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

Abstract

Financial Deepening refers to improvements in both the volume of money

in circulation and the resultant increase in the pool of financial services tai- lored to all levels of society. This paper provides a unique framework for

exploring important factors, through which Financial Deepening leads to fi- nancial crises. The excessive Financial Deepening in the base country spills

over into other economies, leading to financial instability. In this study, an- nual data from 42 countries were collected from the International Monetary

Fund for the period 2000-2016. Augmented Dicky Fuller, Correlation, VIF, linear regression, and ARCH-GARCH family models were applied in order to analyse and validate the outcomes. In the end, recommendations and future research directions are presented for both developed and developing countries.