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ABSTRACT:

This article investigates the Financial Development Index (FDI) calculation in North Macedonia (NM) by using yearly secondary time series dataset for a period of 1995-2022. The index compilation follows a wider matrix including variables of financial institutions and markets, using Principal Component Analysis. The empirical analysis uses Vector Autoregression (VAR) models and Granger causality Wald test. The model tests the relation and positive impact of the sub-indices and other major factors such as GDP, foreign investments, and income, also the negative impact of bank crisis and government expenditures. The extracted results confirm the hypothesis and show that the explanatory variables predict the short run values of the FDI. This result is an added value to the scientific analysis and provides valuable insights for future studies and national strategies of NM and emerging economies.

KEYWORDS:

Financial development, VAR, Financial development index (FDI), Emerging economy, North Macedonia.

JEL classification: G1, G2, O16.

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