The Nonlinear Effects of Globalization and Inflation Components on Financial Development in Iran: Markov Switching Approach(with Emphasis on Banking Credits)

Undoubtedly, it is possible to achieve long-term and continuous economic growth in any country by equipping and optimally allocating investment resources in the national economy of that country, and the role of developed financial markets is necessary to achieve this goal. In fact, the role and importance of the financial system in the development process of countries is such that the difference between developed and developing economies can be found in the degree of efficiency and effectiveness of their financial system. Financial development is a category, which, according to the developments of financial markets, following the discussions of globalization and financial integration after the 70s, was taken into the attention of economists. Therefore, considering the importance of the financial development category in different countries, the study of factors affecting it has always been emphasized. Financial development is a set of factors, policies and institutions that lead to the creation of effective financial markets and financial intermediaries and provide deep and wide access to capital and financial services.

 THEORETICAL FRAMEWORK:

Many factors can influence the development process of financial markets, among which, the role of the combined index of globalization and inflation can be very important. Some economists and economic policymakers, such as Greenaway and Baltaji, believe that globalization leads to better macroeconomic performance and faster financial development in terms of financial and commercial openness, which many empirical studies support this view. International institutions such as the World Bank, the International Monetary Fund, and the Organization for Economic Cooperation and Economic Development advise member countries to believe that commercial and financial liberalization has a positive effect on financial development.

In this research, the non-linear effects of globalization and inflation on the financial development index (facilities granted by the banking system) in Iran during the period 1368 to 2020 have been investigated by using the Markov switching econometric technique. In this study, the dependent variable is financial development, and the independent variables are inflation, globalization, capital stock, and government spending.

In the first regime, the economic dimension of globalization has a positive effect on financial development, which indicates that, due to the increase in the economic dimension of globalization, the index of financial development (facilities granted by the banking system) increases. But in the second regime, the economic dimension of globalization has a negative effect on financial development, which indicates that, due to the increase in the economic dimension of globalization, the index of financial development (facilities granted by the banking system) decreases. Inflation caused by demand pressure and monetary inflation in both regimes has a negative effect on financial development, which indicates that, due to the increase in inflation caused by demand pressure and monetary inflation, the index of financial development (facilities granted by the banking system) decreases.Human capital in both regimes has a positive effect on financial development, which indicates that, due to the increase in human capital, the financial development index (facilities granted by the banking system) increases.In the first regime, capital stock has a positive effect on financial development, which indicates that, due to an increase in capital stock, the index of financial development (facilities granted by the banking system) increases. But in the second regime, ithas no effect on financial development. Government spending in both regimes has a negative effect on financial development, which indicates that, due to an increase in government spending, the financial development index (facilities granted by the banking system) decreases.

CONCLUSIONS & SUGGESTIONS:

The results of the estimates indicate that the sources of inflation (inflation caused by demand pressure and monetary inflation, structural inflation, inflation caused by cost pressure and imported inflation) had a negative effect on financial development in both regimes. Regarding the dimensions of globalization (economic dimension, social dimension and political dimension), we saw a positive relationship in the first regime and a negative relationship in the second regime. In connection with the results of the control variables, the variables of capital stock and human capital in both regimes had a positive effect on banking facilities, but the effect of government spending on banking facilities in both regimes was negative. Now, according to the results, policy proposals are presented as follows:- What can be stated with certainty is that paying attention to globalization and joining international organizations such as the World Trade Organization can help improve the performance of financial development indicators in Iran. Because Iran has a long way to go on the path of globalization and integration into it. Therefore, the economic, political, social and cultural dimensions, especially the political dimension, need a fundamental revision.