The Impact of Financial Inclusion Shocks on Financial Cycles with Emphasis on Financial Stability: A Panel-VAR Approach

Document Type : Research Paper


1 Department of Economics, Urmia University, Urmia, Iran.

2 Department of Economics, Urmia university, Urmia, Iran.


This study aims to examine the impact of financial inclusion shocks on financial cycles, emphasizing financial stability in 73 developing and developed countries over the period 2005-2020. Impulse response functions and Granger causality in the form of a Panel Vector Autoregression (PVAR) have been investigated to analyze the models. At first, the results show that low-level financial inclusion initially reduces financial and credit cycles, but after increasing the financial inclusion level, this negative effect becomes positive and improves financial cycles. Additionally, financial stability can improve financial cycles. Finally, a positive shock from both indicators of the financial cycle increases the variable itself, and the effect of this shock is decreasing. Moreover, the Granger causality test results show a two-way causal relationship between the financial cycle and financial inclusion in both models. Both models show a two-way causal relationship between the financial cycle and financial stability. There is also a one-way causal relationship from financial stability to the financial cycle and financial stability variables. In other words, it can be argued that the variables of the financial cycle, financial inclusion, and financial stability are the Granger causality of each other in the selected countries.


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