Domestic Financial Development in Emerging Economies. Evidence and Implications

We construct, on the basis of an original methodology and database, composite indices to measure domestic fi nancial development in 26 emerging economies, using mature economies as a benchmark. Twenty-two variables are used and grouped according to three broad dimensions: (i) institutions and regulations; (ii) size of and access to fi nancial markets and (iii) market performance. This new evidence aims to fi ll a gap in the economic literature, which has not thus far developed comparable time series including both emerging and mature economies. In doing so, we provide a quantitative measure of the – usually considerable – scope for the selected emerging countries and regions to “catch up” in fi nancial terms. Moreover, we fi nd evidence that a process of fi nancial convergence towards mature economies has already started in certain emerging economies. Finally, we conduct an econometric analysis showing that different levels of domestic fi nancial development tend to be associated with the building up of external imbalances across countries.