Financial Development, Economic Environment and Policies
This paper aims to examine the channels of financial development, including the financial market and fi-nancial institutions, and to investigate the effect of monetary and fiscal policies on these channels using a panel data of 59 economies. The first results show that the value of money growth coefficient negatively relates to financial de-velopment, meaning that strong monetary policy hinders a financial system’s development. The effect of government spending on financial development is significantly and positively correlated, demonstrating that the effectiveness of fiscal policy improves the development of the financial system. Moreover, macroeconomic variables are significant-ly associated with financial development, showing that the lower external debt, lower interest rates and higher trade effect on financial development. The second panel analysis indicates that the most important components of mone-tary policy positively influence financial development in countries with good economic environments as legal and institutional quality, while fiscal policy’s effect on financial development does not depend on the economic environ-ment.
Economic environment, Financial development, Fiscal policy, Monetary policy.
JEL classification: G10, G20, E52, E62.