Linkage Between Financial Inclusion, Financial Development and Financial Stability: Perspectives From Developing and Developed Countries

Using a Panel Vector Autoregressive (PVAR) framework, this study explores the dynamic interactions among financial inclusion, financial development, and financial stability across 45 developing and 13 developed economies from 2004 to 2020. The results reveal that financial inclusion enhances financial stability in developing countries, whereas in advanced economies it tends to exert a destabilizing effect. Additionally, the evidence points to a positive association between financial inclusion and financial development, and between financial development and financial stability in both country groups. Variance decomposition further shows that, in developing countries, financial stability plays a more prominent role in driving changes in financial inclusion and financial development. In contrast, in developed economies, shifts in financial stability are largely shaped by movements in financial inclusion and financial development.