NARDL Model of Shadow Economy, Interest Rate Volatility, Economic Growth and Financial Inclusion: Comparative Study of Western Europe and Developing Asia

Abstract

Background: The current study aims to investigate the impact of macroeconomic variables on financial inclusion by using annual data from 1990-2017 for Western Europe and developing Asia.

Objectives: The study also aims to examine the asymmetric effect of macroeconomic variables on financial inclusion. Further, the study has also drawn a comparison between Western Europe and emerging Asia in the context of which one is more affected by interest rate volatility, shadow economy, and economic growth in terms of financial inclusion.

Methods: This study has adopted the nonlinear cointegration technique NARDL, which shows nonlinearity into the model and depicts the asymmetric impact of underlying variables on financial inclusion.

Results: The results of the study show that all underlying variables significantly impact financial inclusion; the growth relationship is positive, and the shadow economy and interest rate volatility shows a negative connection. The results of the study imply that Denmark, Bangladesh, and France must be vigilant in the implementation of regulations that are linked with economy and interest rate guidelines. Findings of the study depict no- presence of asymmetry except France Vietnam and the Philippine.

Conclusion: The results of the study imply that both developed and developing economies should take specific measures to decrease the level of economic uncertainties, especially related to the interest rate. These nations need to device financial market reform to establish a reliable governance system. Future research can be done through using different proxies for the same variables and comparison of results can be drawn under different measurement criteria. The reverse relationship of financial inclusion on economic variables can also be tested in future research.