The Role of Financial Innovation on Financial Development in the Case of Norway

This thesis investigates the long-run equilibrium relationship and short-run relationship between gross domestic product, inflation, foreign direct investment, stock market traded, financial innovation, and financial development in the case of Norway between 1989 and 2018. In this thesis, the main aim is to find out the effect of financial innovation in the long-run and short-run on financial sector development. Level relationship between variables in this study confirmed by bounds test under the ARDL model mechanism. ECM under the ARDL approach used for the short-run and indicated that financial development converges to long-run equilibrium level by 48.61% speed of adjustment by the contribution of gross domestic product, inflation, foreign direct investment, stock market traded, and financial innovation every year. Results of ARDL estimation indicated that financial innovation has an inelastic, positive, and significant effect on financial development in the long-run and has a significant and negative effect in the short-run. Furthermore, the gross domestic product has a positive effect, and inflation and stock traded value have a negative effect on the financial sector development in the long-run. The Toda-Yamamoto causality test results indicate that there is a bidirectional relationship between financial innovation and financial development. Keywords: Financial Innovation, Financial Development, Toda-Yamamoto Causality Test, ARDL Approach, Norway.