Does domestic public debt affect financial development? New evidence from central and eastern European economies

Abstract

After the 1990s, economic, social, and political changes in transition economies have attracted attention through liberalization and EU integration. In this sense, the effects of liberalization policies and the effects of the economic activities of the state on the economy have been the subject of discussion. The aim of this paper was to investigate the effects of domestic public debt on financial development in Central and Eastern European countries using panel autoregressive distributed lag (ARDL) method for the period of 1994 to 2017 . This study fulfills a gap in the existing literature for Central and Eastern European countries on “safe assets” and the “lazy banks” views. The findings of the study provide evidence that public domestic debt harms financial markets in both the short and long run for these countries. The results strongly support the “lazy banks” view in these countries. The results of this research also reveal that the economic activities of the state through public domestic debt prevent the development and deepening of financial markets.