Do institutions and trade openness mitigate the impacts of inflation on the financial system? Evidence from the Indian economy

The plethora of literature offers varied impacts of macroeconomic variables on the country's financial system. Although most of the studies are biased toward the positive impact, some studies also provide contradictory effects. In this connection, the present study delves into the impact of inflation, institutions and trade openness on India's financial system from 1980 to 2021. Moreover, the study also tests the demand-leading hypothesis in the finance-growth relationship. To unmask the impact of selected variables on financial development, the study employs the highly celebrated "autoregressive distributed lag" model due to Pesaran et al. (1998). Finally, the two-stage principal component analysis is used to measure financial development. The results reveal the long-run relationship among the variables during the study period. Moreover, the study results further provide the credentials of the "demand-leading hypothesis" in the Indian context. Finally, the study has policy implications for both the real and nominal sectors of the Indian economy.