Page 20 - Azerbaijan State University of Economics

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

ESTIMATION of the OPTIMAL SIZE of FINANCIAL DEPTH in
TERMS of MACRO-STABILITY

Gorkhmaz Imanov , Ali Ahmadov
2
1
1 Prof. Dr., Institute of Cybernetics of the Azerbaijan National Academy of Sciences
Prof. Dr., Institute of Cybernetics of the Azerbaijan National Academy of Sciences
2 PhD candidate, Institute of Cybernetics of the Azerbaijan National Academy of
Sciences, E-mail: [email protected]

Received 18 January 2019; accepted 14 June 2019; published online 05 July 2019

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

I. INTRODUCTION

There is a large existing literature that aims at identifying the impact of financial
market development on macroeconomic stability and economic growth (for instance,
Aghion, P., Howitt, P., Mayer-Foulkes, D., 2005; Hasanli 2013; Sahay R., at. all,
2015). Developed financial markets ensure an effective transformation of savings
into investments, redistribute risk between economic agents, and help to disseminate
economic information and thus stimulates economic growth.

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