Adapted Approaches to Measuring Financial Development

In the contemporary literature, the viewpoint that the financial system has critical importance for economic growth coexists with another one, arguing that financial depth and economic growth can be negatively related, at least in the short run period (Arcand et al., Journal of Economic Growth 20:105–148, 2015). Today’s ongoing discussion concerning finance-growth nexus touches, among other subjects, upon the issues of correct set up and use of financial development indicators (FDIs) in empirical studies. In this study, we follow up the evolution of the system of FDIs. We propose ways to improve the system of FDIs that constitute the World Bank's Global Financial Development Database (GFDD). These ways include the adjustment of existing indicators, the development of new indicators, and the expansion of the system of FDIs by including financial structure indicators. Moreover, we have edited the data on private credit by deposit money banks obtained from IMF’s IFS. As a result of the adjustment, the sum of bad loans was subtracted from the total loans to the private sector. Our statistical analysis of the relationship between financial depth and growth in both baseline and adjusted financial depth models for the panel of 94 countries over the 2000–2017 period reveals the following findings. The estimated coefficients for the financial depth variable after the adjustment either become more economically and statistically significant (as it turned out in pooled models), or change their sign from minus to plus (in GMM models). Thus, the credit depth NPL adjustment allows us to provide evidence of a positive relationship between financial deepening and economic growth.