financial development? Capital controls, institutions, and interactions. Journal of Development Economics, 81, 163-192.
Choi, B. (2019). Financial development, endogenous dependence on external financing, and trade. Economica, 87(346), 530-587.
Claessens, S., & Laeven, L., (2003). Financial development, property rights, and growth. Journal of Finance, 58, 2401-2436.
Cottarelli, C., Dell'Ariccia, G., & Vladkova-Hollar, I. (2003). Early birds, late risers, and sleeping beauties: Bank credit growth to the private sector in central and eastern Europe and the Balkans (IMF Working Paper 03/213). Washington, DC: International Monetary Fund.
Dabla-Norris, E., & Srivisal, N. (2013). Revisiting the link between finance and macroeconomic volatility (IMF Working Paper WP/13/29). Washington, DC: International Monetary Fund.
Demirgüç-Kunt, A., & Detragiache, E. (1998). The determinants of banking crises in developing and developed countries. Staff Papers (International Monetary Fund), 45(1), 81-109.
Demirgüç-Kunt, A, & Levine, R. (2009). Finance and inequality: Theory and evidence. Annual Review of Financial Economics, 1, 287-318.
Demirgüç-Kunt, A., Córdova, E. L., Pería, M. S. M., & Woodruff, C. (2011). Remittances and banking sector breadth and depth: Evidence from Mexico. Journal of Development Economics, 95(2), 229-241.
Desbordes, R., & Wei, S.J. (2017). The effects of financial development on foreign direct investment. Journal of Development Economics, 127, 153-168.
Do, Q. T., & Levchenko, A. A. (2004). Trade and financial development (World Bank Policy Research Working Paper No. 3347). Washington, DC: World Bank.
Dumitrescu, E. I., & Hurlin, C. (2012). Testing for Granger non-causality in heterogeneous panels. Economic Modelling, 29(4), 1450-1460.
Eberhardt, M., & Bond, S. (2009). Cross-section dependence in nonstationary panel models: A novel estimator (MPRA Paper No. 17692). Munich: University Library of Munich.
Eberhardt, M., Teal, & F (2010). Productivity analysis in global manufacturing production (Economics Series Working Papers No.515). Oxford: Department of Economics.
Edge, R. M., & Liang, J. N. (2019). New financial stability governance structures and central banks (Finance and Economics Discussion Series 2019-019). Washington, DC: Board of Governors of the Federal Reserve System.
Emran, M. S., & Farazi, S. (2008). Government borrowing and private credit: Evidence from developing countries (World Bank Working Paper Series). Washington, DC: The World Bank.
Emran, M. S., & Farazi, S. (2009). Lazy banks? Government borrowing and private credit in developing countries (IIEP Working Paper 2009-9). Washington, DC: Institute for International Economic Policy.
Ganda, F. (2019). The environmental impacts of financial development in OECD countries: A panel GMM approach. Environmental Science and Pollution Research, 26(7), 6758-6772.
Gebrehiwot, A., Esfahani, N., & Sayin, M. (2016). The relationship between FDI and financial sector development: The case of sub-Saharan African region. International Journal of Regional Development, 3(1), 64–80.
Githaiga, P. N., & Kabiru, C. G. (2014). Remittances as a determinant of financial sector development. Journal of Business Economics and Finance, 3(4), 398-424.
Giuliano, P., & Ruiz-Arranz, M. (2009). Remittances, financial development, and growth. Journal of Development Economics, 90(1), 144–152.
Greenwood, J., & Jovanovic, B. (1990). Financial development, growth, and the distribution of income. Journal of Political Economy, 98(5, Part 1), 1076-1107.
Gupta, S., Pattillo, C.A., & Wagh, S. (2009). Effect of remittances on poverty and financial development in Sub-Saharan Africa. World Development, 37(1), 104–115.
Hassan, M. K., Sanchez, B., & Yu, J. (2011). Financial development and economic growth: New evidence from panel data. The Quarterly Review of Economics and Finance, 51(1), 88-104.
Hauner, D. (2009). Public debt and financial development. Journal of Development Economics, 88 (1), 171-183.
Henri, N., Luc, N.N., & Larissa, N. (2019). The long‐run and short‐run effects of foreign direct investment on financial development in African countries. African Development Review, 31(2), 216-229.
Huang, Y. (2010). Determinants of financial development. Hampshire: Palgrave Macmillan.
Ibrahim, M., & Sare, Y. A. (2018). Determinants of financial development in Africa: How robust is the interactive effect of trade openness and human capital? Economic Analysis and Policy, 60, 18-26.
Ilgün, M.F. (2016). Financial development and domestic public debt in emerging economies: A panel cointegration analysis. Journal of Applied Economics and Business Research, 6(4), 284-296.
Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115(1), 53-74.
International Monetary Fund (IMF) (2020). The financial development index database. Retrieved from https://data.imf.org/?sk=F8032E80-B36C-43B1-AC26-493C5B1CD33B
Ismihan, M., & Ozkan, F.G., (2012). Public debt and financial development: A theoretical exploration. Economic Letters, 115(3), 248-351.
Jalilian, H., & Kirkpatrick, C. (2002). Financial development and poverty reduction in developing countries. International Journal of Finance & Economics, 7(2), 97-108.
Janda, K., & Kravtsov, O. (2017). Time-varying effects of public debt on the financial and banking development in the central and eastern Europe (MPRA Paper No. 77325). Munich: University Library of Munich.
Jeanneney, S. G., & Kpodar, K. (2011). Financial development and poverty reduction: Can there be a benefit without a cost? Journal of Development Studies, 47(1), 143-163.
Kakhkharov, J. (2014). The impact of remittances on financial development: The case of transition economies of Central & Eastern Europe and former Soviet Union (Griffith Business School Discussion Papers-Economics No. 2014-09). Brisbane: Griffith University.
Kar M., & Pentecost, E.J. (2000). Financial development and economic growth in Turkey: Further evidence on the causality issue (Economic Research Paper No. 00/27). Loughborough: Loughborough University, Centre for International, Financial and Economics Research.
Karikari, N. K., Mensah, S., & Harvey, S. K. (2016). Do remittances promote financial development in Africa? Springer Plus, 5(1), 1-21.
King, R., & Levine, R. (1993). Finance, entrepreneurship and growth: Theory and evidence. Journal of Monetary Economics, 32(3), 513-542.
Kose, M. A., Prasad, E., Rogoff, K., & Wei, S. J. (2010). Financial globalization and economic policies. In D. Rodrik & M. Rosenzweig (Eds.), Handbook of development economics (pp. 4283-4359). North-Holland: Elsevier.
Kumar, R. R. (2013). Remittances and economic growth: A study of Guyana. Economic Systems, 37(3), 462-472.
Kumhof, M., Tanner, E. (2005). Government debt: A key role in financial intermediation (IMF Working Paper No. 05/57). Washington, DC: International Monetary Fund.
La Porta, R., Lopez‐de‐Silanes, F., Shleifer, A., & Vishny, R. W. (1997). Legal determinants of external finance. The Journal of Finance, 52(3), 1131-1150.
Levine, R. (1997). Financial development and economic growth: Views and agenda. Journal of Economic Literature, 35(2), 688-726.
Levine, R. (2002). Bank-based or market-based financial systems: Which is better? Journal of Financial Intermediation, 11(4), 398-428.
Levine, R. (2005). Finance and growth: Theory and evidence. In P. Aghion & S. Durlauf (Eds.), Handbook of economic growth (pp. 865-934). New York: Elsevier.
Lynch, D. (1996). Measuring financial sector development: A study of selected Asia-pacific countries. The Developing Economies, 34(1), 1-27.
Malik, A., & Temple, J. R. (2009). The geography of output volatility. Journal of Development Economics, 90(2), 163-178.
Marvasti, B. M., & Razzaghi, S. (2020). Investigating the determinants of financial development in OPEC countries: An application of Bayesian model averaging approach. International Journal of Energy Economics and Policy, 10 (1), 342-352.
McKinnon, R.I. (1973). Money and capital in economic development. Washington, DC: The Brooking Institution.
Naceur, S.B., Cherif, M., & Kandil, M. (2014). What drives the development of the MENA financial sector? Borsa Istanbul Review, 14(4), 212-223.
Olayungbo, D.O., & Quadri, A. (2019). Remittances, financial development and economic growth in sub-Saharan African countries: Evidence from a PMG-ARDL approach. Financial Innovation, 5, 1-25.
Pesaran, M. H. (2004). General diagnostic tests for cross section dependence in panels (CESifo Working Paper No. 1229). Retrieved from http://ftp.iza.org/dp1240.pdf
Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross‐section dependence. Journal of Applied Econometrics, 22(2), 265-312.
Pesaran, M. H., & Yamagata, T. (2008). Testing slope homogeneity in large panels. Journal of Econometrics, 142(1), 50-93.
Pesaran, M.H., Ullah, A., & Yamagata, T. (2008). A bias‐adjusted LM test of error cross‐section independence. The Econometrics Journal, 11(1), 105–127.
Polat, B. (2018). The impact of workers’ remittances on financial market development: A case study for developing countries. Journal of Business Research-Turk, 10 (2), 27-36.
Pradhan, R. P., Arvin, M. B., Bahmani, S., Hall, J. H., & Norman, N. R. (2017). Finance and growth: Evidence from the ARF countries. The Quarterly Review of Economics and Finance, 66, 136-148.
Raddatz, C. (2006). Liquidity needs and vulnerability to financial underdevelopment. Journal of Financial Economics, 8(3), 677-722.
Rajan, R.G., & Zingales, L. (1998). Financial dependence and growth. American Economic Review, 88(3), 559-586.
Rajan, R. G., & Zingales, L. (2003). The great reversals: The politics of financial development in the twentieth century. Journal of Financial Economics, 69(1), 5-50.
Rapp, M. S., & Udoieva, I. A. (2018). What matters in the finance-growth nexus of advanced economies? Evidence from OECD countries. Applied Economics, 50(6), 676-690.
Sahin, S., & Ege, I. (2015). Financial development and FDI in Greece and neighboring countries: A panel data analysis. Procedia Economics and Finance, 24, 583–88.
Shahzad, S. J. H., Rehman, M. U., Abbasi, F., & Zakaria, M. (2014). Relationship between remittance, export, foreign direct investment and growth: A panel cointegration and causal analysis in South Asia. (MPRA Paper No. 60290). Munich: University Library of Munich.
Shaw, E. S. (1973). Financial deepening in economic development. New York: Oxford University Press.
Stulz, R. M., & Williamson, R. (2003). Culture, openness, and finance. Journal of Financial Economics, 70(3), 313-349.
Svirydzenka, K. (2016). Introducing a new broad-based index of financial development (IMF Working Paper 16/5). Washington, DC: International Monetary Fund.
Westerlund, J., & Edgerton, D. L. (2008). A simple test for cointegration in dependent panels with structural breaks. Oxford Bulletin of Economics and Statistics, 70(5), 665-704.
Williams, K. (2016). Remittances and financial development: Evidence from Sub‐Saharan Africa. African Development Review, 28(3), 357-367.
World Bank (2020a). Global Financial Development Database (GFDD). Retrieved from http://www.worldbank.org/en/publication/gfdr/data/global-financial-development-database
World Bank (2020b). Foreign direct investment, net inflows (% of GDP). Retrieved from https://data.worldbank.org/indicator/BX.KLT.DINV.WD.GD.ZS
World Bank (2020c). Personal remittances, received (% of GDP). Retrieved from https://data.worldbank.org/indicator/BX.TRF.PWKR.DT.GD.ZS
Wurgler, J. (2000). Financial markets and the allocation of capital. Journal of Financial Economics, 58(1-2), 187-214.