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 financial 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 financial markets and (iii) market performance. This new evidence aims to fill 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 financial terms. Moreover, we find evidence that a process of financial convergence towards mature economies has already started in certain emerging economies. Finally, we conduct an econometric analysis showing that different levels of domestic financial development tend to be associated with the building up of external imbalances across countries. JEL Classification: F3, F4, G1, G2, E21, E22, C82.