Digital Financial Inclusion and Economic Growth: Nonlinear Evidence from Economies with High and Low Levels of Financial Development

Abstrak

Research Originality: This study contributes to the literature by showing that digital financial inclusion is not always a linear and uniform driver of economic growth. Its effect depends on the level of financial development and may generate diminishing returns after a certain threshold. Research Objectives: This study examines the nonlinear effect of digital financial inclusion on economic growth, identifies its optimal threshold, and compares its effects across low- and high-financial-development economies. Research Method: Using balanced panel data from 117 countries from 2007 to 2022, this study constructs a digital financial inclusion index through principal component analysis and applies Bayesian regression. Empirical Results: The results show clear heterogeneity. In low-income economies, digital financial inclusion has a strong, almost linear positive effect on growth, with a posterior probability close to 100%. In highly developed financial economies, the relationship follows an inverted U-shaped pattern. The estimated threshold is approximately 27.7, after which the marginal growth effect declines. Implications: Low-financial-development economies should expand digital financial services, while high-financial-development economies need stronger fintech regulation and consumer protection.  JEL Classification: O47; G21; O33