Financial Innovation and Economic Development: Evidence From Different Stages of Financial Development

ABSTRACT Financial innovation plays a critical role in advancing the United Nations' Sustainable Development Goal 8 (SDG 8), which aims to promote sustained, inclusive, and sustainable economic growth, along with decent work opportunities. This study examines the dynamic relationship between financial innovation and economic development, motivated by ongoing theoretical and empirical debates regarding whether financial innovation serves as a driver of long‐term economic growth. The primary objective is to assess the impact of financial innovation on real GDP per capita and growth volatility over both the short and long term, with particular emphasis on variations across countries at different stages of financial development and the influence of financial crises. Using panel data from 39 countries spanning the period 1972–2016, the study employs the Pooled Mean Group (PMG) estimator to capture dynamic effects, both before and after financial crises. The empirical findings indicate that financial innovation contributes to long‐term economic development; however, in highly developed financial systems, it also amplifies growth volatility, particularly in the period preceding financial crises. In economies with less developed financial systems, financial innovation stimulates economic expansion but simultaneously heightens volatility, both pre‐ and post‐crisis. These findings underscore the need for policymakers to implement regulatory frameworks that balance the benefits of financial innovation with the risks of financial instability. Most importantly, the study highlights the role of financial innovation in advancing SDG 8 by demonstrating its potential to foster sustained economic growth when appropriately managed.