Effects of financial development on consumption: International empirical evidence

What the paper says

Purpose This study aims to analyze the impact of financial development (FD) on consumption. The authors investigate the individual effects of the development of financial institutions (FI) and financial markets (FM) on consumption, since they can have different impacts. Finally, the authors analyze the effects of the depth, access and efficiency of FI and FM on consumption. Design/methodology/approach The authors use FD indicators obtained from the International Monetary Fund, which provide us with standardized metrics for this assessment, and a sample that includes 100 countries, with annual observations in the period from 1991 to 2019, enabling the exploration of international evidence for a wide range of countries. The authors conducted analyses for the pre and post subprime crisis periods and for subsamples according to the level of development of the countries (developed and developing countries). Besides fixed effects ordinary least squares estimates, the models are also estimated by system-generalized method of moments. Findings The results indicate that FD has a positive impact on consumption in four different scenarios and the development of FI is the most relevant, especially after the subprime crisis. Access to and depth of institutions are particularly important for developing countries in the post-subprime crisis period. Originality/value The impacts of FD on consumption are not consensual, and the studies conducted are mostly individual analyses of countries. In addition, the findings of existing studies are difficult to compare, as they are obtained by different approaches and are not based on standardized indicators. Our study seeks to contribute to the literature with a comprehensive international analysis and an approach that allows comparing the different aspects of FD, both for institutions and markets, in different contexts and level of economic development of countries.