Page 22 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.76, # 1, 2019, pp. 20-33

economy and vice versa) and there is no correlation between bank loans and inflation
and the output gap. Theoretically, the impact of the loan market deepness on
inflation might be positive as well as negative. The first case happens via credit
channel: A high level of loans speeds up economic growth level, which in turn raises
inflation. The second case arise through alternative financial resources prices. In the
context of decreasing number of banks, lending firms search for alternative sources
to finance their projects. This, in turn, affects cost as well as inflation.

Some researches on the other hand focused on the impact of oil revenues on
macroeconomic and financial stability. For instance, Imanov et al. (2017) used fuzzy
modelling to evaluate financial stability and Hubert model to forecast oil and gas
production, which can be useful in assessing impact of oil revenues on financial
stability.

In most empirical papers, besides the impact of financial deepness on price and
financial stability, structural indicators of financial markets are also analyzed. For
instance, the degree of dollarization of bank liabilities serves as a good example.
High dollarization speeds up inflation and high inflation leads to adverse process. In
other words, high inflation decreases the confidence in the national currency, and
financial resources allow to transform into alternative foreign currencies (see Levy-
Yeyati, 2006). According to empirical studies, high dollarization of bank loans
adversely impacts the sustainability of banking sector and gives rise to financial
markets crisis (De Nicolo et al., 2005; Honohan, Shi, 2003; Laeven, Valencia, 2012).

Another structural indicator of financial markets is the share of the foreign capital.
This is particularly relevant in the banking sector. Although foreign capital
contributes to the quality and efficiency of the financial services, it might pose some
threats to financial stability as well. Specifically, competition among foreign and
domestic participants in the banking industry can diminish values of the banks and
negatively affect financial stability (see Claessens et al., 2001).

III. DATA AND EMPIRICAL ANALYSIS
Researchers have studied financial deepness and economic growth as well as their
relation with financial stability. Credit-to-GDP, domestic corporate securities to
GDP and foreign corporate loan to GDP ratios were used to measure financial
deepness. We have used financial deepness and macroeconomic indicators of 64
middle- and high-income countries (including Azerbaijan) for the analysis. The
database covers annual data from 2000 to 2017 and panel model was used. In order
to define development impact of financial markets on economic growth, volatility of
this growth, price and financial stability indicators were divided into

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