The relative impact of traditional and digital financial inclusion on economic growth: a threshold regression-based comparative analysis

ABSTRACTThis study examines the effect of traditional and digital financial inclusion on economic growth in 130 developed and developing countries in 2014 and 2017. The motivation behind this study emerges from the critical need to discern not only how traditional and digital financial inclusion individually influence economic growth, but also to compare their relative contributions. In addition, there exists a potential non-linear relationship between traditional and digital financial inclusion, wherein both forms of financial inclusion can exert a positive influence on economic growth up to a specific threshold. For this purpose, traditional and digital financial inclusion indices were developed as distinct measures to investigate the relative contribution of each to economic growth. Cross-sectional sample splitting and threshold estimation were utilised to analyse whether the effects of each financial inclusion index on economic growth varied across different levels of digital and traditional financial inclusion. This study yielded two notable findings. First, the effect of traditional financial inclusion on economic growth is pronounced in countries with low levels of inclusion. Second, digital financial inclusion has a greater positive impact on economic growth in countries with higher levels of digital financial inclusion.KEYWORDS: Digital financial inclusionfinancial inclusioneconomic growththreshold effectJEL CLASSIFICATION: G21O4O47C31 AcknowledgementWe would like to thank the Editor Jonathan Michie and the anonymous referees for their highly constructive comments.Disclosure statementNo potential conflict of interest was reported by the author(s).Availability of data and materialThe dataset of this study is included in this article as Supplemental online materialAdditional informationFundingThe authors declare that no funds, grants, or other support were received during the preparation of this manuscript.