Impact of Financial Deepening on Exchange Rate: Spillover Evidence from Developed and Developing Economies

Abstract

Financial Deepening essentially refers to improvements in both the volume of money in circulation and the resultant increase in the pool of financial services tailored to all levels of the society. This paper provides a unique edge to existing knowledge by exploring important factor, through which financial deepening leads to financial crises. The excessive financial deepening in the base country spillovers among other economies led to financial instability. In this essence, annually data have been collected from the International Monetary Fund for the period 2000-2016 from 42 countries. Augmented Dicky Fuller, Correlation, VIF,linear regression and ARCH-GARCH family models have been applied in order to analyze and validate the outcomes. At the end recommendations and future research directions have been presented for both developed and developing countries.