Convergence or Divergence? Financial Development Trajectories in Post‐Communist Countries Based on Sharp and Smooth Break Panel Stationarity Tests

ABSTRACT This study examines whether the financial development levels of former communist countries converge, thereby following similar trajectories between 1998 and 2021. Given that financial institution and market development can evolve independently, we employ three key indicators to assess convergence: the Financial Development Index (FDI), the Financial Institutions Index (FII), and the Financial Markets Index (FMI). To test for stationarity, we apply panel stationarity tests incorporating both sharp and smooth structural breaks. Our findings indicate that only a few post‐communist countries exhibit stochastic convergence in overall financial development and its sub‐components. Furthermore, the Smooth Shifts Fourier Stationarity Test reveals that FDI, FMI, and FII do not stochastically converge in most post‐communist countries, underscoring diverse financial development paths and patterns. These results suggest that flexible and dynamic policies, tailored to both global trends and country‐specific needs, can promote more effective and sustainable financial development. Additionally, strengthening regional cooperation and fostering financial integration could support these economies in achieving more convergent financial trajectories.