Rethinking Financial Deepening: Stability and Growth in Emerging Markets
Financial development increases a country’s resilience and boosts economic growth. It mobilises savings, promotes information sharing, improves resource allocation, and facilitates diversification and management of risk. It also promotes financial stability to the extent that deep and liquid financial systems with diverse instruments help dampen the impact of shocks.
But is there a point beyond which the benefits of financial development begin to decline and costs start to rise, and have emerging markets (EMs) reached these limits? This paper takes stock of where EMs are on the stability-growth tradeoff that financial development entails, and considers whether there is further scope for financial development, and how EMs can secure a safe process of financial development.