Impact of Financial Development on Economic Growth Volatility: Moderating Role of Innovation in Developed and Developing Economies

While financial development has contributed to higher economic growth, it has also influenced the volatility of that growth. Numerous studies have investigated the impact of financial development on economic growth volatility, yielding ambiguous results. Additionally, innovation has emerged as a significant determinant of growth volatility. This study explores the relationship between financial development and economic growth volatility within the context of innovation, using panel data from 1996 to 2022 for both developed and developing countries. The Generalized Method of Moments (GMM) is employed as the estimation technique. The findings reveal that, when accounting for innovation, financial development negatively affects growth volatility in both developed and developing nations. Furthermore, inflation is found to increase economic growth volatility across both panels. Government spending reduces growth volatility in developed countries but exacerbates it in developing ones. Institutional quality either positively influences or has an insignificant effect on growth volatility in developing countries, whereas it contributes to reducing volatility in developed economies. The study underscores the importance of leveraging a combination of innovation and financial development to mitigate economic growth volatility.