Macroeconomic effects of financial depth in emerging markets

This thesis examines the relationship between financial depth and macroeconomic performance in selected developing countries. The study aims to determine how financial deepening affects key macroeconomic variables such as GDP growth, inflation, unemployment, current account balance, investment, and savings. The theoretical framework examines the basic structure and functions of financial systems, followed by a discussion of financial depth, measurement indicators, and its relationship with financial liberalization. The research also evaluates the theoretical foundations of the finance-growth relationship through both supply-side and demand-side perspectives. The empirical analysis is based on a panel data set covering eight developing countries over the period 1994–2021. Two fixed-effects models were estimated using Driscoll-Kraay standard errors to ensure robustness against heterogeneity and serial correlation. Overall, the findings suggest that financial deepening alone does not guarantee macroeconomic stability or growth. For developing countries, financial development must be accompanied by robust regulatory frameworks, effective institutional structures, and targeted policy measures to enhance its contribution to sustainable economic performance.