ABSTRACT

In this paper, we have tried to quantify development aspects of the financial sector that ensures price as well as financial stability. Economic development, its volatility as well as non-linear relation between price and financial stability were investigated. Standard panel regression methods were conducted using data obtained from 64 developed and developing countries for the sample period of 2000-2017. Considering the importance of the banking sector in developing countries, we have also tried to quantify the optimal size of the banking sector in the context of Azerbaijan.

Results show that, in countries where financial intermediation was weak rising financial depth is positively correlated with economic growth. Up to optimal point, loan-to-GDP ratio positively impacts economic growth and afterwards negatively. Currently financial sector is bank-based and accordingly banks play important role in the financial markets.

Keywords: financial depth, macroeconomic stability, financial stability, economic growth volatility, panel modelling.

JEL classification: C32; E44; F31; G18