Threshold Effects of Financial Development in the Relationship Between Unemployment Rate and Economic Growth Across Provincial Regions
Keywords:
Keywords: Financial Development, Economic Growth, Unemployment Rate, Income InequalityAbstract
This study examines the threshold effects of financial development in the relationship between the unemployment rate and economic growth across provincial regions over the period 2006–2024. The research is applied in nature and follows a descriptive–correlational design. Panel data were analyzed using the Panel Smooth Transition Regression (PSTR) approach with a logistic transition function. The main variables include provincial Gross Domestic Product (GDP), income inequality index (WTOP), financial development index measured through household credit provision (FAC), domestic credit to the private sector by banks (FD), education level (EDU), provincial government expenditures (GOV), provincial inflation (CPI), and provincial unemployment rate (UNE). Initially, panel unit root tests, including the Levin–Lin–Chu (LLC) test and Im–Pesaran–Shin (IPS) test, were conducted to assess the stationarity of the variables. Subsequently, the Kao cointegration test confirmed the existence of a long-run relationship among the variables. Diagnostic tests for panel model selection, linearity, threshold effects, and parameter stability were also performed. The results indicate that the relationship between financial development, income inequality, and economic growth is nonlinear, and a PSTR model with a single threshold provides the best specification. The findings reveal that financial development has a positive and statistically significant effect on economic growth, whereas income inequality and unemployment exert negative and significant effects on provincial economic growth. The estimated threshold coefficient for the financial development index is 0.96, and once this threshold is exceeded, the positive impact of financial development on economic growth intensifies. Tests for autocorrelation and heteroskedasticity confirm that the classical assumptions of the model are satisfied, and parameter stability across regimes is also verified. Overall, the results highlight the critical role of financial development in mitigating the adverse effects of income inequality and unemployment on economic growth across provinces. Furthermore, improving the financial development index can enhance the effectiveness of economic policies.
References
[1] K. B. Luintel, G. Li, and M. Khan, "The threshold effect of finance on growth: Reassessing the burden of evidence," Open Economies Review, pp. 1-67, 2024.
[2] J. Thornton and C. Vasilakis, "The impact of finance on income inequality: A threshold analysis," Economics and Business Letters, vol. 13, no. 2, pp. 104-111, 2024.
[3] A. Ghorishvandi Irag, M. Sufi Majidpour, S. Ghoveydel Doustkouei, and M. Mahmoudzadeh, "Investigating the Effects of Financial Inclusion on Economic Growth: A Generalized Method of Moments and Quantile Approach," 2025. [Online]. Available: https://civilica.com/doc/2311693.
[4] K. Li, E. B. Nketia, Y. Kong, and M. Appiah, "An introspective analysis of inclusive growth in Africa, with an eminence on the influence of governance and financial development interaction," SAGE Open, vol. 13, no. 2, 2023, doi: 10.1177/21582440231166341.
[5] M. C. Blanco-Arana and M. J. Angulo-Guerrero, "Financial development and poverty reduction in developing countries: The role of entrepreneurial activity," Panoeconomicus, 2024, doi: 10.2298/PAN220310015B.
[6] M. Mohammadi Khiyareh and H. Amini, "The Effect of Financial Development on Entrepreneurship in Developing Countries," Aliabad, 2024. [Online]. Available: https://civilica.com/doc/2134860.
[7] M. Shahbaz, A. C. Nuta, P. Mishra, and H. Ayad, "The impact of informality and institutional quality on environmental footprint: The case of emerging economies in a comparative approach," Journal of Environmental Management, vol. 348, p. 119325, 2023.
[8] A. Khoshniat and M. Zarei, "The functions of development banks in poverty alleviation in economically disadvantaged areas of I.R.I," Bi-quarterly Journal of Religion, Management & Governance, vol. 2, no. 1, pp. 52-69, 2023.
[9] M. Ronaghi and E. Scorsone, "The impact of governance on poverty and unemployment control before and after the Covid outbreak in the United States," Journal of Poverty, pp. 1-21, 2023, doi: 10.1080/10875549.2023.2173708.
[10] K. U. Rahman, "Impact of corruption, unemployment and inflation on economic growth evidence from developing countries," Quality & Quantity, vol. 57, no. 3, pp. 2759-2779, 2023.
[11] A. Moridian, M. Radulescu, P. Kumar, M. T. Radu, and J. Mohammad, "New insights on immigration, fiscal policy and unemployment rate in EU countries: A quantile regression approach," Heliyon, vol. 10, no. 13, 2024.
[12] O. Adeli and Z. Sabzpour, "Investigating the Effect of Financial Development on the Unemployment Rate of Iran's Provinces Using a Panel Data Model," Tehran, 2023. [Online]. Available: https://civilica.com/doc/1832803.
[13] N. Ebrahimi, M. Pedram, and M. H. Mousavi, "The Effect of Fiscal Policy on Unemployment Rate and Inflation Rate in the Provinces of Iran: A GVAR Approach," 2021. [Online]. Available: https://civilica.com/doc/1859880.
[14] M. Tajik Norouzi, F. Pourvahedi, and A. Farazandeh Nia, "Investigating the Effect of Inflation and Unemployment Rates on Purchasing Power and Priorities of Financial Resource Allocation," 2025. [Online]. Available: https://civilica.com/doc/2391539.
[15] D. Ozyakisir, M. Akca, and S. Camkaya, "Do remittances have an asymmetrical effect on financial development? Empirical evidence from Turkey," The Journal of International Trade and Economic Development, 2023, doi: 10.1080/09638199.2023.2203784.
[16] K. Sohag, M. B. Mesut, W. Ameer, and Š. Vilamová, "Does ICT diffusion validate skill-biased technological change hypothesis? Evidence from the post-Soviet countries," Technology in Society, vol. 76, p. 102450, 2024.
[17] J. F. L. Ngono, "Corrupting politicians to get out of unemployment: Empirical evidence from Africa," Journal of the Knowledge Economy, vol. 14, no. 2, pp. 1004-1032, 2023.
[18] R. Mohammadzadeh Foulad and M. Khorramabadi, "Investigating the Effect of Tax Evasion on the Economy of Developing Countries," Mashhad, 2024. [Online]. Available: https://civilica.com/doc/2130311.
[19] R. Pirayandeh, A. Khanzadi, and A. Falahati, "Investigating the Relationship Between Energy Poverty and Economic Growth in MENA Member Countries," 2025. [Online]. Available: https://civilica.com/doc/2343778.
Downloads
Published
Submitted
Revised
Accepted
Issue
Section
License
Copyright (c) 2025 Mohammad Taghi Behari (Author); Mohammad Khezri; Fatemeh Zandi (Author)
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
