The Effect of Financial Innovation on Economic Growth in Transition Countries

This paper aims to explore the effect of financial innovation on economic growth in 28 transition countries from 2004 to 2021. Financial innovation is categorized based on the structure of the financial system, including commercial banks, non-commercial banks and financial markets. By applying difference GMM estimation, the research demonstrated a significant positive effect of financial innovation in commercial banks and non-commercial banks on economic growth. The results show that a greater number of financial innovations in terms of products and services, processes, technology and function in commercial banks and non-commercial banks would result in higher economic growth in transition countries. In contrast, financial innovation in financial markets indicates significantly negative effects on economic growth. Introducing complex products in stock and bond markets in underdeveloped financial markets probably lead to the volatility and fragility, reducing economic growth. The results of this research contribute to issuing crucial policies that employ financial innovation as an impulse for spurring economic growth in transition countries.