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Journal of Competitiveness

The Impact of Geopolitical Risks on Financial Development: Evidence from Emerging Markets

Zhou Lu, Giray Gozgor, Mai Huang, Marco Chi Keung Lau

Keywords:
financial sector development, credits to the private sector, domestic lending, geopolitical risks, emerging markets, competitiveness, panel data methods

Abstract:
This paper aims to investigate the effect of geopolitical risks on financial development (measured by domestic credit to the private sector) in a panel dataset of 18 emerging markets over the period 1985-2018. The results from the fixed-effects estimations indicate that an increase in geopolitical risks leads to a lower level of domestic credit to the private sector. The findings from the bias-corrected least-squares dummy variable estimations also confirm that geopolitical risks impacts negatively on domestic credit to the private sector. In terms of controls, we have found that per capita income and broad money are positively associated with domestic lending. Further, external imbalances were found to suppress domestic credit in emerging markets. Various additional controls were then included to address potential omitted variable bias. Moreover, we utilized multiple robustness checks, such as excluding countries from different continents as well as extracting outlier observations. According to the findings from these robustness checks, the negative impact of geopolitical risks on domestic lending is statistically and economically robust. To the best of the author’s knowledge, this paper is the first to provide evidence for the negative impact of geopolitical risks on financial development in emerging markets, the economic performance of which can slow down as competitiveness deceases due to concomitant threats.

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10.7441/joc.2020.01.06


Lu, Z., Gozgor, G., Huang, M., & Lau, C. K. M. (2020). The Impact of Geopolitical Risks on Financial Development: Evidence from Emerging Markets. Journal of Competitiveness, 12(1), 93–107. https://doi.org/10.7441/joc.2020.01.06

Journal of Competitiveness

  

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ISSN 1804-171X (Print); eISSN 1804-1728 (On-line)


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