Financial development and poverty reduction in emerging and advanced economies

This study investigates the impact of financial development on poverty reduction in emerging market economies over 1994–2019 and in advanced economies over 2000–2019. Poverty is measured using the poverty gap in the main analysis, which captures the depth of poverty not reflected by the headcount ratio. In contrast, the headcount ratio is used as a robustness check. The World Bank’s current extreme poverty line of $3.00 is used in the main analysis, while the $4.20 and $8.30 poverty lines are employed for robustness checks. The Financial Development Index of the IMF and its constituent components are used to measure financial development, offering a more comprehensive assessment than the traditional private credit-to-GDP ratio. The system GMM results show that overall financial development and its dimensions have no significant effect on poverty reduction in both emerging and advanced economies, with results robust across both poverty measures and all three World Bank poverty lines.