Revisiting long-run dynamics between financial inclusion and economic growth in developing nations: evidence from CS-ARDL approach

Abstract

Purpose This study aims to analyze the long-run dynamic relationship between financial inclusion and economic growth for developing nations. Design/methodology/approach This study develops a comprehensive financial inclusion index based on the UNDP methodology for 53 developing nations. The authors use second-generation unit root tests, cointegration techniques and an advanced dynamic common correlated effects estimator model called cross-sectional augmented autoregressive distributed lags (CS-ARDL) to examine long-run dynamics among variables. Findings The tests confirm the presence of slope-heterogeneity and cross-sectional dependency. The second-generation panel unit root tests show the chosen variables are stationary at first difference. The bootstrap Westerlund cointegration result shows the variables are cointegrated in the long run. The CS-ARDL estimates conclude that financial inclusion positively enhances gross domestic product per capita in selected developing countries. The robustness check through augmented mean group estimation validates the findings. Originality/value The study makes three important contributions: first, it constructs a comprehensive financial inclusion index using 10 variables for a panel of 53 developing nations; second, the potential cross-section dependence and slope heterogeneity of panel data have been accounted for by applying the second-generation unit root tests; third, the study uses the dynamic common correlated effects estimator model (CS-ARDL) to examine long-run dynamics among variables.

The dynamics of the financial inclusion index for developing countries: lessons learned

“…Yet access to these services is essential to simplify the daily lives of households and businesses (Ajide, 2020; Sethi and Acharya, 2018). It enables them to plan their expenditure, deal with unforeseen events and achieve their short-, medium- and long-term objectives (Ababio et al , 2023; Mir et al , 2023; Ratnawati, 2020; Beck et al , 2007). In developing countries, where financial insecurity is often the norm, this access is of paramount importance.…”