Impact of domestic public borrowing on financial development: Evidence from European Union transition economies

The financial sector is an important determinant of many economic variables including economic growth and development, tax revenues, foreign direct investments, shadow economy, income distribution and poverty. Considering the aforementioned economic impacts of financial sector, it is crucial to determine the determinants of the financial sector development. In this study, by applying second generation cointegration and causality analyses, the impact of domestic public borrowing with foreign direct investment inflows and remittances on financial development over the period 1996-2017 in European Union transition economies which underwent an institutional and economic transformation has been investigated. Within the scope of the econometric analysis, the causality analysis reveals that domestic public borrowing has a significant effect on financial development. On the other hand, the cointegration analysis has revealed findings supporting both the safe asset view and the lazy bank view. In addition, in the long run, a positive weak impact of foreign direct investments inflows and remittances on financial sector development has been revealed.