Financial Development and Domestic Public Debt in Emerging Economies: A Panel Cointegration Analysis

The share of domestic public debt over total public debt has increased in most developing economies during the last 30 years, these period also characterized by expansion and liberalization of the financial markets. Financial development requires the existence of appropriate institutional infrastructure and economic stability. This paper investigates the long-run relationship between financial development and domestic public debt in 18 emerging economies over the period 1987-2013. The study uses the second generation panel unit root test and panel cointegration analysis which allows for both cross section dependence and heterogeneity. The results reported in this study suggest that government borrowing from domestic banks has negative effect on financial development in the long run. Furthermore, the findings indicate that while trade openness enhances financial development, economic instability exerts a negative impact in emerging countries.