Financial development, diversity, and economic stability: Micro and systemic evidence

In this “Data, Tools and Replication” paper we adapt the complexity algorithm by Hidalgo and Hausmann (2009) to the financial sector and compute a measure of financial development that is intrinsically linked to its diversity dimension. We then test the impact of financial development on financial stability, economic resilience and growth, focusing on Italy. By employing an index that levers on the diversity dimension of financial development, our findings reveal that higher degrees of financial development translate into a lower financial fragility and a more resilient real economy. Indeed, territories denoted by more diverse and developed financial systems show an increased firm natality rate, a reduced firm mortality rate, and a lower probability of experiencing employment and GDP drops. Finally, higher financial development also spurs economic growth. Results are confirmed at micro-level, and higher levels of financial development and diversity decrease the probability of firms’ exit from the market and enhance their investment activity. Our findings unveil the importance of considering the diversity dimension of financial development when investigating its role on economic performance.