Are Financial Development and Financial Stability Complements or Substitutes in Poverty Reduction?

Singh, Sunny and Jha, Chandan (2021): Are Financial Development and Financial Stability Complements or Substitutes in Poverty Reduction?

Abstract

This paper studies the association between financial development, financial stability, and poverty for a sample of 136 developed and developing countries over the period 1995-2018. Most of the existing studies in this literature have focused on financial development. Few recent studies have looked at the effects of financial stability. However, none of the existing studies has looked at the interaction effect of the two on poverty. Our contribution to this literature is manifold. First and foremost, we investigate whether financial development and financial stability are substitutes or complement in reducing poverty and find evidence in favour of the former: financial development has greater effects on poverty alleviation in a more fragile financial system and vice-versa. Second, using two different measures of financial stability, we show that financial stability is associated with lower levels of poverty. And, finally, while previous studies have presumed that the effect of financial development on poverty is homogeneous at various levels of poverty, we show that financial development and financial stability both have heterogeneous effects on poverty depending on the level of poverty considered.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial Development; Financial Stability; Poverty Gap Ratio; Panel Quantile Regression
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G20 - General; I - Health, Education, and Welfare > I3 - Welfare, Well-Being, and Poverty > I30 - General; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development

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