What Matters for Financial Development and Stability?

45 Pages Posted: 14 Sep 2015

See all articles by Raja Almarzoqi

Raja Almarzoqi

International Monetary Fund (IMF)

Sami Ben Naceur

International Monetary Fund (IMF)

Akshay Kotak

Systemic Risk Centre, LSE

Date Written: July 2015

Abstract

This study aims to identify policies that influence the development of financial institutions as measured across three dimensions: depth, efficiency, and stability. Applying the concept of the financial possibility frontier, developed by Beck & Feyen (2013) and formalized by Barajas et al (2013a), we determine key policy variables affecting the gap between actual levels of development and benchmarks predicted by structural variables. Our dynamic panel estimation shows that inflation, trade openness, institutional quality, and banking crises significantly affect financial development. Our analysis also helps identify potential complementarities and trade-offs for policy makers, based on the effect of the policy variables across the different dimensions of financial development.

Keywords: financial development, financial possibility frontier, variables, benchmarks, trade, economy, Financial Markets and the Macroeconomy, Monetary Policy (Targets, Instruments, and Effects), Globalization: General, General

JEL Classification: E44, E52, F60, G20, O16

Suggested Citation

Almarzoqi, Raja and Ben Naceur, Sami and Kotak, Akshay, What Matters for Financial Development and Stability? (July 2015). IMF Working Paper No. 15/173, Available at SSRN: https://ssrn.com/abstract=2659531

Raja Almarzoqi (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Sami Ben Naceur

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Akshay Kotak

Systemic Risk Centre, LSE ( email )

Houghton St London WC2A 2AE United Kingdom

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