Financial Development in Uncertain Economies: A Pathway to Sustainability
Financial Development in Uncertain Economies: A Pathway to Sustainability

Summary/Abstract: This study is the first to explore the effect of economic policy uncertainty (EPU) on multidimensional financial development. Using data from 22 countries over 20 years (2002–2021) and employing fixed effects regression and two-step dynamic system GMM estimators, the results reveal a significant negative impact of EPU on financial development. This adverse effect spans both key dimensions: financial institution development and financial market development. The analysis further highlights how EPU hampers key dimensions of financial institutions’ and markets’ performance – depth, access and efficiency. Importantly, the study highlights the positive moderating role of institutional quality, which mitigates the negative impact of EPU, reinforcing its importance in enhancing financial resilience. Furthermore, this study differentiates between elevated and mild EPU regimes, highlighting the capacity of the latter to significantly hinder financial development. These findings underscore the vital role of strong institutions in stabilizing financial systems amid policy uncertainty.

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