The Effect of the Financial Development on Income Level of Transition Economies

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Using panel data methods and annual data for the period 1995-2010, this study attempts to examine the effects of various financial development indicators on the income level in 19 transition economies and two subgroups with differing levels of socio-economic development. These countries have relatively weak financial system compared with developed market economies. Subgroups are formed for 11 Central and Eastern Europe (CEE) transition economies and 8 former Soviet Union (CIS) members. Panel data estimations show that developments in the financial system contribute to the income level for all country groups. Increase in banking lending, realization of banking reforms, liberalization of interest rates, and increase in domestic savings influence the income level in the CEE lower than in the CIS. Securities markets and non-bank financial institutions reforms support the income level increases in the CEE countries, but in CIS countries where the level of this variable is rather low; such an effect is not observed.

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Financial development , income level , transition economies , panel data.

Ege Academic Review (EAR)

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Ege Academic Review (EAR)