Financial development and macroeconomic interdependencies in developing economies: a comparative panel analysis

Financial development is pivotal to long-term economic transformation, yet evidence on its macroeconomic determinants in developing economies remains fragmented and at times inconsistent. Prior studies often examine a narrow set of variables, overlook cross-country heterogeneity, or fail to incorporate the structural shocks that shape emerging markets. This study addresses these limitations by analyzing the interdependencies among financial development, economic growth, foreign investment, trade openness, capital formation, domestic income, inflation, and export–import dynamics across 95 developing economies from 2009 to 2022. Employing advanced heterogeneous panel estimators, the analysis identifies both long-run equilibrium relationships and short-run adjustments while accounting for country-specific differences and global spillover effects. Results indicate that economic growth, foreign investment inflows, domestic income, and trade-related variables exert significant long-run impacts on financial development, although the strength and direction vary due to structural and institutional differences across countries. Inflation and trade variables also demonstrate asymmetric effects, underscoring the diverse macro-financial conditions in developing economies. Short-run influences are generally weak, suggesting that financial development evolves gradually through structural and institutional adjustments rather than immediate macroeconomic fluctuations. The findings highlight the need for policy frameworks that strengthen institutional quality, maintain monetary stability, and promote diversified and resilient financial systems. Policymakers should prioritize inclusive financial reforms, technological innovation, capacity building, and international cooperation. Such strategies are essential for enhancing financial development and advancing sustainable economic progress aligned with the Sustainable Development Goals.