Page 23 - Azerbaijan State University of Economics

Gorkhmaz Imanov, Ali Ahmadov: Estimation of the Optimal Size of Financial Depth
in Terms of Macro-Stability

macroeconomic, financial, demo graphic and institutional groups. We have used
Global Financial Development Database of the World Bank, Heritage Foundation
and IMF’s International Financial Statistics as well as Financial Soundness
Indicators. For banking sector measurement, i) number of banks ii) number of bank
branches iii) number of banking sector employees and iv) assets of banking sector
were used.

Using quarterly data of 64 middle- and high-income countries approximated for the
sample 2000-2017, we have analyzed the relationship between financial deepness
and economic growth and its implications on financial stability. In general, the
followings seem more relevant to research in Azerbaijan that stem from the
empirical research conducted.

1. How financial deepness affects i) economic growth, ii) macroeconomic de-
stabilization (volatility of economic growth rate) iii) inflation and iv) financial
stability?
2. If the impact is non-linear, in what shape it is and what is the distance from
optimal level?
3. At what optimal level of financial markets, maximum level of economic
growth and minimum level of macroeconomic, price and financial
destabilization is achieved?

To investigate these problems, we have used panel regression methodology
conducted by Rioja, Valev (2004), Arcand et al. (2015); Sahay et al. (2015) and
finance-volatility nexus, Easterly et al. (2000); Beck et al. (2014); Sahay et al.
(2015). The regression equation for each of 4 purposes (i)Economic growth, ıı) low
macroeconomic non-stability (volatility of economic growth rate), ııı) low inflation
and ıv) financial stability) of the macroeconomic policy (Y1....Y4) is shown below:

1
2
= = + ∗ , + ∗ , + ∑ ∗ , + (1)

2

1
=1
here: i – number of countries (64 countries), t – evaluation period (2010-2017), n –
number of mentioned purposes of the macroeconomic policy (4 purposes) , =

– average growth rate of GDP, = – deviation of growth rate of
2

GDP from average indicator, = – average inflation level during the

3
period, = – share of years that crisis happened in the banking sector.
4

Z-score indicator was used as an alternative indicator of financial stability. This
index was calculated for the banking sector and defines distance until bankruptcy.
2
, – financial markets development level (deepness) main indicator is loan to
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