Effect of Structural Break on Financial Development and Economic Growth Nexus in Middle-Income Countries in Asia: Moderating Role of Technological Advancements

Abstract

Asian countries have experienced many financial catastrophes and pandemics in the past couple of decades. Therefore, evaluating the effect of structural breaks on economies has taken substantive attention in the empirical literature. Thus, this study aims to investigate the effect of structural breaks on the Financial Development (FD) and Economic Growth (EG) of middle-income countries in Asia. The study considered the global financial crisis of 2008 as a key structural break. The sample consisted of 24 middle-income countries while the sample period was 20 years from 2000 to 2019. Technological Advancement was considered a moderator variable that facilitate the smooth functioning of the FD and EG. Structural Break was identified using the "xtbreak" function and the effect was analyzed with panel unit root, panel homogeneity test and short panel cointegration. The findings revealed that before the structural break, FD and moderator variables were the only significant variables but after the structural breaks, Human Capita and Private Consumption also have become significant. FD had a significant negative influence over EG before and after the structural break but the moderator variable had a positive influence. HC was not a significant factor before the structural break but has become significant after the economic downturn with a positive influence on EG. In contrast, PC shows a negative influence after the structural breaks. Hence, it guides the policymakers to decide on reducing investments for FD and direct funds to HC development and developing the technology. Moreover, they must consider making policy decisions to reduce PC.