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Borsa Istanbul Review 18-1 (2018) 52e75
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Full Length Article

Does central banking promote financial development?

Oueslati Tayssir*, Ouerghi Feryel
ESSEC, University of Tunis, Tunisia
Received 28 December 2016; revised 5 August 2017; accepted 5 September 2017
Available online 18 September 2017

Abstract

This paper examines the influence of central bank characteristics and their monetary policies on the level of financial development. Initially,
on the basis of a review of the literature, we selected the central characteristics of the central banks as well as their monetary policies likely to
influence the level of financial development. Next, we estimated an econometric model linking the level of financial development with measures
of central bank characteristics and their monetary policies using panel data econometrics. The sample is made up of a panel of 89 countries,
including 22 developed countries, 34 emerging countries and 33 developing countries over the period 1980e2010. The results show that there is
a very significant influence of central bank characteristics as well as their monetary policies on the fluctuation of the level of financial
development for the three categories of countries.
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Copyright © 2017, Borsa Istanbul Anonim Şirketi. Production and hosting by Elsevier B.V. This is an open access article under the CC BY-NC-
ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).

JEL: E58; E52; E44

Keywords: Characteristics of central banks; Monetary policies; Level of financial development

1. Introduction openness as percent of GDP, net foreign direct investment as

The importance of financial sector to contribute to eco-
nomic growth and to create and distribute economic oppor-
tunities makes understanding its development an increasingly
significant research topic. A large body of economic literature
focusing not only on the relationship between financial
development and growth or financial stability, but also on the
determinants of financial development, including institutional
factors, macroeconomics factors, geographic factors and
others. Imran and Nishat (2013) found that bank credit to the
private sector in the long run in Pakistan is explained by the
foreign liabilities, domestic deposits, economic growth, ex-
change rate, and the monetary conditions, Raza, Shahzadi, and
Akram (2014) find that the credit to private sector, as measure
of financial development, depends on population growth, share
of agriculture sector in GDP, Real GDP growth, trade
* Corresponding author.
E-mail address: ouslatitayssir@yahoo.fr (O. Tayssir).
_
Peer review under responsibility of Borsa Istanbul Anonim Şirketi.
percent of GDP, government spending as percent of GDP, Dem
index of democracy, and the rule of law. Mbulawa (2015)
show that financial development was positively influenced
by credit to the public sector, per capita gross domestic
product, gross fixed capital formation, financial openness, in-
terest rates and institutional factors while savings and gov-
ernment debt have a negative influence.
The role of institutional factors on financial development is
one of the most studied researches, especially factors pro-
moting the development of healthy financial system. La Porta,
Lopez-de-Silanes, Lopez-de-Silanes, and Vishny (1997, 1998),
Levine (1998) and Levine and Zervos (1998) find that coun-
tries where institutions better protect and enforce property
right, are countries with higher levels of financial develop-
ment. Law and Azman-Saini (2008) and Gazdar (2011) show
that the quality of institutions appears to be an important
determinant for the development of the banking sector while it
has no effect on the development of the stock market. Evi-
dence shows that strong institutions, adequate implementation
of financial reforms, increased financial development level,

https://doi.org/10.1016/j.bir.2017.09.001
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2214-8450/Copyright © 2017, Borsa Istanbul Anonim Şirketi. Production and hosting by Elsevier B.V. This is an open access article under the CC BY-NC-ND
license (http://creativecommons.org/licenses/by-nc-nd/4.0/).
 _
O. Tayssir, O. Feryel / Borsa Istanbul Review 18-1 (2018) 52e75
(Huang (2005); Mandaci, Aktan, Gumus, and Tvaronaviciene
(2013); Aduda, Masila, and Onsongo (2012); Huang (2005);
Mandaci et al. (2013) and Aduda et al. (2012)). Ahokpossi,
Ismail, Karmarkar, and Koulet-Vickot (2012) show that
strong rule of law and institutional infrastructure as well as
collection and dissemination of credit information leads to an
increase in bank lending to the private sector. Ayadi, Arbak,
Naceur, and De Groen (2013), show that strong legal in-
stitutions, good governance and adequate implementation of
financial reforms can have a substantial positive impact on
financial development only when, they are all taken together.
Acemoglu, Aghion, and Zilibotti (2006) and Anderlini, Felli,
Immordino, and Riboni (2013) argue that more rigid legal
environments can impede economic development through
their negative effect on financial development. A recent study
by Le, Kim, and Lee (2016) reports that better governance and
institutional quality foster financial sector development in
developing economies. Muye and Muye (2017) find a positive
long run relationship among globalization, institutions and
financial development.
Based on political economy approach, several studies argued
that financial development is limited in economies where in-
terest groups exert significant pressure on policy makers who
can intervene on financial markets regulation. Rajan and
Zingales (2003) examine the role of interest group in the pro-
cess of financial development. They argue that policy influence
of incumbents on financial development may be weakening if
trade openness and financial openness are encouraged. Huang
(2005-a) supports that political liberalization is followed by a
stronger financial development. Nevertheless, Huang (2005 b)
argues that extend of democracy may have a negative effects
on financial development. Chinn and Ito (2006) hypothesize
that under a certain level of institutional and legal development,
capital account liberalization is a significant determinant of
financial development. Baltagi, Demetriades, and Law (2009)
show that financial and trade openness is positively correlated
with banking sector development. Girma and Shotland (2008);
Do and Levchenko (2004); and Huang and Temple (2005)
argue that fuller democracy promote financial development.
Voghouei, Azali, and Jamali (2011) show that political econ-
omy factors, which can have both direct and indirect effects
through other determinants, can be considered as the most
influential factors in financial development. Roe and Siegel
(2011) show that the political stability has a positive impact
on financial development.
The impact of financial liberalization on financial devel-
opment is carried out in several directions. Based on Mc
Kinon-Shaw model (McKinnon, 1973; Shaw, 1973), which
argues that financial liberalization can faster economic growth
by increasing investment and productivity, others research find
that the positive correlation between financial liberalization
and financial development cannot be supported without risk
(World Bank, 1989; Demirgüç-Kunt & Detragiache, 1998).
Bailliu (2000) and Chinn and Ito (2006) argue that the positive
link between capita account liberalization and financial
development may have destabilizing effects. Claessens,
Demirguic-Kunt, and Huizinga (1998) and Leaven (2000)
53
support that banking sector liberalization may improve the
functioning of national banking and the quality of financial
services stimulating financial development.
Other studies highlight the importance of macroeconomics
policies such as maintaining lower inflation or higher invest-
ment to improve financial development. Huybens and Smith
(1999); Boyd, Levine, and Smith (2001); and Rousseau and
Wachtel (2002) show that economies with high inflation
rates are likely to be less financially developed. The stock
market development is also driven by the movements in
macroeconomic variables like interest rates and exchange rates
as well as the overall security of the market, Kaehler, Weber,
and Aref (2013). David, Mlachila, and Moheeput (2014),
found that trade openness is important for financial develop-
ment for countries with better institutional quality. Dabla-
Norris & Narapong (2013) study the relationship between
macroeconomic volatility and financial development and find
that financial development acts as a shock absorber against
volatility but only up to a point; beyond a certain level,
financial systems exacerbate shocks and increase volatility.
Barajas et al. (2013a) suggest that the level of financial
development in a country depends on both structural charac-
teristics such as income, population, demographics, and other
fundamentals that are outside policy control in the short to
medium run, and on policy and institutional variables. (Beck
and Torre, 2007; and; Beck & Feyen, 2013).
Others variables are considered as financial development
determinants, such as trade openness, investment profile and
population, per capita income and economic growth which has
a long term relationship (Baltagi, Demetriades, & Law, 2007;
and; Shaheen, Awan, Waqas, & Aslam, 2011; Takyi & Obeng,
2013), religious, language and ethic characteristics (Stulz &
Williamson, 2003). Kumar, Jeremy, and Spalt (2011) suggest
that religious-induced gambling attitudes have a significant
effect on financial outcomes. They show that in countries with
higher concentrations of Catholics relative to Protestants, in-
vestors are more likely to participate in stock markets, em-
ployees are more likely to accept stock-option plans, and
initial public offerings tend to be more successful. Ben Naceur
and Kandil (2014) find that higher GDP growth has a positive
impact on the stock market; however it does not seem to
promote banking activities.Khalfaoui (2015) shows that
financial development determinants are mainly related to
banking and financial sector and the level of economic and
human development for developed and developing countries.
Whereas, the determinants related to economic stability and
the legal and institutional framework have a significant impact
on financial development only in the developed countries.
Few studies consider the impact of modern central bank
functions on financial development.
There is an ample evidence that monetary policy institutions
do affect financial development (Khan, Senhadji, & Smith,
2006; Piazzesi & Schneider, 2009; and; Boyd et al., 2001)
through the resulting level and prediction of inflation. In this
sense, the classic case for central bank independence of Rogoff
(1985) applies. The issue is not yet settled however, since the
recent financial crisis has renewed concerns over the optimality
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O. Tayssir, O. Feryel / Borsa Istanbul Review 18-1 (2018) 52e75
and even the ability of independent central banks to handle asset
price inflation, which in turn can threaten financial stability
(Blanchard, Dell’Ariccia, & Mauro, 2010; Berger and Kismer,
2013). Anthony and Frank (2013) find that government and
central bank should play their active role in the financial sector
and forced the commercial banks to improve their credit sys-
tems to reduce default rate rather than using the traditional
methods. Ma and Lin (2016) find that monetary policy effec-
tiveness and financial development are negatively correlated as
monetary policy has a dampening effect on output and inflation
with higher levels of financial development.
Neyapti (2001) and Akinci, Akinci, and Yilmaz (2015) sug-
gest a positive correlation between central bank independence
and financial development. By contrast, Ferrari, Pistoresi, and
Salsano (2009) concludes no correlation between them. Walsh
(2009) and Woodford (2012) study the effects of target infla-
tion on macroeconomic performance. They argue that monetary
policy may promote financial stability and financial develop-
ment through inflation targeting. Gupta (2011) claims that the
effect of lower inflation target on growth is ambiguous, and
depends on initial level of growth, the individual bank size and
the level of financial sector development. Boyd et al. (2001)
suggest that countries with low level of banking system and
stock market development are countries that experience periods
with high inflation rates. Girma and Shotland (2008), Do and
Levchenko (2004) and Huang and Temple (2005) argue that
fixed exchange rate regime promote financial development.
Hung (2009) show a positive and significant correlation between
financial development, exchange rate regime and economic
growth. Lin and Ye (2011) study the relationship between
financial development and exchange rate regime choice. They
argue that countries with low level of financial development
adopt a fixed exchange rate regime.
In this paper, we seek to extend and improve the analysis of
the determinants of financial development. First, we extend the
analysis by including central banks’ characteristics and mon-
etary policy in the determinants of financial development. This
provides a more rounded assessment of the effects of policy on
financial development and also brings to light possible com-
plementarities and trade-offs in the way different policy
measures affect different dimensions of financial development.
Our choice of indicator variables for the different dimensions
is driven by recent literature review and data disponibility. We
use the sum of market capitalization and bank credit to GDP as
the indicator of financial structure and the Kaopen1 indicator
as a measure of financial openness. The size and the signifi-
cance of the estimated coefficients vary, but the robustness
checks serve to confirm our broad findings. Second, we make
use of annual data in order to maximize our use of the data set
and better identify the policies of interest. This necessitates the
1
The Chinn-Ito index (KAOPEN) is an index measuring a country's degree
of capital account openness. The index was initially introduced in Chinn and
Ito (Journal of Development Economics, 2006). KAOPEN is based on the
binary dummy variables that codify the tabulation of restriction on cross-
border financial transactions reported in the IMF's Annual Report on Ex-
change Arrangements and Exchange Restrictions (AREAER).
_
use of a dynamic specification to allow for adjustments to-
wards a steady state, since development indicators exhibit a
high degree of persistence when measured annually. This
paper contributes to several strands of literature. We therefore
include a lagged regress and in the right hand side of our
specification and employ dynamic generalized method of
moments (GMM) estimators, allowing for endogeneity in the
model. This paper contributes to several strands of literature.
Moreover, we employ panel data techniques to better exploit
the cross-sectional, and time-series variation, of recent data
and provide a more technically sound analysis of the policy
determinants of financial development. Therefore, our objec-
tive is to derive central banking characteristics and their
monetary policies efficiency and employ them to analyze their
impact on financial development. The advantage of using
central banking characteristics and their monetary policies in
addition to other determinants of financial development is to
find which from the central banking characteristics and their
monetary policies can be the source of the high level of the
financial development in order to enhance central bankers to
ameliorate it and make it more important when applying their
policies. The rest of the paper is organized as follows. Section
2 elaborates on the main role of modern central bank. Section
3 outlines the empirical strategy employed in this paper,
including the methodology and describes the data used in the
analysis. Section 4 presents the specification of the dynamic
model and appropriate estimation techniques, and reports the
estimation results, and robustness checks. Section 5 features
our conclusions.
2. Main role of modern central bank
Central Banks play an important role in monitoring the
payment system, conducting of monetary policy and insuring
stability of banking system. According to numerous empirical
studies, the two last decades are characterized by an overall
change in the theory and practice of the central banking
(Blinder, 1998, 2004).
2.1. Political role of central bank
The first main role is the political role of Central Bank,
which imply whether or not Central Bank is independent of
the government and whether it provides public explanation of
its policy decisions.
2.1.1. Central bank independence
Central Bank independence implies that Central Bank
should not be submitted to government pressure to finance its
deficit. The first component of the Central bank independence
is the political dimension, which includes the absence of
government influence on the decisions of the Central Bank as
well as its institutional organization, including the nomination
and change of executive, the period of mandate of the
Governor of the Central Bank as well as the nature of its re-
sponsibilities, (Videau, 2011). The second component is the
economic dimension, which includes the free choice of goals
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O. Tayssir, O. Feryel / Borsa Istanbul Review 18-1 (2018) 52e75
and procedure used by the Central Bank and the refuse to
finance the government budget deficit by creating money.
2.1.2. Central bank transparency
The European Central Bank defines transparency as the fact
that the Central Bank provides economic agents and markets
information about its strategy, its analyzes and policy de-
cisions as well as its procedures, in clarity and on time using
good communications which strengthen transparency. The
latter in its turn, improve the efficiency of monetary policy,
enhance the credibility of a central bank and reduces infor-
mation asymmetries between the Central Bank and the private
sector (Geraats, 2002).
2.2. The inflation targeting
Central banks aim to reduce the effects of inflation on the
economy by raising interest rates in order to reduce inflationary
pressure. However, when inflation expectations are unclear, it
can affect all central banks. So the inflation targeting is the best
way to deal with this problem, (Wyplosz, 2002). The FMI
(2003) shows that in order to target inflation, the central bank
should focus directly on inflation. So when the level of inflation
deviates from the already predetermined target, the central bank
uses its monetary policy instruments so that expected inflation
level will be the same as the fixed objective.
2.3. Pursuing indirect tools of monetary policy
To be more efficient, the Central Bank should not use credit
allocation techniques, such as interest rates, credit and capital
limits to control or affect the amount or allocation of credit,
but it must use the short-run interest rate. Indeed, the Central
Bank sets this rate to be used to grant short-run loans to
commercial banks, and banks used it to set the rates on which
they will provide credit to their customers. Therefore, this rate
allows the Central Bank to regulate the activity of granting
loans of the banking system, and this can influence the level of
financial development.
3. Methodology and data
3.1. Methodology
Our main objective is to study the impact of various mea-
sures relating to the central bank on the level of financial
development, we consider also some control and macroeco-
nomic variables. Given the following specification:
Findevi j ¼ a0 þ Sai j CBi j þSbi j Institi j
þSgi j Macroi jþ S Ui j Othersi j þ 3i j
Where Findevij is the matrix of variables that measure finan-
cial development for the country i in year j, CBi j is the matrix
of variables relating to central banking of the country i in year
j, Institij is the matrix of institutional measures, Macroijis the
matrix of macroeconomic variables for country i in year j,
controlsijis the matrix of cotrols' variables.
55
The choose of these variables is based on the existing
literature related to this topic, to the availability of data, to the
economic theory and whether they fit well in the model in
statistical terms.
In order to make our results more robust, the dependent
variable is represented by two different measures namely
financial structure and financial openness, which are expressed
by their lagged value.
Models are presented as follows:
Finstrucij ¼ a0 þ a1 Finstrucij-1 þSaij CBij þSbij Institij
þSgij Macroij þ SUij Othersij þ 3ij
Finopenij ¼ a0 þ a1 Finopenij-1 þSaijCBij þSbij Institij
þSgi j Macroij þ S Uij Othersijþ 3ij
where2;
Finstrucij: is the financial structure of the country i in year j.
It presents a combination between the level of development
banks and the level of development of financial market; it's
calculated by adding the market capitalization and bank
credit to GDP.
Finstrucij-1: is the financial structure of the country i for the
year j-1
Finopenij: is the financial openness of the country i in year
j. It measures the degree of openness of the capital account
in a country.
Finopenij-1: is the opening of the financial of country i for
year j-1
CBij: is the matrix of variables that measure the main role
of modern central bank for the country i in year j. It in-
cludes the following variables: the exchange rate regime,
inflation targeting, the interest rate, the actual independence
of the central bank, the legal independence of the central
bank, the transparency of the central bank, the level the
assets of the central bank and the level of public debt for
each country and over time.
Institij: is the matrix of institutional measures for country i in
year j, which are mainly: the rule of law, regulatory quality;
an index of democracy, civil liberties and political rights.
Macroij: is the matrix of policy variables for country i in
year j, that includes: trade openness, the volatility of growth
rates, the volatility of inflation and the volatility of terms of
trade.
Controlij: is the matrix of other variables for country i in
year j. This matrix includes: per capita income and the level
of the population.
3.2. Definition of variables
The inclusion of the various variables is based on sound
theoretical and empirical foundation. The variables of interest
2
Variable definitions and data sources are given in table 1 in appendix.
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O. Tayssir, O. Feryel / Borsa Istanbul Review 18-1 (2018) 52e75
in this study are meticulously chosen in order to be able to
investigate if there exists a relationship between central
banking and financial development and if yes, how and to what
extent. The dependent variable we seek to explain is financial
development. Our dependent variable is expressed by two in-
dicators. The first one is developed by Beck, Demirguc-Kunt,
and Levine (2000) and used one throughout the study, while
the second is used to check the robustness of our results. The
first measure of financial development attempts to not only
include bank based measures as above, but also stock market
variables following the previous literature (e.g., Beck,
Demirgüç-Kunt, & Levine, 2006; Demirgüç-Kunt & Levine,
1996; Demirgüç-Kunt, Feyen, & Levine, 2011; Levine,
2002). This measure is denoted financial structure it is equal
to the sum of Private Credit, presented by the private sector
credit to GDP ratio-to measure the degree of intermediation of
the economy- and Capitalization which is the value of all
domestic shares listed on the domestic markets as a share of
GDP and which indicate the size of the stock market in the
economy. This measure has been widely used in the literature
in Levine and Zervos (1998) and Rousseau and Wachtel (2000)
among others. Private Credit, which is the value of all credit
that financial intermediaries issue to the private sector as a
share of GDP is the preferred measure since it excludes credit
to public enterprises and other government agencies, which
may not be allocated by expected return. Private Credit in-
cludes credit issued by all financial intermediaries (including
non-deposit money banks) in a country, but excludes credit
issued by central banks. According to Levine, Loayza, and
Beck (2000), higher levels of Private Credit indicate “higher
levels of financial services and therefore greater financial
intermediary development.”3 Since financial structure includes
stock market related measures, it is first useful to describe the
rationale for their inclusion. Capitalization represents an
alternative source of funds and, hence, a substitute of bank
loans as a means of financing for entrepreneurs.
Our second measure of financial development is financial
openness. Most of the initial empirical literature consider that
capital account liberalization pioneers for financial openness.
Therefore, the most common method in those studies is to use
an index of openness based on the legal restrictions on cross-
border capital flows as a measure of financial openness. Such
restrictions involve controls on inflows versus those on out-
flows, quantity versus price controls, restrictions on foreign
equity holdings, etc. (Kose et al., 2010). These are the de jure
measures, which are based on IMF's Annual Report on Ex-
change Arrangements and Exchange Restrictions (AREAER)
and often constructed of a binary indicator a 0 or 1 of capital
account openness. Some studies have extended these measures
like using a “share” measure, which is equal to the ratio of
years in which a country's capital account was open in the
sample (Kose et al., 2010). Others have used all the infor-
mation available in the AREAR and construct more
3
Levine, R., Loayza, N., and Beck, T. (2000), “Financial intermediation and
growth: Causality and causes,” Journal of Monetary Economics, 46(1), 31~n77.
_
sophisticated capital account measures with an extended set of
index or indicators. One such widely used de jure measure that
we will use in our study is of Chinn and Ito (2006) AREAR
based measure of capital controls. Generally called as
KAOPEN, it is an index based on the binary dummy variables
that code the restrictions on cross-border financial transactions
reported in the IMF's AREAER (Ito and Chin, 2006).
3.2.1. Explanatory variables
The set of independent variables is constructed from a
number of financial and macroeconomic variables. A large
body of economic literature focusing on the determinants of
financial development, including institutional factors, macro-
economics factors, and control factors. However few studies
have been interested to study the role of central bank char-
acteristics and their monetary policies on the level of financial
development.
Variables relating to the Central Bank include central bank
measures, which are mainly: real independence of the central
bank, legal independence of the central bank, transparency of
central bank, exchange rate regime, inflation targeting, interest
rate, level of central bank assets and the level of public debt.
Among monetary institutions and arrangements, substan-
tial attention has been paid as to how the degree of central
bank independence (CBI) can affect the degree of financial
development. The literature considers that there are two main
types of (CBI), the central bank legal independence and the
central bank real independence. The central bank legal in-
dependence implies that the central bank should not be under
pressure of the government to finance its deficit, so this type
of independence concerns the legislative side of the rela-
tionship between the central bank and the government. It is
measured mainly by the Cukierman index (1992), which is
characterized by the fact that it is more complete and more
accurate in the evaluation of the degree of independence. The
central bank real independence also called the turnover rate
of central bank governors is obtained by calculating the
number of governor changes per year, considering that the
governor can't institute long-term policies during a short
term, high turnover of governors indicates a low level of in-
dependence. In other words, the longer the mandate, the less
political pressure, (Carstens and Jacome, 2005). The Central
Bank Transparency means that the central bank provides
economic agents and markets, openly, clearly and timely all
relevant information concerning its strategy, analyzes and
monetary policy decisions as well as its procedures, thus
reducing the asymmetry of information between the central
bank and the public (Walsh, 2003). Eijffinger and Geraats
(2006) develop a transparency index for 9 major central
banks between 1998 and 2002, followed by Dincer and
Eichengreen (2007), which extended the calculation of this
index to 100 central banks between 1998 and 2006. The ex-
change rate regime is relative to the classification of Reinhart
and Rogoff (2010), called the natural classification that in-
troduces the exchange rates used in the parallel market for
countries that have two foreign exchange markets. It is an
indicator of de facto exchange rate flexibility, ranging from 1
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O. Tayssir, O. Feryel / Borsa Istanbul Review 18-1 (2018) 52e75
to 15, i.e. from the least flexible to the most flexible exchange
rate regime (Crowe & Meade, 2008; Mussa et al., 2000; Baig,
2002; Bubula and Otker-Robe, 2003 and; FMI, 2003). There
is a two-way relationship between exchange rate flexibility
and the structure of balance sheets, in particular the preva-
lence of currency mismatches. A more flexible exchange rate
may encourage a reduction in currency mismatches and un-
hedged borrowing, by raising awareness about financial risks.
The extent to which currency mismatches are reduced de-
pends on whether firms and governments can hedge currency
risks, affording an important role for the development of
derivatives markets. On the other hand, the degree of ex-
change rate flexibility also depends on initial mismatches, as
argued in the “fear of floating” literature (Calvo & Reinhart,
2002). In the presence of large currency mismatches, in
particular under liability dollarization, policymakers may be
reluctant to allow much exchange rate flexibility. Lastly, large
net foreign assets in the form of foreign exchange reserves
could be used by the authorities to reduce exchange rate
volatility. The inflation targeting policy is a monetary policy
structure aimed at explicitly and numerically announcing the
inflation target as well as responding to short-term shocks, its
overriding objective being price stability. More recently,
attention has shifted to analyzing how countries can benefit
from adopting an explicit inflation target regime. Bernanke
and Mishkin (1997) argue that inflation target-ing (IT)
makes price stability the main goal of policy. The empirical
evidence suggests that most IT experiences have been suc-
cessful in reducing inflation as high rates of inflation nega-
tively affect developments in the financial system, exacerbate
credit market frictions and ultimately, make financial in-
stitutions inefficient in allocating resources for growth
(Huybens & Smith, 1998; 1999; Boyd & Smith, 1998; Stone,
2003; Agbeja, 2008). The interest rate represents the rate of
loans that is the rate of banks, which usually corresponds to
the short- and medium-term financing needs of the private
sector. This rate is normally differentiated according to the
solvency of the borrowers and the financing objectives. The
terms and conditions attached to these rates differ from
country to country, since they are set by the central banks of
the latter. Odhiambo (2005). According to the literature we
found that the positive real interest rates, which result from
financial liberalization, lead unequivocally to the financial
developer. Central Bank assets are the ratio of the total assets
held by the central bank to the GDP of the corresponding
country. More central bank has assets more it can finance the
financial system when they need funds and this will improve
the level of financial development. Public debt is measured by
the ratio of public debt to GDP, which is determined by
adding two ratio which is the accumulated debt-to-GDP ratio
for the previous year, discounting it by the interest rate and
The ratio of budget deficit to GDP for the current year. The
negative impact of public debt on financial development
through the crowding out effect is empirically ambiguous.
According to Hauner (2009), the role of public debt in
financial development can be discussed from the “safe asset”
view and “the lazy bank” view. Public debt serves as
57
collateral for depositors and provides a benchmark for the
private sector in supporting the financial development
(Kumhof & Tanner, 2005). However the increase of public
debt held by banking sector might be critical for the financial
development, as higher interest rates limit the availability of
bank credit to private sector (Ismihan & Ozkan, 2012).
However Kutivadze, (2011) investigates also the relation
between public debt and financial development and finds
positive correlation between the development of the domestic
debt market and financial development.
One of the goals of our study is to derive conclusions
whether the effects of central banking on financial develop-
ment change as the level of institutional development in a
country changes. In other words, if there exists indirect ben-
efits of central banking on financial development. To this end,
we use several institutional indicators such as the rule of law,
the quality of regulation and the index of democracy, civil
liberty and political rights. The rule of law measures the au-
thority of the law and captures the perception and the extent to
which economic agents trust and respect the rules. This indi-
cator is particularly sensitive to the quality of contract
enforcement, property rights, the police and the courts. Our
focus on the rule of law and financial development as key
institutional features is motivated by their importance for
development as highlighted across separate strands in the
literature, (King & Levine, 1993; Rajan & Zingales, 1998;
Shleifer & Vishny, 1998; Svensson, 1998). The quality of
regulation captures the government's ability to formulate and
implement good policies and regulations that promote eco-
nomic practice, which ensures the smooth conduct of financial
transactions and ensures the protection and security of eco-
nomic actors (Ferguson & Schularick, 2006). The Democracy
Index is an indicator that measures the degree of democracy,
which seeks to reflect the type of government and institutional
quality based on freedom of elections, operational constraints
and balances on cadres and respect for other fundamentals
related to Political rights and civil liberties. The score of de-
mocracy is calculated on six characteristics of the authority
(regulation, competitiveness and opening of executive
recruitment, operational independence of general manager,
constraints and regulation of management and competition
participation). Based on these criteria, each country is awarded
a democracy score ranging from 0 to 10, with the highest
values representing the most democratic regimes. (Cavallo &
Cavallo, 2010). Civil Liberty index is established on a scale
of 1e7, 1 representing the strongest civil liberties and 7 a
complete absence of civil liberty. The criteria taken into ac-
count are: freedom of expression, the right to assembly and
education, freedom of religion, the rule of law and free eco-
nomic activity. The average of the indices of civil liberties and
political rights from the Freedom House Country Survey
(2008). Higher ratings indicate better civil liberties and po-
litical rights such as freedom to develop views, institutions and
personal autonomy from government. Political rights index
measures the degree of freedom in the electoral process,
pluralism, political participation and the functioning of gov-
ernment. Numerically, it is based on a scale of 1e7, 1
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represents the freest and 7 represents the least free.
Andrianova, Demetriades, and Xu (2008) conclude that secure
property rights alone may not be sufficient for financial
development to take place. In the early stages of financial
development, careful government interventions may be needed
to ensure that investment returns are sufficiently high in order
to mobilize savings.
To examine whether macroeconomic policy variables
explain the variation in financial development, this research
makes extensive use of four economic volatility indicators and
an indicator of trade openness. It uses output volatility and
inflation volatility to capture macroeconomic mismanagement
and fluctuations. The output volatility measure is defined as
the standard deviation of the annual growth rate of real.
Inflation volatility is defined as the standard deviation of the
annual inflation rate. Taken from the GDN, the volatility of the
terms of trade is used to reflect the extent of external shocks. It
is defined as the standard deviation of the first log-differences
of terms of trade index for goods and services. To assess the
role of trade factors, this research uses a trade openness policy
index, which is commercial opening according to Frankel and
Romer (1999). This measure captures the natural opening of
foreign trade. It is determined by summing all bilateral trade
with all potential trading partners from a bilateral trade
equation that controls the population and region of the host
country and trading partners, the distance between the two
trading partners and whether the country is a landlocked
country or not.
Following the literature, the control variables for other
potential determinants of financial development in the study
are the initial income and the initial population. The inclusion
of the level of GDP per capita is stimulated by work such as
Greenwood and Smith (1997) on the impact of economic
growth on the development of financial markets. The size of
the population is closely linked to financial development
indices because small countries tend to have higher ratios of
liquid debt and private credit, with the potential to substan-
tially affect the overall results.
3.3. Data
Our empirical study is based on a sample of 89 countries,
including 22 developed countries, 34 emerging economies and
33 developing countries,4 and seeks to analyze the impact of
measures of central banks on financial development level.5The
estimation period extends over thirty years from 1980 to
2010.The choice of this period is justified by the fact that
financial development had its starting since 1980. We ended
our study in 2010, since until that date the ways out of the
subprime crisis were not yet implemented view that studies
have shown that excess of financial development has created
4
Table 3 in appendix presents the descriptive statistics of the variables used
in the model in terms of their averages, standard deviations, their minimum
and maximum values.
5
Table 2 in appendix reports the list of countries.
_
very risky financial activities that have been one of causes of
the crisis.6
4. Estimation results and discussions
4.1. Main results
We consider models (1) and (2) separately for each group
of countries (developed, emerging and developing countries).
Before the development of an appropriate structure of
the econometric model, we must investigate characteristics
of all data series and check the degree to which they are
integrated.
The exogenous variables in the models (1) and (2) are
explained by their retarded values, which leads us to estimate
these models using the GMM estimator system to avoid the
problem of endogeneity. The effectiveness of the GMM
estimator system is based on the validity of the model spec-
ification, which is based on two main tests. The first one is the
test of Sargan/Hansen. Table 1 shows that the Sargan test
does not reject the null hypothesis of over-identification of
the model, which validates the quality of the instruments. The
second test is the test of autocorrelation of errors. The test
results lead us to accept the null hypothesis and this indicates
the absence of correlation between the errors in the second
order (Table 2).
4.1.1. Developed countries
We start by estimating the models (1) and (2) for developed
countries which are presented in Table (1).
The variable of central bank legal independence is statis-
tically significant for the two models, affecting positively the
financial stability and financial openness. These results are
consistent with those of Krause and Rioja (2006) which
showed that the control of the independence of central banks
aims to improve the implementation of effective monetary
policies that can improve the level of financial development.
The central bank real independence is statistically significant
and affects negatively the measurement of financial openness.
So more the mandate of the governor is long, he will establish
structural policies that will improve the level of financial
development. Posen (1993, 1995) and Scheve (2004), found
the same results. Regarding the inflation target, it is statisti-
cally significant for model (1) and (2). It has a positive ef-
fect on financial structure and negative effect on financial
opening. The first result confirms those of Boyd et al., (2001)
who found that countries with problems of inflation have
6
Table 4 in appendix reports the correlation matrix.According to our results,
we find that the correlation coefficients between the majority of our variables
don't exceed the value from which we can conclude the presence of a multi-
collinearity problem, which is 0.8 (Kennedy, 2003). Therefore, we can
conclude the absence of multicollinearity between the variables, except the
variables of the democracy index, civil liberty and political rights, which have
a multicolinearity rate exceeding 0.8, and this can be explained by the fact that
the decomposition of the democracy index includes civil liberty and political
rights, which creates multicolinearity problem.
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Table 1
Results of regressions for developed countries.
Dependent variables financial structure Financial openness
Reg 1 Reg 2 Reg 3 Reg 4 Reg 1 Reg 2 Reg 3 Reg 4
Dependent variables 0.85 0.847 0.838 0.833 0.909 0.812 0.804 0.803
(-1) (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)***
Legal independence 0.206 0.22 0.123 0.134 0.148 0.126 0.081
(0.013)** (0.009)*** (0.155) (0.122) (0.029)** (0.087)* (0.277)
Real independence 0.003 0.002 0.002 0.001
(0.286) (0.321) (0.439) (0.505)
transparency 0.059 0.0289 0.029 0.021
(0.043)** (0.015)** (0.014)** (0.089)*
Exchange rate regime 0.016 0.016 0.002 0.002
(0.057)* (0.674) (0.64) (0.603)
Inflation targeting 0.123 0.131 0.1885 0.128 0.217 0.018 0.043 0.0689
(0.011)** (0.007)*** (0.013)** (0.008)*** (0.041)** (0.667) (0.339) (0.136)
Interest rate (cyclique) 1.077 0.188 0.081 0.017
(0.001)*** (0.156) (0.569) (0.902)
Interest rate 0.953 1.016 2.013 1.447 1.107 1.471
(0.003)*** (0.002)*** (0.02)** (0.000)*** (0.001)*** (0.000)***
Central bank assets 1.323 1.343 1.528 1.565 0.181 0.147
(cyclique) (0.002)*** (0.002)*** (0.000)*** (0.000)*** (0.027)** (0.069)*
Public debt 0.122 0.103 0.124 0.102 0.446 0.249
(0.054)* (0.110) (0.047)** (0.109) (0.026)** (0.012)**
Rule of law 0.217 0.108 0.063 0.044
(0.041)** (0.087)* (0.346) (0.503)
Quality Regulation 0.023 0.036 0.029 0.029
(0.648) (0.081) (0.158) (0.233)
Civil liberty 0.182 0.198 0.175 0.193 0.144 0.057 0.059 0.407
(0.089)* (0.065)* (0.099)* (0.07)* (0.031)** (0.044)** (0.036)** (0.147)
Political right 0.042 0.042 0.007 0.004 0.328 0.228 0.265 0.284
(0.281) (0.284) (0.857) (0.907) (0.000)*** (0.000)*** (0.000)*** (0.000)***
Growth rate Volatility 0.014 0.006 0.002 0.023 0.0545 0.088 0.082 0.073
(0.879) (0.950) (0.439) (0.81) (0.404) (0.001)*** (0.002)*** (0.007)***
Inflation Volatility 0.079 0.094
(0.092)* (0.045)**
Volatility of terms 0.521 0.475 0.547 0.494 0.081 0.322 0.256 0.232
of trade (0.063)* (0.092)* (0.048)** (0.076)* (0.576) (0.000)*** (0.003)*** (0.006)***
Trade opennes - 0.0133 0.243 0. 125 0.088 0.348 0.015 0.001 0.021
(0.920) (0.857) (0.360) (0.523) (0.000)*** (0.612) (0.951) (0.502)
Income per capita 0.05 0.127 0.127 0.11
(0.092)* (0.007)*** (0.006)*** (0.016)**
Population size 0.075 0.069 0.093 0.088 2.705 0.296 0.503 0.202
(0.006)*** (0.012)** (0.001)*** (0.002)*** (0.002)*** (0.461) (0.222) (0.635)
Constant 0.528 0.545 0?746 0.78 132 117 116 116
(0.004)*** (0.003)*** (0.000)*** (0.000)***
Number of observation 406 406 406 406 125 106 105 106
Number of instruments 355 356 356 357 0.0000 0.0000 0.0000 0.0000
Wald (p-value) 0.0000 0.0000 0.0000 0.0000 295.248 142.672 136.928 136.35
(0.000)*** (0.003)*** (0.007)*** (0.0007)***
Sargan Test 583.048 577.734 586.874 581.099 0.448 0.651
(0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.654) (0.541)
Autocorrelation Test 2.787 0.345 0.146 2.787 0.345 0.146
AR(2) (0.53) (0.729) (0.883) (0.53) (0.729) (0.883)
Note: Plus value in parentheses. ***, **, * denotes significance at 0.10, 0.05 and 0.01 levels respectively. All regressions include both country-specific effects and
time-period effects. Model specifications statistics includes Wald Chi2, P-values of Sargan test for overidentifying restrictions and AR(2) test of the disturbance
error terms. The instruments are endogenous; they are calculate by the Stata program. Instruments for differenced equation are the independent variables and
instruments for level equation is the constant.

experienced significantly lower levels of the banking system
and stock market development. Regarding the result of model
(2), when the country applies an inflation targeting to reduce
its level of inflation, the interest rate increase and the money
in circulation decrease and therefore the financial activities
will decrease, which may have an impact on financial open-
ing. The exchange rate regime is another measure of central
banking development, it is statistically significant with a
negative impact on the financial structure. Therefore, coun-
tries that tend to use the flexible exchange rate regime, suffer
from a decrease of the level of financial development, while
those who used the fixed exchange regime would increase the
level of financial development. In fact, exchange rate regimes
lead to higher long-run productivity growth in countries with
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Table 2
Results of regressions for emergent countries.
Dependent variables Financial Structure Financial Openness
Reg 1 Reg 2 Reg 3 Reg 4 Reg 1 Reg 2 Reg 3 Reg 4
Dependent variables 0.041 0.056 0.053 0.058 0.088 0.086 0.818 0.797
(-1) (0.122) (0.039)** (0.046)** (0.024)** (0.000)*** (0.000)*** (0.000)*** (0.000)***
Legal independence 13.119 15.068 14.061 14.282 0.725 0.579 0.423 0.716
(0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.034)** (0.095)* (0.215) (0.075)*
Real independence 0.117 0.112 0.035 0.000 0.019 0.02 0.0246 0.0206
(cyclique) (0.055)* (0.066)* (0.560) (0.993) (0.007)*** (0.006)*** (0.001)*** (0.023)**
transparency 0.216 0.069 0.173 0.374 0.168 0.017 0.016 0.016
(0.061)* (0.621) (0.210 (0.0.09)*** (0.024)** (0.03)** (0.044)** (0.182)
Exchange rate regime 0.321 0.267 0.221 0.241 0.124 0.086 0.093 0.257
(0.000)*** (0.005)*** (0.015)** (0.007)*** (0.094)* (0.291) (0.268) (0.004)***
Inflation targeting 0.435 0.519 0.308 0.601 0.625 0.829 0.681
(0.539) (0.456) (0.651) (0.038)** (0.032)** (0.005)*** (0.054)*
Interest rate 13.113 9.97 0.25 0.12 0.003 1.473
(0.000)*** (0.000)*** (0.414) (0.726) (0.993) (0.001)***
Central bank assets 16.296 22.163 25.307 28.126 0.109 0.326
(cyclique) (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.370) (0.069)*
Public debt 3.265 3.492 1.655
(0.008)*** (0.003)*** (0.178)
Rule of law 1.569 2.086 1.974 0.633 0.218
(0.13) (0.054)* (0.058)* (0.543) (0.026)**
Quality Regulation 1.087 2.123 1.969 0.023 0.213 0.013
(0.243) (0.018)** (0.025)** (0.107) (0.162) (0.559)
Democracy index 1.031 1.031 0.0123 0.051 0.085 0.05
(0.000)*** (0.000)*** (0.563) (0.088)* (0.012)** (0.303)
Civil liberty 1.36 1.47 0.662 0.953 0.059 0.163
(0.000)*** (0.000)*** (0.048)** (0.004)*** (0.104) (0.003)***
Political right 1.984 2.107 2.113 2.435 0.082 0.039 0.183
(0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.801) (0.9) (0.612)
Growth rate Volatility 2.821 3.213 1.024 1.154 0.107 0.152 0.147 0.148
(0.298) (0.240) (0.697) (0.653) (0.038)** (0.007)*** (0.011)** (0.069)*
Inflation Volatility 0.459 0.435 0.327 0.199 0.005 0.005 0.000 0.009
(0.291) (0.539) (0.44) (0.627) (0.314) (0.298) (0.893) (0.266)
Volatility of terms of trade 0.135 0.005 0.002 0.094 0.717 0.166
(0.832) (0.927) (0.964) (0.524) (0.639) (0.349)
Trade opennes 0.416 0.084 0.807 0.525 0.049 0.026 0.018
(0.624) (0.924) (0.351) (0.533) (0.367) (0.653) (0.802)
Income per capita 2.088 0.139 0.136 0.106 0.152
(0.000)*** (0.007)*** (0.01)** (0.044)** (0.053)*
Population size 0.37 0.72 0.327 0.864 0.58 1.291 0.846 0.123
(0.404) (0.125) (0.137) (0.05)** (0.014)** (0.014)** (0.141) (0.869)
Constant 7.212 5.465 12.323 28.644 779 759 737 384
(0.005)*** (0.039)** (0.000)*** (0.000)***
Number of observation 345 341 340 340 496 500 501 351
Number of instruments 311 314 316 317 0.0000 0.0000 0.0000 0.0000
Wald (p-value) 0.0000 0.0000 0.0000 0.0000 550.409 556.019 574.921 407.962
(0.019)** (0.012)** (0.002)*** (0.002)***
Sargan Test 543.137 544.100 537.954 557.422 0.839 1.778 0.463 0.023
(0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.401) (0.075)* (0.642) (0.981)
Autocorrelation Test 1.234 1.334 1.056 2.309 1.234 1.334 1.056 2.309
AR(2) (0.217) (0.182) (0.29) (0.021) (0.217) (0.182) (0.29) (0.021)
Note: Plus value in parentheses. ***, **, * denotes significance at 0.10, 0.05 and 0.01 levels respectively. All regressions include both country-specific effects and
time-period effects. Model specifications statistics includes Wald Chi2, P-values of Sargan test for overidentifying restrictions and AR(2) test of the disturbance
error terms.The instruments are endogenous; they are calculated by the Stata program. Instruments for differenced equation are the independent variables and
instruments for level equation is the constant.

low financial development, while the effect in financially
developed countries is insignificant. The channel that ex-
plains this evidence is the following: A fixed exchange rate
regime leads to lower inflation when the money growth is
otherwise high under flexible exchange rates. In turn, lower
inflation results in higher long-run productivity growth since
financial intermediaries hold a fraction of deposits as a
reserve, whose return is lower than the market rate and, thus,
is affected by inflation. So the positive effect of fixed ex-
change rate regime on growth is larger for countries with
lower levels of financial development because inflation and
the fraction of deposits held as reserves are typically higher in
these countries. These results are consistent with those of
Slavtcheva (2013). Concerning Public debt, it has a
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O. Tayssir, O. Feryel / Borsa Istanbul Review 18-1 (2018) 52e75
significant effect for the models (1) and (2), by affecting
negatively the financial structure and positively the financial
openness. According to Kumhof and Tanner (2005), public
debt serves as a guarantee for depositors and provides support
for the private sector in improving financial development.
However, Ismihan and Ozkan (2012) show that the increase in
public debt held by the banking sector could be critical for the
financial development view that higher interest rates limit the
availability of bank credit to the private sector. The interest
rate variable affects significantly and negatively the financial
development in our two models. This result can be explained
by the fact that when interest rates used to grant loans has a
low level, this will encourage investors to take more money to
invest and therefore this will increase the level of financial
development in the country and vice versa. However,
Escolano, Aguilar, and Minguez (2011) found that the lower
the interest rate is, the lower the financial development level
will be, because lower interest rates are related to captive
financial markets, financial repression, and lack of financial
development,. The variable that presents the volume of cen-
tral banks assets is statistically significant and affect nega-
tively the financial structure and financial openness. In fact,
the more the central bank has funds and more it will use it to
finance banks, so that they can give more credit to develop the
economic sphere rather than financial one. The final measure
is the central bank transparency; this variable is significant
with a negative effect on the financial structure. Our re-
sults contradict those of Siklos (2000) who find that if central
bank publishes high quality information, this will increase
the transparency of the central bank and reduce the uncer-
tainty in the financial market which will promote financial
development.
Moving now to variables related to institutional measures.
The first variable is civil liberty; which is statistically significant
with a negative impact on the model (1) and (2). Our results
contradict those of Huang (2010) who suggested that the quality
of political institutions including civil liberty could improve the
level of financial development. Democracy index is the second
institutional measure that has a significant and positive impact
on financial structure and financial openness. These results
confirm those of Miletkov and Wintoki (2008), Girma and
Shotland (2008), and Yang (2011) who found that democracy
has an important direct role in stimulating financial develop-
ment. Political right, which is statistically significant for model
(2), affecting positively financial structure, which prove that
institutional measures help to improve the level of financial
development and encourage the entry of foreign capital flows in
countries with good institutional quality. Our results confirm
those of Asiedu and Lien (2011) and Okada (2013).
The third category of measures is relative to the macro-
economic variables. The first variable is trade opening; it is
statistically significant for models (1) and (2), affecting
negatively the financial structure and the financial openness.
These results contradict those of Rajan and Zingales (2003)
and, Braun and Raddatz (2008) who found that an open
economy might weaken the incentives and the political power
of interest groups to decrease the financial deepening. Terms
61
of trade volatility has a significant and positive impact on the
financial structure. However, the literature has focused on
studying the role of financial development in mitigating
macroeconomic shocks and not the inverse. Indeed Beck et al.
(2000) found that a higher level of financial development re-
duces the positive effect of the volatility of terms of trade on
economic volatility, particularly in high-income countries.
Concerning growth rates volatility, it is statistically significant
and affects negatively financial openness. However, Mendoza
(1994) found that when the volatility of growth rates increases,
the level of financial openness also increases.
Regarding the last category of variables, namely, the con-
trol variables, we found that the population level is significant
for the two models, having a negative effect on financial
structure and financial openness. Results of model (1) and (2)
agree with those of, Yartey (2006). As relates to the regression
results of the model, we can see that more the population in-
creases, more demand for credit increases and this will
improve the financial system and makes it more developed.
Regarding the level of per capita income, it affects signifi-
cantly the financial development measures with a negative
impact on the financial structure and positive impact for
financial openness. Which lead us to note that when people
have more income, they will not be encouraged to invest in the
financial sector, this is in contradiction with Aghion, Bloom,
Blundell, Griffith, and Howitt (2005), who found that the
higher the per capita income is, the higher the financial
development level is.
4.1.2. Emerging countries
The regression results for model (1) and (2) are presented in
Table (2).
The Central bank legal independence variable affects
significantly the financial development with a negative effect
on the financial structure and positive effect on financial
openness. We can deduct that in emerging countries the au-
thorities are interested by the development of their industry;
that is why the independence of the central bank may lower
financial development in favor of development of the indus-
trial sector.
The second measure related to the central bank is central bank
real independence. This measure is statistically significant and
has a positive effect on financial openness. So more the mandate
of the Governor is short, more he will implement fast and
effective solutions to improve financial development, as facili-
tate capital entered in the country. However, the results of
Woolley (1994) showed that, it could not be a direct relationship
between the independence of the central bank and financial
openness without intervention of other variables between them.
For the exchange rate regime variable, it is statistically signifi-
cant with a positive effect on the financial structure while it has a
negative effect on the financial openness. Results relative to
model (1) show that more the exchange rate regime is flexible;
more the financial system is developed. According Bailliu and
Murray (2010), an emerging country aiming to have higher
level of financial development, cannot apply a fixed exchange
rate but rather a flexible regime that allows it to adjust to
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international financial system. The variable of interest rates,
affect significantly and positively the financial structure. Indeed,
most emerging countries have financial systems based mainly on
the banking system, so when the interest rate increases, the
banking system will grow because this high rate will be a
motivation to deposit more. The regressions also show that the
variable of central bank assets is statistically significant and
negatively affects the financial structure. This finding corrobo-
rates with the case of developed countries.
The variable public debt is statistically significant and af-
fects positively the financial structure while it affects signifi-
cantly and negatively financial openness. Kumhof and Tanner
(2005) found that the high level of public debt is an symptom
of financial repression. The last variable concerning the central
bank the central bank transparency, it is significant and posi-
tive for the financial structure in model (1). According to Egert
and Kocenda (2014), Fiser and Horvath (2010) and Goyal and
Arora (2012), central banks in emerging markets use sys-
tematically communication to influence the expectations of the
financial markets which may affect the financial development
level.
The second category concerns institutional measures. The
index of democracy is statistically significant and positive in
models (1) and (2). Indeed, Przeworski, Alvarez, Cheibub, and
Fernando Limongi (2000) and Brune and Guisinger (2003)
found a positive impact of the democracy index on financial
development, especially when the democratic government in
power is “capitalist”. The variable quality of regulation is
statistically significant and has a positive impact on financial
openness. So, more the quality of regulation has improved
more it will promote financial openness. Regarding the law
policy variable, it has a significant and negative impact on the
financial structure, and this is the case of developed countries.
The civil liberty variable has a significant and positive effect
on the financial structure and the financial openness. La Porta
et al. (1997) and Baltagi et al. (2007) found that the applica-
tion of the law and institutional quality are associated with the
capital market development include the control of corruption,
rule of law and the quality of regulation.
The second category of variables is relative to macroeco-
nomic measures. The trade openness is statistically significant
and positive for models (1) and (2). Our results are consistent
with those of Baltagi et al. (2009) that found that trade liber-
alization and capital accounts opening are needed to promote
financial development. Alternatively, Do and Levchenko (2004;
2007), show that the increase in export opportunities may serve
to stimulate demand for external financing and this admits
particularly a strong relationship in countries where the ma-
jority of activities is high-tech manufacturing which is the case
of emerging countries. The volatility of terms of trade has a
significant and positive effect on financial structure and finan-
cial openness. This finding corroborates with the case of
developed countries. The variable inflation volatility also has a
significant and positive impact on financial openness. However,
Boyd, Levine, and Smith (2000) indicate that there is a signif-
icant negative relationship, and economically important be-
tween inflation and both the development of the banking sector
_
and the activity of the stock market. The volatility of growth
rates is statistically significant and negatively affects the
financial structure. This result is the same as that in the case of
developed countries.
Per capita income variable has a significant and negative
effect for the two measures of financial development. How-
ever, Greenwood and Smith (1997) found a positive relation-
ship between the level of income and financial development
level. In fact, modern theorists have attempted to illuminate
more precisely the ties between exchange, specialization, and
innovation. More specialization requires more transactions.
Because each transaction is costly, financial arrangements that
lower transaction costs will facilitate greater specialization. In
this way, markets that promote exchange encourage produc-
tivity gains. There may also be feedback from these produc-
tivity gains to financial market development. If there are fixed
costs associated with establishing markets, then higher income
per capita implies that these fixed costs are less burdensome as
a share of per capita income. Thus, economic development can
spur the development of financial markets.
4.1.3. Developing countries
Regression results for models (1) and (2) are presented in
Table (3).
Regarding the first category of variables that represent the
measures relative to the central bank, we find that the variable
of central bank legal independence is statistically significant
for models (1) and (2) and positively affects the financial
structure and the financial opening. Central bank real inde-
pendence is statistically significant affecting positively the
financial structure and negatively the financial openness.
Indeed, Dreher, Sturm, and Haan (2010) showed that the
financial sector would develop, if the mandate of the Governor
were longer. The exchange rate regime variable has a signifi-
cant and negative impact on the two measures of financial
development. Our results confirm those of Aghion, Bacchetta,
Ranciere, and Rogoff (2009) who found that in developing
countries, the use of flexible exchange rate regime reduce the
capacity of financing investors especially those investing in the
research and development field and it may eventually restrain
the financial development. Regarding the variable of interest
rate, it is statistically significant and positively affects financial
openness. Our results are consistent with those of McKinnon
(1973) and Shaw (1973) that showed that control of interest
rates in developing countries has led to negative real interest
rates, which have discouraged saving and investment. Our
results show that the assets of the central bank affect signifi-
cantly and positively financial openness. More central bank
has money; more-financial opening is encouraged by
providing more funds.
Institutional variables that are significant for developing
countries are mainly; civil liberty and democracy index.
Therefore, for these countries, since the quality of institutions
is very low, it is insufficient to improve the financial devel-
opment. While variables of rule of law and regulatory quality
have a significant and positive effect on the level of financial
openness, since foreign investors will be encouraged to invest
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Table 3
Results of regressions for developing countries.
Dependent variables Financial Structure Financial Openness
Reg 1 Reg 2 Reg 3 Reg 4 Reg 1 Reg 2 Reg 3 Reg 4
Dependent variables 0.352 0.543 0.474 0.696 0.882 0.873 0.868 0.789
(-1) (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)***
Legal independence 0.313 0.315 0.145 0.427 0.423 0.505 0.402 0.488
(0.079)* (0.079)* (0.446) (0.653) (0.082)* (0.069)* (0.153) (0.493)
Real independence 0.021851 0.0118644 0.007 0.002 0.010 0.006 0.02
(0.000)*** (0.017)** (0.208) (0.805) (0.198) (0.416) (0.005)***
transparency 0.097 0.014 0.016 0.022 0.029
(0.001)*** (0.084)* (0.071)* (0.016)** (0.183)
Exchange rate regime 0.017 0.002 0.002 0.031
(0.015)** (0.784) (0.748) (0.180)
Inflation targeting 0.062 0.018 0.074 0.045 1.069 0.952
(0.088)* (0.643) (0.086)* (0.017)** (0.000)*** (0.069)*
Interest rate 0.009 0.203 0.206 1.330 0.563 0.561 0.498 0.481
(0.965) (0.348) (0.348) (0.033)** (0.051)* (0.073)* (0.114) (0.307)
Central bank assets 0.002 0.074 0.056 0.272
(0.992) (0.754) (0.815) (0.477)
Public debt 0.009 0.011 0.058 0.137
(0.868) (0.857) (0.346) (0.205)
Rule of law 0.0253
(0.891)
Quality Regulation 0.011
(0.930)
Democracy index 0.016 0.006 0.129 0.009 0.014 0.053
(0.577) (0.858) (0.026)** (0.771) (0.663) (0.187)
Civil liberty 0.010 0.008 0.006 0.060 0.047 0.042 0.018
(0.519) (0.683) (0.817) (0.216) (0.290) (0.350) (0.187)
Political right 0.0411 0.175 0.193 0.442 0.31 0.018
(0.252) (0.646) (0.299) (0.320) (0.487) (0.740)
Growth rate Volatility 0.491 0.194 0.231 0.011 0.033 0.036 1.559
(0.192) (0.605) (0.538) (0.996) (0.004)*** (0.002)*** (0.390)
Inflation Volatility 0.091 0.078 0.021 0.014 0.009 0.01 0.022
(0.000)*** (0.000)*** (0.428) (0.084)* (0.097)* (0.096)* (0.344)
Volatility of terms 0.0009 0.0008 0.002 1.079 0.044 0.042 0.238
of trade (0.821) (0.837) (0.665) (0.003)*** (0.608) (0.627) (0.001)***
Trade opennes 0.171 0.132 0.171 0.064 0.143
(0.008)*** (0.037)** (0.009)*** (0.468) (0.014)**
Income per capita 0.136 0. 341 0.0646 0.037 0.117
(0.003)*** (0.702) (0.155) (0.414) (0.031)**
Population size 0.152 0.100 0.014 0.011 0.055 0.098 0.125 1.172
(0.000)*** (0.004)*** (0.793) (0.928) (0.669) (0.661) (0.576) (0.081)*
Constant 0.464 0.290 0.872 0.995 488 461 461 195
(0.000)*** (0.049)** (0.034)** (0.298)
Number of observation 421 420 390 159 396 391 392 188
Number of instruments 406 406 381 156 0.0000 0.0000 0.0000 0.0000
Wald (p-value) 0.0000 0.0000 0.0000 0.0000 488.735 446.975 431.355 213.051
(0.000)*** (0.008)*** (0.03)** (0.018)**
Sargan Test 424.683 304.490 306.521 163.332 0.854 0.804 1.027 0.527
(0.130) (0.989) (0.987) (0.055)* (0.393) (0.421) (0.304) (0.597)
Autocorrelation 1.616 1.800 1.169 1.616 1.800 1.169
test AR(2) (0.106) (0.071) (0.242) (0.106) (0.071) (0.242)
Note: Plus value in parentheses. ***, **, * denotes significance at 0.10, 0.05 and 0.01 levels respectively. All regressions include both country-specific effects and
time-period effects. Model specifications statistics includes Wald Chi2, P-values of Sargan test for overidentifying restrictions and AR(2) test of the disturbance
error terms.The instruments are endogenous; they are calculated by the Stata program. Instruments for differenced equation are the independent variables and
instruments for level equation is the constant.

when they find a sufficiently developed institutional quality.
Cull and Effron (2008), found that institutional development
serves to promote financial development in developing
countries.
Turning now to the macroeconomic variables, we found
that: the volatility of growth rates is statistically significant and
negatively affects the financial structure and financial
openness. This result can be explained by the fact when the
level of growth is not stable; investors are not encouraged to
bring capital to invest in the financial system, while trade
openness has a significant and positive impact on the financial
structure. In fact, Law and Demetriades (2005) showed that if
the borders of developing countries are open to capital flows
and trade, this will help financial development improvement.
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Asghar and Hussain (2014) found that trade openness affects
financial development positively. However, the volatility of
inflation rates has a negative effect on the financial structure
since when the level of inflation is not stable, it does not
encourage economic agents to invest their funds, while it has a
positive effect on financial openness. Beck and Levine. (2001),
found a positive relationship between inflation volatility and
financial intermediation.
The last category of variables has a significant variables
income per capita has a significant impact for the two mea-
sures of financial development by positively affecting the
financial structure and financial openness. Beck, Feyen, Ize,
and Moizeszowicz (2008) showed that the population size
and per capita income have a significant effect on financial
development.
4.2. Robustness checks
4.2.1. Robustness using first-differenced GMM estimators
Our models using the GMM SYSTEM, which is consid-
erate as the most pertinent method when using the Dynamic
Panel, can be re-estimated using First-differenced GMM Es-
timators to be sure of the robustness of our first results. Thus,
we re-estimate the panel regressions for financial structure and
financial openness using the GMM FIRST DIFFERENCE.
Table 4, Table 5, Table 6 and Table 7 present the empirical
result for both financial structure and financial openness re-
gressions respectively.
A look at Table 4, Table 5, Table 6, and Table 7 show no
significant variation between the results when using GMM
FIRST DIFFERENCE and our main result.
The regression results show also a significant positive rela-
tionship between exchange rate regime, interest rate, rule of law,
regulation quality, civil liberty, commercial openness, popula-
tion and financial structure. Tables show also negative rela-
tionship between central bank legal independence, central bank
transparency, central bank assets, democracy index, political
right and income level and financial structure. These results are
consistent with the ones from system GMM estimators.
The regression results reported show also a significant
positive relationship between central bank legal independence,
inflation targeting, interest rate, central bank assets, rule of
law, regulation quality, democracy index, commercial open-
ness, income level and financial openness. Tables show also
negative relationship between, exchange rate regime, political
right, the volatility of terms of trade, population and financial
openness. These results are consistent with the ones from
system GMM estimators.
4.2.2. Robustness for hole sample
Our whole sample analysis involves considering a pertinent
question of whether the above empirical findings differ
considerably when using the whole sample of countries used
in the study. Thus, we re-estimate the panel regressions for
financial structure and financial openness for whole countries.
Table 8 presents the empirical result for both financial struc-
ture and financial openness regressions respectively.
_
For the first measure of the financial development, which is
financial structure, we found some results as our main results,
such as central bank real independence that has the same pos-
itive relationship with financial structure as in the case of
developing countries. Central bank transparency has also a
positive relationship with financial structure as in the case of
emergent countries. Central bank assets have a negative rela-
tionship with financial structure, which is the same result in the
case of developed countries. Political right has a negative
relationship with financial structure; population has a positive
relationship with financial structure which are the same results
as the case of emergent countries. However, most of the rest of
results are contradictory with main results such as central bank
legal independence, inflation targeting and commercial open-
ness, which have a negative relationship with financial structure
and this relationship is contradictory with main results, interest
rate, civil liberty, regulation quality and rule of law have a
positive relationship with financial structure and this relation-
ship is contradictory with main results. This is can be explained
by the fact that countries have heterogeneous characteristics and
that is why results were contradictory with the main results and
with the findings in the empirical literature.
For the second measure of the financial development, which
is financial openness, we found some results that are the same
with those of the main results. Central Bank legal independence
has the same positive relationship with financial openness as in
the case of developed and developing countries. Central bank
real independence has a negative relationship with financial
openness as in the case of developing countries. Inflation tar-
geting has a positive relationship with financial openness which
is the same result in the case of developed and emergent
countries. Central bank assets have a negative relationship with
financial openness for the three categories of countries. Political
right has a negative relationship with financial openness which
is the same result with developed and emergent countries.
Growth volatility has a negative relationship with financial
openness that is the same result with developed countries and
population has a negative relationship with financial openness,
which is the same result as the case of developing countries.
However, the rest of results are contradictory with main results
such as central bank transparency and civil liberty, with a
negative relationship with financial openness and this rela-
tionship is contradictory with main results. Exchange rate
regime, rule of law and regulation quality have a positive
relationship with financial openness and this relationship is
contradictory with main results. This is can be explained by the
fact that countries have heterogeneous characteristics and this is
why results were contradictory with the main results and with
the findings in the empirical literature.
5. Conclusion and policy implications
Macroeconomic performance has improved in many coun-
tries in the world in the last fifteen years or so. Developmental
central bank policies have included policies directed at financial
sector development, the promotion of financial inclusion and
aligning the financial system with sustainable development.
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Table 4
Results of regressions for whole sample.
Dependent variables Financial structure Financial openness
Reg 1 Reg 2 Reg 3 Reg 4 Reg 1 Reg 2 Reg 3 Reg 4
Dependent variables 0.081 0.127 0.108 0.078 0.863 0.842 0.825 0.625
(-1) (0.013)** (0.000)*** (0.000)*** (0.002)*** (0.000)*** (0.000)*** (0.000)*** (0.000)***
Legal independence 27.582 0.319 0.271 0.297 0.411
(0.000)*** (0.011)** (0.048)** (0.064)* (0.031)**
transparency 0.517 0.572 0.377 0.009
(0.000)*** (0.000)*** (0.005)*** (0.000)***
Exchange rate regime 0.311 0.309 0.413 0.39 0.013 0.014 0.0077
(0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.024)** (0.02)** (0347)
Inflation targeting 1.275 0.466 0.592 0.047 0.079 0.182
(0.093)* (0.509) (0.419) (0.940) (0.246) (0.012)**
Interest rate 7.505 4.864 0.442 1.454 0.311 0.271 0.273 0.147
(0.015)** (0.091)* (0.873) (0.558) (0.049)** (0.048)** (0.096)** (0.559)
Central bank assets 14.165 17.078 20.233 22.239 0.5 0.673 0.576 0.617
(cyclique) (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.073)* (0.016)** (0.038)** (0.041)**
Central bank assets 0.765 0.128 0.101 0.36
(0.173) (0.807) (0.840) (0.397)
Public debt 0.938 2.312 2.658 4.254 0.049
(0.415) (0.031)** (0.012)** (0.000)*** (0.55)
Rule of law 2.659 2.314 1969 0.246 0.192
(0.004)*** (0.006)*** (0.02)** (0.741) (0.097)*
Quality Regulation 1.263 1.715 0.154
(0.000)*** (0.000)*** (0.063)*
Democracy index 3.788 2.539 1.482 0.024 0.028 0.028
(0.000)*** (0.000)*** (0.000)*** (0.024)** (0.028)** (0.028)**
Civil liberty 0.257 2.203 2.471 2.25 0.0182 0.005
(0.468) (0.000)*** (0.000)*** (0.000)*** (0.462) (0.872)
Political right 3.411 3.431 3.175 1.56 0.039 0.017 0.010 0.061
(0.119) (0.09)* (0.118) (0.383) (0.094)* (0.478) (0.596) (0.099)*
Growth rate Volatility 0.093 0.197 0.320 0.222
(0.715) (0.406) (0.144) (0.237)
Inflation Volatility 0.032 0.002 0.032 0.0823
(0.555) (0.970) (0.483) (0.03)**
Volatility of terms 3.145 2.37 1.916 1.733 0.007
of trade (0.000)*** (0.001)*** (0.009)*** (0.005)*** (0.056)*
Trade opennes 1.604 1.357 0.137 0.133 0.135 0.148
(0.007)*** (0.009)*** (0.069)* (0.100)* (0.100)* (0.085)*
Income per capita 8.475 9.249 13.247 15.381 0.053
(0.003)*** (0.001)*** (0.000)*** (0.000)*** (0.398)
Population size 27.744 33.984 25.472 12.478 0.21 0.819
(0.003)*** (0.000)*** (0.006)*** (0.116) (0.637) (0.016)**
Constant 444 444 413 381 0.074 0.139 0.21 2.199
(0.477) (0.362) (0.637) (0.022)**
Number of observation 309 310 312 313 1953 1823 1710 896
Number of instruments 0.0000 0.0000 0.0000 0.0000 471 473 476 345
Wald (p-value) 514.228 485.526 511.0149 698.676 0.0000 0.0000 0.0000 0.0000
(0.0000)*** (0.0000)*** (0.0000)*** (0.0000)***
Sargan Test 0.938 0.728 0.606 0.606 618.129 603.113 606.41 552.9412
(0.347) (0.466) (0.54) (0.544) (0.0000)*** (0.0000)*** (0.0000)*** (0.0000)***
Autocorrelation 0.064 0.3191 0.002 0.117 0.85 0.564 0.579 0.65
test AR(2) (0.9483) (0.9745) (0.9978) (0.9067) (0.395) (0.572) (0.562) (0.5157)
Note: Plus value in parentheses. ***, **, * denotes significance at 0.10, 0.05 and 0.01 levels respectively. All regressions include both country-specific effects and
time-period effects. Model specifications statistics includes Wald Chi2, P-values of Sargan test for overidentifying restrictions and AR(2) test of the disturbance
error terms. The instruments are endogenous; they are calculated by the Stata program. Instruments for differenced equation are the independent variables and
instruments for level equation is the constant.

Much of the literature has concentrated on how central bank in-
dependence, inflation targeting regimes, and currency unions
have contributed to improving the effectiveness of monetary
policy and hence macroeconomic performance. Since the
financial system is a key component of the monetary transmission
mechanism, we study how a country's central bank characteristics
and their monetary policies affect financial development. In this
article, we have tried to clarify the impact of the mechanisms of
the central bank in determining the level of financial develop-
ment. Following the literature review, we found that the impact of
the central bank on the excessive level of financial development is
a topical debate. Our goal is the enrichment of the subject
empirically and this by affecting a comparative study by category
of developed, emerging and developing countries in order to
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Table 5
Results of regressions for developed countries.
Dependent variables Financial Structure Financial openness
Reg 1 Reg 2 Reg 3 Reg 4 Reg 1 Reg 2 Reg 3 Reg 4
Dependent variables 0.752 0.749 0.739 0.678 0.853 0.86 0.689 0.687
(-1) (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)***
Legal independence 0.321 0.326 0.364 0.284 0.442 0.439
(0.000)*** (0.001)*** (0.000)* (0.004)*** (0.041)** (0.043)**
Real independence 0.002 0.003 0.003 0.004 0.012 0.013 0.000 0.000
(0.291) (0.257) (0.244) (0.117) (0.000)*** (0.000)*** (0.932) (0.995)
transparency 0.135 0.003 0.006
(0.000)*** (0.844) (0.724)
Exchange rate regime 0.017 0.02 0.017 0.0419 0.008 0.003 0.003
(0.006)*** (0.003)*** (0.014)* (0.05)** (0.384) (0.785) (0.81)
Inflation targeting 0.162 0.168 0.173 0.317 0.134 0.137 0.023 0.0299
(0.000)*** (0.000)*** (0.000)** (0.033)** (0.017)** (0.031)** (0.766) (0.7)
Interest rate (cyclique) 0.369 0.378 0.357 0.521 -0.524 -0.0.704 -0.0.151 -0.0.159
(0.003)*** (0.094)* (0.114) (0.22) (0.014)** (0.005)*** (0.532) (0.514)
Central bank assets 1.175 1.119 1.128 4.353 1.48 1.759 1.313 1.366
(cyclique) (0.006)*** (0.009)*** (0.009)*** (0.001)*** (0.015)** (0.007)*** (0.068)* (0.064)*
Public debt 0.178 0.187 0.201 0.438 0.044 0.28 0.294
(0.007)*** (0.011)** (0.006)*** (0.03)** (0.623) (0.006)*** (0.004)***
Rule of law 0.593 0.041 0.017
(0.018)** (0.721) (0.892)
Quality Regulation 0.17 0.121 0.142 0.189 0.178
(0.194) (0.053)* (0.032)** (0.007)*** (0.012)**
Democracy index
Civil liberty 0.104 0.089
(0.3) (0.371)
Political right 0.067 0.052 0.036 0.504 0.434
(0.068)* (0.556) (0.433) (0.285) (0.366)
Growth rate Volatility 0.037 0.056 0.499 0.331 0.405 0.376
(0.711) (0.595) (0.414) (0.251) (0.184) (0.228)
Inflation Volatility 0.005 0.002 0.0139 0.027 0.078 0.075
(0.906) (0949) (0.858) (0.520) (0.048)** (0.074)*
Volatility of terms 0.123 0.135 0.044 0.216
of trade (0.627) (0.595) (0.922) (0.359)
Trade opennes 0.22 0.216 0.197 0.703 0.623 0.431 0.507
(0.208) (0.215) (0.603) (0.000)*** (0.001)*** (0.022)** (0.014)**
Income per capita 0.291 0.055 0.0839 0.086
(0.035)** (0.422) (0.291) (0.279)
Population size 0.206 0.194 2.057 0.583 1.172 1.137 1.354
(0.162) (0.185) (0.091)* (0.048)** (0.026)** (0.042)** (0.047)**
Constant 0.5117 0.218 0.294 7.130 0.799 1.91 4.116 4.115
(0.000)*** (0.601) (0.481) (0.01)*** (0.276) (0.049)** (0.005)*** (0.005)***
Number of observation 578 578 578 235 293 287 233 233
Number of instruments 411 417 418 234 240 241 201 203
Wald (p-value) 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Sargan Test 679.897 669.361 669.835 274.133 348.188 327.6749 219.269 217.451
(0.000)*** (0.000)*** (0.000)*** (0.004)*** (0.0000)*** (0.0000)*** (0.038)** (0.046)**
Autocorrelation 2.577 4.563 1.585 0.882 0.811 0.623 0.607 0.073
Test AR(2) (0.009)*** (0.000)*** (0.113) (0.377) (0.417) (0.533) (0.543) (0.941)
Note: Plus value in parentheses. ***, **, * denotes significance at 0.10, 0.05 and 0.01 levels respectively. All regressions include both country-specific effects and
time-period effects. Model specifications statistics includes Wald Chi2, P-values of Sargan test for overidentifying restrictions and AR(2) test of the disturbance
error terms.The instruments are endogenous; they are calculated by the Stata program. Instruments for differenced equation are the independent variables and
instruments for level equation is the constant

compare results and draw relevant conclusions. During our
empirical analysis, we expressed financial development in two
ways: financial structure and financial openness. Therefore, we
estimated two models Based on a wide battery of variables
relating to the Central Bank but also political and institutional
ones. To do this, we used the GMM dynamic panel estimators.
Our sample is composed of 89 countries, including 22 developed
countries, 34 emerging economies and 33 developing countries
aver the 1980e2010 period.
The results generated from regressions for two measures of
financial development and for the three categories of countries
show that the variables related to the central bank have a
significant and important impact on financial development
level. Among the variables affecting the level of financial
development we found that the legal and real independence as
well as transparency of the central bank have an important role
in improving the level of financial development especially for
developed countries. The other variables related to the central
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Table 6
Results of regressions for emergent countries.
Dependent variables Financial Structure Financial Openness
Reg 1 Reg 2 Reg 3 Reg 4 Reg 1 Reg 2 Reg 3 Reg 4
Dependent variables 0.11 0.087 0.098 0.103 0.692 0.642 0.64 0.641
(-1) (0.001)*** (0.006)*** (0.002)*** (0.001)*** (0.000)*** (0.000)*** (0.000)*** (0.000)***
Legal independence 22.261 22.832 21.464 19.475 0.562 0.774 0.933 0.922
(0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.045)** (0.004)*** (0.001)*** (0.001)***
Real independence 0.092 0.002 0.009 0.009 0.006 0.007 0.008 0.008
(0.099)* (0.0969) (0.858) (0.861) (0.384) (0.330) (0.245) (0.259)
Exchange rate regime 0.227 0.462 0.405 0.348 0.005 0.005
(0.061)* (0.000)*** (0.001)*** (0.009)*** (0.67) (0.66)
Inflation targeting 0.223 0.245 0.266 0.263 0.146 0.202 0.187 0.173
(0.014)** (0.004)*** (0.002)*** (0.002)*** (0.082)* (0.016)** (0.033)** (0.049)**
Interest rate 0.082 0.416 0.132 0.102 0.095
(0.895) (0.235) (0.702) (0.733) (0.787)
Central bank assets 5.755 6.407 6.071 6.101 0.969 0.774 0.854 0.837
(cyclique) (0.036)** (0.015)** (0.021)** (0.021)** (0.058)* (0.140) (0.096)* (0.104)
Public debt 24.608 30.015 30.902 32.065 0.108 0.254 0.252
(0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.558) (0.186) (0.191)
Rule of law 3.467 2.782 3.685 3.387 0.376 0.262 0.21 0.196
(0.003)*** (0.018)** (0.002)*** (0.005)*** (0.021)** (0.094)* (0.195) (0.231)
Quality Regulation 2.395 3.439 2.265 2.799 0.256 0.232 0.232 0.238
(0.026)** (0.001)*** (0.021)** (0.01)** (0.047)** (0.078)* (0.083)* (0.078)*
Democracy index 2.661 2.545 0.029
(0.003)*** (0.005)*** (0.142)
Civil liberty 1.29 1.3 1.224 0.015 0.004
(0.000)*** (0.000)*** (0.000)*** (0.672) (0.9)
Political right 1.772 0.742 0.813 0.966 0.411
(0.000)*** (0.014)** (0.007)** (0.001)** (0.459)
Growth rate Volatility 1.125 0.675 0.951 1.103 0.287 0.187 0.179 0.198
(0.007)*** (0.089)* (0.018)** (0.006)*** (0.49) (0.643) (0.659) (0.624)
Inflation Volatility 1.689 0.038 0.085 0.066 0.072
(0.477) (0.517) (0.135) (0.235) (0.217)
Volatility of terms 0.211 0.008 0.168 0.163 0.000 0.016 0.016 0.017
of trade (0.596) (0.983) (0.658) (0.671) (0.933) (0.057)* (0.052)* (0.047)**
Trade opennes 0.289 0.643 0.619 0.553 0.537
(0.587) (0.000)*** (0.000)*** (0.002)*** (0.003)***
Income per capita 3.807 2.701 2.924 2.984 0.022 0.05 0.042 0.039
(0.002)*** (0.021)** (0.012)** (0.013)** (0.791) (0.554) (0.625) (0.656)
Population size 1.29 1.707 2.061 0.558 0.922 1.095 1.169
(0.000)*** (0.002)*** (0.000)*** (0.270) (0.078)* (0.036)** (0.047)**
Constant 4.8 10.076 13.321 14.943 1.405 2.246 2.996 3.4
(0.127) (0.002)*** (0.000)*** (0.000)*** (0.358) (0.192) (0.086)* (0.067)*
Number of observation 14.707 14.735 24.172 28.489 406 397 383 383
(0.227) (0.2) (0.04)** (0.017)**
Number of instruments 310 308 308 308 343 341 338 339
Wald (p-value) 298 300 301 304 0.0000 0.0000 0.0000 0.0000
Sargan Test 0.0000 0.0000 0.0000 0.0000 397.264 369.836 365.654 364.548
(0.004)*** (0.043)** (0.039)** (0.043)**
Autocorrelation 604.736 596.066 595.0271 601.733 0.613 0.352 0.882 1.651
Test AR(2) (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.539) (0.724) (0.377) (0.098)*
1.194 0.984 1.391 0.984
(0.232) (0.325) (0.164) (0.325)
Note: Plus value in parentheses. ***, **, * denotes significance at 0.10, 0.05 and 0.01 levels respectively. All regressions include both country-specific effects and
time-period effects. Model specifications statistics includes Wald Chi2, P-values of Sargan test for overidentifying restrictions and AR(2) test of the disturbance
error terms. The instruments are endogenous; they are calculated by the Stata program. Instruments for differenced equation are the independent variables and
instruments for level equation is the constant.

bank also showed their important role. Indeed, the results
showed that inflation targeting is very effective to enhance the
development and more the exchange rate regime is flexible
higher the level of development is. The measures of the public
debt and the interest rate also help draw relevant conclusions
regarding the role of the central bank in determining the level
of financial development of each country.
Regarding to variables related to institutional quality. Civil
liberty and democracy index are the most important variables
for different categories of countries. They affect all three
measures of financial development for developed and
emerging countries while they have no impact on developing
countries and this makes sense since these countries don't
dispose of high quality institutions.
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O. Tayssir, O. Feryel / Borsa Istanbul Review 18-1 (2018) 52e75
Table 7
Results of regressions for developing countries.
Dependent variables Financial Structure Financial Openness
Reg 1 Reg 2 Reg 3 Reg 4 Reg 1 Reg 2 Reg 3 Reg 4
Dependent variables 0.311 0.275 0.256 0.235 0.843 0.835 0.812 0.784
(-1) (0.000)*** (0.000)*** (0.000)*** (0.007)*** (0.000)*** (0.000)*** (0.000)*** (0.000)***
Legal independence 0.407 0.465 0.429 0.179 0.524 0.653 0.3 0.514
(0.003)*** (0.008)*** (0.07)*** (0.674) (0.024)** (0.022)** (0.394) (0.159)*
Real independence 0.0131 0.011 0.009 0.016 0.005 0.006 0.005
(0.007)*** (0.038)*** (0.07)* (0.065)* (0.491) (0.444) (0.577)
transparency 0.018 0.209
(0.081)* (0.053)*
Exchange rate regime 0.004 0.004 0.012
(0.543) (0.51) (0.54)
Inflation targeting 0.722 0.953 0.75 0.762
(0.001)*** (0.001)*** (0.025)** (0.028)***
Interest rate 0.166 0.105 0.331 0.529 0.571 0.601 0.728
(0.401) (0.774) (0.574) (0.063)* (0.073)* (0.061)* (0.025)**
Central bank assets (cyclique) 0.119 0.804 0.0153 0.113
(0.593) (0.722) (0.972) (0.048)**
Public debt 0.015 0.006 0.036
(0.786) (0.915) (0.735)
Rule of law
Quality Regulation 0.008 0.035 0.044 0.000 0.002
(0.966) (0.013)** (0.033)** (0.978) (0.928)
Democracy index 0.016 0.022 0.015 0.039 0.024 0.005 0.004
(0.063)* (0.056)* (0.267) (0.123) (0.515) (0.892) (0.917)
Civil liberty 0.013 0.08 0.048 0.036 0.016 0.015
(0.540) (0.722) (0.348) (0.414) (0.727) (0.746)
Political right 0.025 0.066 0.26 0.461 0.45
(0.428) (0.303) (0.549) (0.287) (0.319)
Growth rate Volatility 0.111 0.105 0.243 0.038 0.03 0.027
(0.758) (0.774) (0.784) (0.015)** (0.038)** (0.138)
Inflation Volatility 0.088 0.104 0.099 0.116 0.006 0.033 0.007
(0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.298) (0.038)** (0.18)
Volatility of terms of trade 0.000 0.001 0.001 0.023 0.075 0.091
(0.919) (0.805) (0.863) (0.793) (0.466) (0.380)
Trade opennes 0.0927 0.108 0.127 0.14 0.091 0.158
(0.074)* (0.071)* (0.044)** (0.172) (355) (0.124)
Income per capita 0.054 0.106 1.099 1.277
(0.388) (0.46) (0.001)*** (0.000)***
Population size 0.452 0.494 0.619 1.995 1.808
(0.462 (0.000)*** (0.03)** (0.003)*** (0.01)**
Constant 0.012 0.105 0.352 0.636 481 424 405 397
(0.877) (0.496) (0.441) (0.613)
Number of observation 400 363 361 227 361 354 351 346
Number of instruments 369 350 350 228 0.0000 0.0000 0.0000 0.0000
Wald (p-value) 0.000 0.000 0.000 0.000 405.701 350.351 337.667 335.165
(0.0326) (0.352) (0.448) (0.395)
Sargan Test 387.9977 326.8455 325.327 193.862 1.13 0.62 1.058 1.377
(0.166) (0.625) (0.623) (0.0781) (0.5) (0.534) (0.289) (0.168)
Autocorrelation test AR(2) 1.398 0.968 0.36 0.002
(0.162) (0.333) (0.718) (0.998)
Note: Plus value in parentheses. ***, **, * denotes significance at 0.10, 0.05 and 0.01 levels respectively. All regressions include both country-specific effects and
time-period effects. Model specifications statistics includes Wald Chi2, P-values of Sargan test for overidentifying restrictions and AR(2) test of the disturbance
error terms. The instruments are endogenous; they are calculated by the Stata program. Instruments for differenced equation are the independent variables and
instruments for level equation is the constant.

Relating to macroeconomic variables, our results show
their important role in determining the level of financial
development for different countries. The measure of trade
openness represents a negative major effect on the level of
financial development for developed countries and a positive
one for emerging countries. This is relating to the
specificities of each country as well as of the purpose of trade
openness. Concerning macroeconomic shocks, namely the
volatility of growth rates, inflation and the terms of trade,
their effect is not important enough on the financial devel-
opment and their impact varies depending on the specificity
of the country.
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O. Tayssir, O. Feryel / Borsa Istanbul Review 18-1 (2018) 52e75 69
Table 8
Results of regressions for whole sample using GMM SYSTEM estimators.
Dependent variables Financial Structure Financial openness
Reg 1 Reg 2 Reg 3 Reg 4 Reg 1 Reg 2 Reg 3 Reg 4
Dependent variables 0.031 0.031 0.0049 0.063 0.794 0.806 0.803 0.805
(-1) (0.093)* (0.093)* (0.077)* (0.004)*** (0.000)*** (0.000)*** (0.000)*** (0.000)***
Legal independence 12.484 12.409 0.818 20.461 0.457 0.563 0.557 0.499
(0.000)*** (0.000)*** (0.003)*** (0.000)*** (0.050)** (0.020)** (0.02)** (0.040)**
Real independence 0.0219 0.0008 0.009 0.009 0.008
(0.003)*** (0.093)* (0.058)* (0.056)* (0.088)*
transparency 0.222 0.221 0.047 0.333 0.023 0.025 0.031 0.008
(0.014)** (0.017)** (0.008)*** (0.009)*** (0.081)* (0.066)* (0.027)** (0.583)
Exchange rate regime 0.175 0.175 0.0211 0.245 0.009 0.004 0.004 0.001
(0.001)*** (0.008)*** (0.044)** (0.002)*** (0.351) (0.629) (0.682) (0.885)
Inflation targeting 1.042 1.054 0.392 1.542 0.139 0.084 0.083 0.075
(0.032)** (0.031)** (0.000)*** (0.02)** (0.09)* (0.3) (0.307) (0.352)
Interest rate 4.091 4.187 0.603 3.021 0.323 0.131 0.163 0.019
(0.064)* (0.059)* (0.155) (0.267) (0.314) (0.684) (0.611) (0.953)
Central bank assets 14.711 15.221 0.471 17.9 0.515 0.679 0.596 0.532
(cyclique) (0.000)*** (0.000)*** (0.317) (0.000)*** (0.088)* (0.024)** (0.049)** (0.083)*
Public debt (cyclique) 0.225 0.065 0.023 0.014 0.59
(0.64) (0.543) (0.789) (0.872) (0.506)
Rule of law 1.062 1.081 0.478 2.623 0.180 0.023 0.015 0.174
(0.068)* (0.065)* (0.000)*** (0.000)*** (0.042)** (0.814) (0.871) (0.861)
Quality Regulation 1.756 1.767 0.005 0.566 0.004 0.158 0.162 0.156
(0.001)*** (0.001)*** (0.954) (0.468) (0.948) (0.07)* (0.063)* (0.073)*
Democracy index 0.689 0.698 0.023 0.921
(0.000)*** (0.000)*** (0.415) (0.000)***
Civil liberty 0.561 0.556 0.053 1.658 0.052 0.053
(0.022)** (0.024)** (0.253) (0.000)*** (0.047)** (0.041)**
Political right 1.928 1.937 0.078 3.174 0.074
(0.000)*** (0.000)*** (0.054)* (0.000)*** (0.024)**
Growth rate Volatility 0.017 0.026 0.124 1.23 0.476 0.561 0.598 0.515
(0.992) (0.988) (0.683) (0.539) (0.120) (0.066)* (0.05)** (0.092)*
Inflation Volatility 0.009 0.063 0.228 0.008 0.008 0.001 0.009
(0.961) (0.041)** (0.274) (0.794) (0.791) (0.962) (0.769)
Volatility of terms 0.010 0.254 0.028 0.003 0.004 0.005 0.004
of trade (0.824) (0.000)*** (0.509) (0.685) (0.605) (0.465) (0.572)
Trade opennes 1.199 1.237 0.179 0.275 0.047 0.054 0.033 0.31
(0.009)*** (0.008)*** (0.092)* (0.658) (0.544) (0.491) (0.669) (0.697)
Income per capita 1.261 1.27 0.259 2.101
(0.000)*** (0.000)*** (0.000)*** (0.000)***
Population size 2.013 1.992 0.48 2.46 0.129
(0.000)*** (0.000)*** (0.003)*** (0.000)*** (0.018)**
Constant 18.31 18.519 1.793 30.018 0.080 0.354 0.162 1.172
(0.000)*** (0.000)*** (0.001)*** (0.000)*** (0.657) (0.87) (0.498) (0.015)**
Number of observation 730 727 618 415 810 797 797 797
Number of instruments 323 325 326 326 310 323 323 324
Wald (p-value) 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Sargan Test 496.197 499.453 759.323 686.713 434.1762 445.122 444.1916 440.6424
(0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)***
Autocorrelation 2.057 1.083 0.509 0.786 0.064 0.3191 0.002 0.117
test AR(2) (0.039) (0.278) (0.61) (0.431) (0.9483) (0.9745) (0.9978) (0.9067)
Note: Plus value in parentheses. ***, **, * denotes significance at 0.10, 0.05 and 0.01 levels respectively. All regressions include both country-specific effects and
time-period effects. Model specifications statistics includes Wald Chi2, P-values of Sargan test for overidentifying restrictions and AR(2) test of the disturbance
error terms. The instruments are endogenous; they are calculated by the Stata program. Instruments for differenced equation are the independent variables and
instruments for level equation is the constant.

The last category includes the variables of control such as
the measurement of the population size and per capita income
level, results show that they are significant and have an
important role in determining the level of financial develop-
ment of a country whatever is its class.
In our study we were able to identify key measures
responsible of the level of financial development, especially
for developed and emerging countries. For developing
countries, results remains mixed. The policy implication of
this study is therefore straightforward. In fact there is need to
strengthen the monetary policy and the characteristics of
central banking through deliberate efforts to deepen the
financial sector development, enhance the competitiveness of
financial markets, build strong institutional and regulatory
framework that strengthens creditor and property rights, foster
the development and smooth functioning of secondary and
70 _
O. Tayssir, O. Feryel / Borsa Istanbul Review 18-1 (2018) 52e75

money markets so as to deepen the influence of monetary
policy instruments on market interest rates in the financial
sector, and this will ensure the integration of financial markets
for greater capital mobility. The central bank must also create
an environment conducive for financial innovation that will
encourage financial inclusion and market development. Policy
makers could also possibly consider central bank characteristic
and their monetary policy as one of the factors that can lead to
the effectiveness of financial development through namely
legal and real independence as well as transparency of the
central bank, inflation targeting, exchange rate regime, public
debt and interest rate. However, although we found that central
banking is important to enhance the level of financial devel-
opment; our results also raise some important points for policy
makers to consider before issuing new financial development
plans in the future. Thus policy makers should be aware that if
they do not carefully control financial development in coun-
tries at a suitable level of development, it can lead to a
financial instability or even a financial and an economic crisis.
This study allows us to ask several questions aimed to clarify
the role of Central Banking currently, including the role of the
Central Bank in financial stability through its monetary policy
as well as macro prudential ones. This is an area that has not
received much attention and may be deserving of further study.
Appendix.

Appendix Table 1
Variable definitions and data sources.
Variables class Definition of variables Mesures of Data sources
variables
The class of Financial openness It is an index measuring the openness of a based on binary dummy variables Chinn and Ito (2011)
dependent variable: (KAOPEN) country's capital account. that codify the tabulation of
financial restrictions on cross-border financial
development transactions
Financial structure This variable has a combination between the Market Capitalization þ Bank credit/ Financial Structure
level of development banks and the level of GDP
development of financial markets
Index of central bank the central bank shouldn't be submitted to indice Cukierman (1992), CWN (1992)
legal independence government pressure Crowe and
Meade (2007)
Index of central bank Turnover ratio of central bank Governors the number of governors change per CWN (1992)
real independence year Crow and
Meade (2007)
Index of central bank The central bank should disseminate Transparency Dincer and Dincer and
transparency accurate information about its activity Eichengreen Index (2007) Eichengreen (2010)
Exchange rate regime This is a de facto indicator of flexibility of It varies between 1 and 15, that is to Reinhart and
the exchange rate say from the least flexible exchange Rogoff (2010)
rate regime to the most flexible
The class of inflation targeting This measure aims to the announcement of This is binary variable that takes 1 if Hammond (2011),
central banks an explicit and numerical inflation target the country is Targeted inflation and Roger (2010) and
variables 0 if not IMF staff calculations
Interest rate It is the bank rate with which it gives loans The loan rate WB
to the private sector
Central bank assets It's all of detentions central banks Central bank assets/GDP Financial Structure
Public debt It is the sum of the ratio of accumulated debt the ratio of public debt/GDP IMF database
stock/GDP for the preceding year by
updating by the interest rate and the ratio of
budget deficit to GDP for the current year.
Rule of law It measures the rule of law and captures the Estimation of governance (from WGI du WB
perception and measurement to which about 2.5 (low) to 2.5 (high
economic agents trust and respect rules performance governance))
Quality regulation This variable captures the government's Estimation of governance (varies WGI du WB
ability to formulate and apply good policies between 2.5 (low) and 2.5 (high
and regulations that promote economic performance governance))
practice
The Democracy Index This is an index that seeks to reflect the type The value of this index ranges from 0 POLITY IV
of government and institutional quality to 10, with higher values
based on freedom of elections, operational representing the most democratic
constraints and respect of other fundamental regimes.
rights connected on political and civil
liberties
(continued on next page)
 _
O. Tayssir, O. Feryel / Borsa Istanbul Review 18-1 (2018) 52e75 71

Appendix Table 1 (continued )

Variables class
The class of Civil liberty
institutional
variables
Political rights
growth rate volatility
Inflation volatility
Macroeconomic The volatility of terms
policy variables of trade
Trade openness
Per capita income
Other variables population size
Definition of variables Mesures of Data sources
variables
This index is calculated based on the The civil freedom index is on a scale FREEDOM HOUSE
following criteria: freedom of expression, of 1e7, with 1 representing the COUNTRY SURVEY
the right of assembly and education, greatest civil liberties and 7 a total
religious freedom, the rule of law and free absence of civil liberty.
economic activity.
This index measures the degree of freedom Its calculation is based on a scale FREEDOM HOUSE
in the electoral process, political pluralism from 1 to 7, 1 represents the most COUNTRY SURVEY
and participation and the functioning of free and 7 represents the least free.
government.
it is used to capture mismanagement and s((GD t - GDP t-1)/GDPt) WB
macroeconomic fluctuations.
it is used to capture mismanagement and s(inflation rate) WB
macroeconomic fluctuations
it is used to reflect the extent of external s (Log(the index of the terms of WB
shocks. trade in goods and servicest - the GDN
index of the terms of trade in goods
and servicest-1))
this measure allows capturing the natural Export þ import/GDP WB
opening of foreign trade
GDP 80 WB
Population 80 GDN

Appendix Table 2
the distribution of countries
Developed countries Emerging countries Developing countries
Germany, Spain, Australia, Algeria, Argentina, Bangladesh, Brazil, Bahamas, Barbados, Bolivia, Botswana,
the United States China, Chile, Colombia, South Korea, Costa Rica, Ethiopia, Guyana, Haiti, Honduras,
Austria, Finland, Dominican Republic, Ecuador, Egypt, Jamaica, Jordan, Kenya, Kuwait, Lebanon,
Belgium, France, Elsalvadeur, Ghana, Guatemala, Hungary, Lesotho, Libya, Madagashkar, Malawi, Nepal,
Canada, Greece, India, Indonesia, Iran, Malaysia, Mexico, Nicaragua, Panama, Paraguay, Seychelles, Sudan,
Cyprus, Ireland, Morocco, Nigeria, Pakistan, Peru, Suriname, Swaziland, Syria, Sri Lanka, Tanzania,
Denmark Philippines, Poland, Romania, Saudia Arabia, Tunisia, Zambia, Zimbabwe
Iceland, Italy, South Africa, Thailand, Turkey, Uruguay,
Japan, New Zealand, Venezuela
Norway, Netherlands,
Portugal, UK, Sweden

Appendix Table 3
Descriptive statistics
Variables Number Of observations Mean Standard deviation Minimum Maximum
Financial openness 2813 0.1877481 1.600832 1.875 2.421764
Financial structure 2654 0.7569567 1.665028 0 77.157
Central bank legal independence 2150 0.457069 0.2033461 0.1 0.92
Central bank real independence 2803 3.849447 4.58127 0 30
Central bank transparency 923 6.174973 3.624676 0 14.5
Exchange rate regime 2768 7.988439 4.122169 1 15
The inflation targeting 2848 0.1060393 0.307942 0 1
Interest rate 2808 0.1227436 0.10999 0 0.8636
Centrale bank assets 2848 0.0806978 0.119826 0 1.401094
Public debt 2759 0.649118 0.6186314 0 7.84351
Quality regulation 1320 0.1895434 0.976088 2.44611 1.04
The rule of law 1320 0.1570864 1.019335 1.910213 1.99964
Democracy Index 2717 5.63894 4.048164 0 10
Civil liberty 2816 3.214844 2.076599 1 7
Political rights 2814 3.370291 1.825108 1 7
growth rate volatility 2745 0.0398809 0.0794665 0.0006463 1/060623
Inflation volatility 2826 0.6906126 1.667026 0.0202966 34.23569
The volatility of terms of trade 2644 0.25549 2.831919 0 69.8511
Trade openness 2759 0.6742129 0.508514 0 4.396567
Income per capita 2759 7.989619 1.570482 11.48123 16.39151
Population size 2848 2.991439 2.116741 –1.58174 10.451
 72
Appendix Table 4
Correlation matrix. Main results using GMM SYSTEM estimators
Financial Financial Interest Legal Real Transparency Exchange Inflation Central Quality Rule Index of Civil Political Trade Growth rate Inflation Volatility Public Income Population
structure opennes rate independence independence rate regime targeting bank assets regulation of law democracy liberty rights opennes volatility volatility of terms debt per capita size
of trade
Financial 1
structure
Financial 0.2158 1

O. Tayssir, O. Feryel / Borsa Istanbul

opennes
Interest rate ¡0.0835 ¡0.1425 1
Legal
independence 0.0227 0.3009 ¡0.0003 1
Real
independence 0.0373 0.0689 ¡0.1020 ¡0.0735 1
Transparency 0.1598 0.4804 ¡0.2873 0.4439 ¡0.0644 1
Exchange
rate regime ¡0.0009 ¡0.2203 0.1586 ¡0.3016 0.0793 ¡0.0136 1
Inflation 0.1537 0.2146 ¡0.0350 0.1956 ¡0.0175 0.4807 0.2383 1
targeting

_
Central bank ¡0.1217 ¡0.1627 0.0816 ¡0.1074 ¡0.1233 ¡0.3248 0.1586 ¡0.0350 1
assets
Quality 0.2194 0.5740 ¡0.2768 0.1506 0.1091 0.6646 ¡0.1148 0.1521 ¡0.2494 1
regulation

Review 18-1 (2018) 52e75

Rule of law 0.2112 0.4043 ¡0.3753 ¡0.0320 0.1329 0.6169 ¡0.1487 0.2900 ¡0.2430 0.7888 1
Index of 0.1170 0.4331 0.0787 0.3313 ¡0.0899 0.7186 ¡0.1005 ¡0.2991 ¡0.1476 0.6041 0.4640 1
democracy
Civil liberty ¡0.1197 ¡0.3708 ¡0.0378 ¡0.2726 0.0467 ¡0.6808 0.0472 0.2955 0.1479 ¡0.6974 ¡0.5557 ¡0.9018 1
Political rights ¡0. 1598 ¡0.4147 ¡0.0293 ¡0.2648 ¡0.0132 ¡0.7188 0.1395 0. 0299 ¡0.1603 ¡0.7605 ¡0.6374 ¡0.8616 0.9250 1
Trade opennes 0.1240 0.2274 ¡0.0446 0.0208 0.0808 0.0188 ¡0. 0.0337 ¡0.0674 0.2496 0.2729 ¡0.0033 ¡0.0367 ¡0.0843 1
Growth rate ¡0.0015 0.0437 ¡0.0003 0.0305 0.0140 ¡0.0217 ¡0.0212 ¡0.0381 ¡0.0081 0.0061 0.0150 ¡0.0441 ¡0.0423 0.0485 0.0614 1
volatily
Inflation ¡0.0004 ¡0.0872 0.0424 ¡0.0031 ¡0.0242 ¡0.2422 0.0356 ¡0.0253 0.0093 ¡0.2354 ¡0.1793 ¡0.1285 0.1580 0.1575 ¡0.0114 0.0199 1
volatility
Volatility of ¡0.0030 0.0315 ¡0.0051 ¡0.0318 ¡0.0006 ¡0.0894 ¡0.0416 ¡0.0116 0.0505 ¡0.00317 ¡0.0331 ¡0.0462 0.0402 0.0408 0.0004 ¡0.074 ¡0.0018 1
terms of
trade
Public debt ¡0.0183 ¡0.0429 0.0966 ¡0.0170 ¡0.0122 ¡0.1199 0.0382 ¡0.0326 0.2832 ¡0.0627 0.0805 ¡0.0920 0.0915 0.0813 0.1531 0.0886 0.0376 ¡0.0008 1
Income per 0.2576 0.599 ¡0.2556 0.2106 0.1985 0.6663 0.0942 0.0391 ¡0.3067 0.7299 0.7610 0.5685 ¡0.5788 ¡0.6466 0.1788 0.0110 ¡0.1140 ¡0.0212 ¡0.1856 1
capita
Population 0.0205 ¡0.0515 ¡0.0430 0.0 242 ¡0.1641 ¡0.1302 0.2081 ¡0.0252 0.0893 ¡0.3383 ¡0.3656 ¡0.1494 0.2564 0.2899 ¡0.3221 ¡0.0348 0.0431 0.0056 0.1790 ¡0.1977 1
size
 _
O. Tayssir, O. Feryel / Borsa Istanbul Review 18-1 (2018) 52e75 73

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