Exploring the impact of financial literacy and financial inclusion on financial stability: An analysis using machine learning approaches

The main objective of this study is to examine the intersection between financial literacy, financial inclusion, and financial stability. Using cross-sectional data on 142 economies, we employ ordinary least squares with robust standard errors in performing linear support vector and quantile regressions to analyze the results. We find that financial literacy positively impacts financial stability across the full sample and in high- and middle-income economies. Our findings also reveal that financial inclusion and combining with financial literacy significantly promote financial stability. They also indicate that macroeconomic variables—such as the size of the financial sector, government debt, and interest rates—have a significant effect on financial stability. As an extension, our findings are confirmed using a generalized additive model, which accounts for nonlinear trends. This study outlines effective policies and practical implications that would boost financial literacy and financial stability in high-, middle-, and low-income countries.