Financial Development and Fragility: a clustering analysis
with Pietro Calice, André Lucas and Julia Schaumburg.
We explore the potential correlations between financial development and fragility or institutional vulnerability using a sample of 137 countries observed over the period from 1998–2019 and World Bank indicators. We group countries into clusters that capture the different joint states of financial development and fragility. We do so with and without controls, and with and without allowing countries to switch cluster membership over time. We obtain a robust positive association between higher financial development and lower fragility after controlling for several forms of observed and unobserved heterogeneity. The new switching methodology further allows a qualification of the evolution of countries in terms of CPIA scores and its relation to underlying variables. Irrespective of the precise methodology as used in this paper, we find a clear negative trend in average CPIA worldwide after controlling for both observed and unobserved heterogeneity.