Impact of Domestic Public Borrowing on Financial Development: Evidence from EU Transition Economies

Improvements in the financial sector have been suggested as a significant factor of economic growth. For that reason, it is crucial to reveal the determinants of financial sector development to ensure appropriate policy making. In this regard, this paper explores the influence of public borrowing from domestic money banks together with FDI inflows and remittances on the development of the financial sector over the period 1996-2017 in 11 EU transition economies with second-generation cointegration and causality analysis. The causality analysis discloses that domestic public borrowing had a significant influence on financial development. On the other side, the cointegration analysis revealed findings supporting both the safe asset view and the lazy bank view. Furthermore, a positive weak influence of FDI inflows and remittances on financial sector development was revealed in the long run.