Financial depth in the context of the relationship with economic growth

Abstract

The generalization of quantitative and qualitative scientific approaches to the essence of financial depth enables to define it as a resulting characteristic that demonstrates the saturation of the economy with financial resources, that allows assessing the ability of the financial system to effectively mobilize and redistribute financial resources to achieve sustainable economic development. The retrospective analysis of empirical hypotheses linking the financial depth of the economy and economic growth suggests that while some scholars focus on the importance of financial depth in economic development, others emphasize the effects of financial crises caused by rapid financial deepening, in particular credit expansion. The focus of contemporary research is on the nonlinearity of the relationship between financial depth and long-term economic growth and on defining the limit of financial development, exceeding which inhibits economic growth or negatively impacts it. Among the positives of financial deepening is the expansion of access to financial resources (increase in the volume and diversification of financial instruments), reduction of income inequality and smoothing of consumption, diversification of production risks. Among the risks of financial deepening is the deterioration of the current account due to excessive lending, unproductive investment, growth in employment in non-productive sectors, limitation of the use of fiscal policy as an instrument of countercyclical policy. It is noted that formation of the financial depth of the economy depends on the characteristics of financial resources and as well in structural, macroeconomic, political and institutional factors of economic development. While the world tends to increase the ratio of financial assets, broad money, domestic credit provided by financial institutions, the capitalization of listed companies to GDP, in Ukraine since 2014 there has been a significant decrease in these indicators, which is not typical in comparison with countries with the same level of income and demonstrates the low level of financial depth of the domestic economy.