THE EFFECT OF DIGITAL FINANCIAL LITERACY ON FINANCIAL DEVELOPMENT AND GOVERNANCE: USING PANEL VECTOR AUTOREGRESSIVE MODEL

Abstract

The study examined the impact of digital financial literacy on financial development utilizing a panel vector autoregressive (PVAR) model and panel data encompassing 108 countries from 2017 to 2021. In addition, Panel Granger causality tests were employed. The findings of the estimation indicated that enhancing digital financial literacy leads to an increase in financial development. The panel Granger causality tests strongly support the existence of a causal relationship between the Composite Digital Financial Literacy Index (CDFLI) and the Financial Development Index (FDI). Furthermore, the panel impulse response function demonstrated a significant and time-varying relationship between CDFLI and FDI. The variance decomposition revealed that variations in the FDI can be explained by changes in the CDFLI. Overall, digital financial literacy plays a crucial role in fostering financial. Given the continuous technological advancements in the financial industry, individuals must possess essential skills and knowledge to make well-informed decisions and effectively manage their finances. Policymakers bear the responsibility of promoting financial education and ensuring the accessibility and usability of digital financial services. This study contributes to the existent studies on the effect of digital financial literacy on financial development, building upon the works of Basha (2023) and Muat et al. (2024).