GOVERNMENT EFFECTIVENESS THRESHOLDS IN THE DIGITAL ERA: REVISITING THE DIGITAL FINANCIAL INCLUSION–CRISIS NEXUS
DOI:
https://doi.org/10.18623/rvd.v22.n6.3918Keywords:
Digital Financial Inclusion, Financial Crisis, Financial Stability, Government EffectivenessAbstract
This study examines the nonlinear relationship between Digital Financial Inclusion (DFI) and financial crises (FC), emphasizing the pivotal role of Government Effectiveness (GE) as a structural threshold shaping this nexus. Using panel data from 52 countries over the period 2004–2021 and applying the Panel Threshold Regression (PTR) model, the analysis identifies a statistically significant GE threshold at 1.3464. The results reveal a clear regime-dependent dynamic: in countries with GE below the threshold, higher levels of DFI increase financial fragility, reflecting the inability of weak institutions to regulate digital credit markets, enforce consumer protection, and manage emerging risks associated with rapid digitalization. Conversely, when GE exceeds the threshold, DFI contributes positively to financial stability, as capable governments are better equipped to supervise digital finance, enhance regulatory compliance, and leverage technological advances to strengthen resilience. These findings demonstrate that DFI is neither inherently stabilizing nor destabilizing; its effects depend critically on governance capacity. The study offers important policy insights, highlighting the need for governance-responsive digital finance strategies. While high-GE countries can safely accelerate DFI expansion, countries with low GE must prioritize institutional strengthening to prevent digitalization from amplifying systemic vulnerabilities. The results contribute to the growing literature on financial inclusion, digital transformation, and crisis risk by identifying governance thresholds that shape the stability implications of DFI.
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