Politická ekonomie X:X | DOI: 10.18267/j.polek.1495

Financial Development in Uncertain Economies: A Pathway to Sustainability

Xin Ling, Muhammad Atif Khan ORCID..., Hammad Qadeer
Xin Ling, School of Economics of Beijing Wuzi University, Beijing, China
Muhammad Atif Khan (Corresponding author), Department of Commerce, Faculty of Management Sciences, University of Kotli, City Kotli, Azad Jammu and Kashmir 11100, Pakistan
Hammad Qadeer, School of Accounting, Zhongnan University of Economics and Law, Wuhan, China

This study is the first to explore the effect of Economic Policy Uncertainty (EPU) on multidimensional financial development. Using data from 22 countries over 20 years (2002-2021) and employing fixed effects regression and two-step dynamic system GMM estimators, the results reveal a significant negative impact of EPU on financial development. This adverse effect spans both key dimensions: financial institutions and financial markets development. The analysis further highlights how EPU hampers key dimensions of financial institutions and markets\' performance - depth, access, and efficiency. Importantly, the study highlights the positive moderating role of institutional quality, which mitigates EPU\'s negative impact, reinforcing its importance in enhancing financial resilience. Furthermore, this study differentiates between elevated and mild EPU regimes, highlighting the capacity of the latter to significantly hinder financial development. These findings underscore the vital role of strong institutions in stabilizing financial systems amid policy uncertainty.

Keywords: Economic policy uncertainty, financial development, institutional quality

Received: August 27, 2024; Revised: January 20, 2025; Accepted: January 27, 2025; Prepublished online: November 12, 2025 

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