Research Article |
Corresponding author: Tuyen Quang Tran ( tuyenisvnu@gmail.com ) © 2024 Non-profit partnership “Voprosy Ekonomiki”.
This is an open access article distributed under the terms of the Creative Commons Attribution License (CC BY-NC-ND 4.0), which permits to copy and distribute the article for non-commercial purposes, provided that the article is not altered or modified and the original author and source are credited.
Citation:
Van Le D, Tran TQ (2024) Financial soundness and subjective financial well-being: Do government policies matter? Russian Journal of Economics 10(4): 332-350. https://doi.org/10.32609/j.ruje.10.137491
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Does government policy intervention enhance citizens’ financial well-being, particularly when considering the increased financial soundness attributed to the private sector? This study empirically addresses this question, using data from more than 200,000 individuals worldwide. To provide causal evidence, we employ a two-stage least squares (2SLS) approach with a high-dimensional fixed-effect estimator, which captures multiple levels of control and addresses endogeneity concerns. Our findings suggest that (i) improvements in financial soundness — proxied by domestic credit development — significantly increase financial satisfaction, whereas (ii) surprisingly, government interventions, whether in the form of policies tightening or loosening, tend to erode this positive effect. This outcome may reflect either (i) ineffective interventions or (ii) the government serving as a scapegoat for a decline in subjective financial well-being. Our findings imply that to optimize public satisfaction, governments should approach interventions in the private sector with caution, thereby strengthening government legitimacy.
financial soundness, financial satisfaction, macroprudential policies.
Finance is often regarded as the lifeblood of an economy, and financial soundness plays a crucial role in a country’s economic and social development (
Domestic credit is a pivotal component of a nation’s financial system. This form of credit, provided by banks and other financial institutions, facilitates access to capital for businesses and individuals, thereby enabling investment, consumption, and economic expansion (
Another important discussion revolves around the role of government coordination and regulation in achieving an effective state of socio-economic development. Accordingly, the government’s role is essential not only in enhancing efficiency, but also in avoiding the misuse of public resources, as observed in developing countries (Tran et al., 2022; Trinh Thanh et al., 2023; Nguyen et al., 2024). Harmonizing this sector with the activities of the private sector seems to be a key element in pursuing sustainable goals (Van Le and Tran, 2024a; Van Le et al., 2022). However, historical development shows that reaching these goals means navigating a “narrow corridor” (
These discussions motivate us to investigate the extent to which sovereign government policies contribute to optimal citizen welfare in light of financial soundness improvements driven by the private sector. More broadly, our goal is to provide empirical evidence of the dynamics — either harmonious or conflicting — among key economic players: the state, the private sector, and citizens. Specifically, we aim to answer two questions: (1) How do private-sector-led improvements in financial soundness influence citizens’ financial satisfaction? And if this relationship exists, then, (2) Do government interventions facilitate this relationship in a way that benefits citizen welfare?
This study makes several key contributions. First, we give a presentation of the causal relationship between domestic credit and the subjective financial well-being of more than 200,000 individuals worldwide by combining individual-level financial satisfaction data with country-level macroeconomic data. This global-scale analysis employs a two-stage least squares estimator (2SLS) with high-dimensional fixed effects, utilizing monthly international export price shocks as a theoretically valid instrument to address endogeneity concerns. Notably, increases in export prices in international trade are linked to significant capital inflows, which strengthen national financial systems (
Second, we are aiming to explore the regulatory role of government policy — whether through tightening or loosening — in the moderated relationship by leveraging the global Integrated Macroprudential Policy (iMaPP) database,
Research on well-being spans both subjective and objective dimensions, examining individuals’ perceptions of their quality of life. Financial satisfaction, often equated with subjective financial well-being, encompasses an individual’s personal evaluation of their financial situation, incorporating both emotional responses and life satisfaction influenced by financial and economic conditions (
Classical theories propose that financial soundness significantly enhances individuals’ financial well-being (
Another strand of research directly relates financial soundness to financial well-being by examining the adverse effects of financial instability or scams on the economy. Financial unsoundness, indicating instability or weakness in financial institutions or systems (
Furthermore, there is a broad consensus on viewing the SME sector as a vital foundation for enhancing financial performance, economic growth, and productivity (
Hypothesis 1: Financial soundness enhances financial subjective well-being.
We now turn to the third major entity in the economy, which is the government. The central inquiry concerns whether governmental interventions improve or detract from the existing relationship. If considered purely from the standpoint of efficient economic allocation, expected to directly affect citizens’ financial well-being, state intervention, as posited by Keynesian and post-Keynesian economists, can potentially rectify market failures (e.g., provision of public goods, addressing externalities, curbing monopolies, and resolving information asymmetries). Post-Keynesian perspectives also stress the importance of targeted governmental investment to effectively foster or anticipate systemic market risks (
Historical economic analyses by Acemoglu and Robinson (2012, 2019) conclude that institutional harmony, balancing power between the state and society, is crucial for a country’s economic and financial growth. This balance is particularly important in the realm of digital finance, where significant information asymmetries exist between big tech companies and their customers (Dinh et al., 2023; Van Le and Tran, 2024b). Empirical research in transitioning countries increasingly supports this balanced institutional theory (Van Le and Tran, 2022; Van Le et al., 2022), suggesting a clear endorsement of the impact of government policies when effectively implemented, either by positively influencing economic outcomes or by fostering a conducive environment for economic entities to interact (e.g., between the private sector and citizens). Conversely, an ineffective government, either overly dominant or dominated by the private sector, can negatively affect economic efficiency, and thereby be reasonably expected to diminish citizens’ welfare (
However, the moderating impact of government policies on the relationship between financial soundness and subjective financial well-being remains underexplored. This is likely due to differences in data structures, where individual-level financial satisfaction data change daily/monthly, while policy and financial development data are measured on an economic scale with potential annual fluctuations. Some studies at the individual level assess policy changes subjectively (Gholipour et al., 2022; Lee et al., 2023), while others may aggregate annual financial satisfaction data with datasets reflecting year-over-year government policies. It should be noted that measuring financial satisfaction at the national level may be less meaningful due to the variability of individual sentiments throughout the year and differing welfare perceptions among individuals (
Last but not least, the subjective perception of financial satisfaction is not solely influenced by government promises of economic prospects, typically visible in the short term. Governments frequently emerge as the central point of public dissatisfaction and frustration, often bearing the brunt of blame during economic or social turmoil — a phenomenon known as the “scapegoat” effect. This effect encapsulates the propensity of citizens to level their grievances at governmental entities, irrespective of whether the root causes of these grievances originate from broader global economic dynamics or structural issues within the economy (
For instance, during the European debt crisis, despite the underlying issues stemming from global financial market dynamics and historical mismanagement, the Greek government faced intense public scorn as it enforced austerity measures under duress from international lenders (
In a nutshell, scholarly work to date highlights a clear theoretical and empirical relationship between the advancement of financial soundness driven by the private sector and financial subjective well-being. The principal mechanism underpinning this relationship is the freedom individuals have to make their own choices and the consequent improvements in goods and services, facilitated by competitive processes in the global market (
Furthermore, an effective government can significantly enhance economic efficiency and reduce transaction costs within an economy, improving the nexus between private sector activities and public financial welfare (
Contemporary theoretical research models often consider subjective well‑being (SWB), perceived in life satisfaction and happiness, as a function influenced by a set of factors including social relationships, income, personal traits, social characteristics, and environmental living conditions (
Satisfaction = f (financial status, education, personal characteristics,
environmental characteristics). (1)
While many studies focus primarily on personal characteristics affecting SWB, Bjørnskov et al. (2008) have broadened the analytical framework to incorporate country-specific attributes, such as economic growth, levels of democracy, and institutional structures. This expanded analytical model integrates individual-level characteristics with national-level traits in the determination of SWB, positing that individuals within the same country in a given year, irrespective of personal differences (e.g., gender, age, education level), are uniformly affected by shifts in the country’s macroeconomic variables. We leverage this research design in our examination of financial soundness indices. Consequently, the empirical design is structured as follows:
Satisfactioni,c,y,m = β Financial soundnessc,y + αc + λy + θm + Z'η + εi,c,y,m. (2)
Satisfactioni,c,y,m denotes the financial subjective well-being of individual i, in country c, during month m of year y. Collected from the World Values Survey from 1981 to 2022 across nearly 100 countries, the data is based on the question, “How satisfied are you with the financial situation of your household?” Although this measure of financial subjective well-being has its limitations, it is a widely used and sufficiently comprehensive method for examining more complex issues, as will be analyzed later (Diener et al., 1999; Voukelatou et al., 2021).
Financial soundness is represented by domestic credit to the private sector domain for two main reasons. First, domestic credit is a crucial indicator commonly analyzed in recent discussions (
Empirically, the initial financial soundness indicators were expected to be gathered from the Financial Soundness Indicators
Given that the research design in equation (2) controls for fixed effects on a monthly, annual, and country-specific basis, we employ high-dimensional fixed effects as suggested by
Heterogeneity. The impact of domestic credit on people’s financial satisfaction may be heterogeneous depending on different government interventions. This heterogeneity, theoretically anticipated, may arise because (i) government interventions either mitigate or amplify the benefits or drawbacks of financial soundness (
Satisfactioni,c,y,m = ω0 Financial soundnessc,y +
+ ω1 Financial soundnessc,y × _GovAcc +
+ αc + λy + θm + Z'η + εi,c,y,m. (3)
For simplicity, we examine government actions (GovAcc) categorized in two opposing directions, (i) policy tightening actions and (ii) policy loosening actions. Data for this analysis is collected and detailed in the iMaPP database, which assesses 17 government tools used to regulate the economy. These tools are classified according to three effects: either (i) tightening existing policies (e.g., restricting international financial flows or limiting foreign currency reserves), (ii) loosening existing policies, or (iii) maintaining the status quo (do nothing). We analyze the average value of these actions over the period (_GovAcc) to determine if consistent government actions, whether tightening or loosening policies, moderate the relationship in question. In other words, we will not look at the government’s temporary actions in response to specific situations but instead focus on consistent long-term action (for at least 30 years). Our main estimated coefficient of interest is ω1. If ω1 is positive and statistically significant in at least one of the government action proxies, we can reasonably assert that government actions can enhance the positive impact of financial soundness on subjective financial well-being.
Endogeneity. Equation (2) may encounter confounding effects, where a variable in the error term simultaneously affects both financial soundness and financial satisfaction. This leads to inconsistent coefficients. To address this, we employ a robust two-stage regression model to analyze changes in exogenous factors (instrumental variables) that influence financial subjective well-being solely through the financial soundness channel. Accordingly, we look for cases where a country suddenly receives a significant financial influx from international trade. Arezki et al. (2017), for example, found that discovering new oil reserves provided a cash windfall through oil sales, boosting financial soundness. Similarly, an increase in a country’s export prices can be set up in the same way, reasonably assuming that countries are unlikely to influence global export prices in the short term (
First stage:
Financial soundnessc,y,m = f (exported price shocksc,y,m, Z) . (4)
Second stage:
Satisfactioni,c,y,m = βIV Financial ^soundnessc,y,m +
+ αc + λy + θm + Z'η + εi,c,y,m. (5)
Monthly data on export price shocks is collected from
Variable | Units | Source | Obs | Mean | SD | Min | Max |
Dependent variable: financial subjective well-being | |||||||
Satisfaction with financial situation of household | = 1 if lowest satisfaction, = 10 if highest | WVS (all waves) | 426,629 | 5.766 | 2.564 | 1.000 | 10.000 |
Independent and control variables | |||||||
Domestic credit to private sector | % of GDP | WDI | 315,252 | 68.615 | 53.502 | 1.267 | 243.215 |
Health status | = 1 if poorest health status, = 5 if highest | WVS (all waves) | 421,302 | 2.193 | 0.886 | 1.000 | 5.000 |
Belief in God | Dummy | WVS (all waves) | 308,313 | 0.854 | 0.353 | 0.000 | 1.000 |
Gender | = 1 if male, = 0 if female | WVS (all waves) | 426,629 | 0.475 | 0.499 | 0.000 | 1.000 |
Income levels | = 1 if poorest, = 10 if richest | WVS (all waves) | 392,920 | 4.684 | 2.258 | 1.000 | 10.000 |
Age | Years | WVS (all waves) | 422,073 | 41.339 | 16.240 | 13.000 | 103.000 |
Unemployment status | = 1 if unemployed, = 0 otherwise | WVS (all waves) | 426,629 | 0.088 | 0.283 | 0.000 | 1.000 |
Democracy | Z-score | V-Dem | 409,740 | 0.571 | 0.261 | 0.017 | 0.921 |
GDP growth | % | WDI | 403,359 | 3.925 | 6.144 | -23.043 | 53.382 |
Macroprudential policies | |||||||
Loosening policy action | = +1 if loosening policy action, = 0 if not | iMaPP | 338,158 | 0.016 | 0.124 | 0.000 | 1.000 |
Tightening policy action | = +1 if tightening policy action, = 0 if not | iMaPP | 338,158 | 0.088 | 0.426 | 0.000 | 5.000 |
Instrumental variable | |||||||
Export price shocks | Standardized by IMF | IMF | 392,451 | 96.967 | 6.517 | 57.775 | 113.900 |
First, we analyze the relationship to the private sector between the average value of subjective financial well-being and domestic credit. Fig.
Table
Considering additional control variables, the coefficient in column [4] (0.003) indicates that a 1% increase in domestic credit to the private sector as a share of GDP results in a 0.03% increase in financial satisfaction. It is worth noting that our sample includes more than 200,000 people worldwide from 1981 to 2022. Although this marginal effect appears small, when accounting for the 240% range between the highest and lowest country values, the difference in financial well-being between the two extremes could exceed 7.2%. It is important to mention that domestic credit is just one aspect of financial soundness, and the influence of individual characteristics on financial satisfaction is also consistent with the expectations of previous studies (Bjørnskov et al., 2008).
Although a country’s fixed effects have been allowed for, one might be concerned about the impact of changes in institutional factors and national growth expectations on people’s perception of happiness. Thus, in column [5], we further control for the democracy index and the country’s economic growth rate, which are expected to be positively correlated with financial satisfaction. The coefficients of our interest remain statistically significant. To obtain more precise estimates (with the lowest variance), in column [6] we perform the estimation with heteroskedasticity-robust standard errors, which correct standard errors in the presence of heteroskedasticity. Appendix B also presents the variance inflation factor (VIF) between the variables used, showing that the results imply that there is no high correlation between the estimated variables in the model. For the remainder of the study, and to save space in the paper, we only report the key variables of interest.
In Table
Heterogeneity. Table
This result can be explained in at least three ways. (1) Government interventions might generally be ineffective in the long term, meaning that people do not benefit from the financial development of the private sector as they would if the government did not intervene. This view aligns with the Chicago and Austrian economic schools (
The third explanation, suggested by
The influence of domestic credit on the private sector regarding satisfaction with the financial situation of the household.
Dependent variables | Satisfaction with financial situation of household [1, 10] | |||||
[1] | [2] | [3] | [4] | [5] | [6] | |
Domestic credit to private sector (β) | 0.004*** (0.000) | 0.004*** (0.000) | 0.004*** (0.000) | 0.003*** (0.001) | 0.002*** (0.001) | 0.002*** (0.001) |
State of health: Good a) | –0.501*** (0.013) | –0.496*** (0.013) | –0.496*** (0.013) | |||
State of health: Fair | –1.033*** (0.015) | –1.028*** (0.015) | –1.028*** (0.016) | |||
State of health: Poor | –1.713*** (0.025) | –1.709*** (0.025) | –1.709*** (0.027) | |||
State of health: Very poor | –1.983*** (0.068) | –1.982*** (0.068) | –1.982*** (0.082) | |||
Belief in God (yes) | 0.074*** (0.018) | 0.069*** (0.018) | 0.069*** (0.016) | |||
Male | –0.062*** (0.010) | –0.063*** (0.010) | –0.063*** (0.010) | |||
Income scale: second step b) | 0.220*** (0.024) | 0.223*** (0.024) | 0.223*** (0.028) | |||
Income scale: third step | 0.498*** (0.022) | 0.500*** (0.022) | 0.500*** (0.027) | |||
Income scale: fourth step | 0.918*** (0.022) | 0.920*** (0.022) | 0.920*** (0.026) | |||
Income scale: fifth step | 1.262*** (0.021) | 1.263*** (0.021) | 1.263*** (0.025) | |||
Income scale: sixth step | 1.603*** (0.022) | 1.606*** (0.022) | 1.606*** (0.026) | |||
Income scale: seventh step | 1.940*** (0.024) | 1.944*** (0.024) | 1.944*** (0.027) | |||
Income scale: eighth step | 2.255*** (0.027) | 2.261*** (0.027) | 2.261*** (0.029) | |||
Income scale: ninth step | 2.294*** (0.036) | 2.286*** (0.036) | 2.286*** (0.039) | |||
Income scale: tenth step | 2.533*** (0.037) | 2.522*** (0.037) | 2.522*** (0.042) | |||
Age | 0.010*** (0.000) | 0.010*** (0.000) | 0.010*** (0.000) | |||
Unemployed | –0.406*** (0.018) | –0.409*** (0.018) | –0.409*** (0.020) | |||
Democracy index | 1.316*** (0.090) | 1.316*** (0.091) | ||||
GDP growth | 0.013*** (0.003) | 0.013*** (0.003) | ||||
Country fixed effect | Yes | Yes | Yes | Yes | Yes | Yes |
Year fixed effect | No | Yes | Yes | Yes | Yes | Yes |
Month fixed effect | No | No | Yes | Yes | Yes | Yes |
Adjusts for heteroskedasticity | No | No | No | No | No | Yes |
Observations | 315,252 | 315,252 | 309,722 | 203,255 | 202,454 | 202,454 |
R-squared | 0.094 | 0.105 | 0.109 | 0.226 | 0.228 | 0.228 |
Number of countries | 86 | 86 | 86 | 73 | 72 | 72 |
Number of years | 33 | 33 | 33 | 26 | 26 | 26 |
Variable | Satisfaction with household financial situation | |||
[1] | [2] | [3] | [4] | |
Domestic credit to private sector (βIV) | 0.015*** (0.002) | 0.013*** (0.004) | 0.008* (0.004) | 0.267*** (0.065) |
Country fixed effect | Yes | Yes | Yes | Yes |
Year fixed effect | No | Yes | Yes | Yes |
Month fixed effect | No | No | Yes | Yes |
Personal characteristic fixed effect | No | No | No | Yes |
Observations | 307,706 | 307,706 | 307,706 | 202,454 |
R-squared | –0.007 | –0.002 | 0.000 | –0.841 |
Under-identification test (Anderson canonical correlation LM statistic) | 0.000 | 0.000 | 0.000 | 0.000 |
Weak identification test (Cragg–Donald Wald F-statistic) a) | 4890.857 | 1959.091 | 2485.690 | 30.768 |
Excluded instruments | Net exported price shocks | Net exported price shocks | Net exported price shocks | Net exported price shocks |
Number of countries | 86 | 86 | 86 | 73 |
Number of years | 33 | 33 | 33 | 26 |
Dependent variable | Satisfaction with household financial situation | |||
[1] | [2] | [3] | [4] | |
Panel A: Government action through loosening policies | ||||
Domestic credit to private sector (DCTPS) | 0.004*** (0.000) | 0.001*** (0.000) | 0.001*** (0.000) | 0.002*** (0.001) |
DCTPS × (ω1) | –0.025*** (0.005) | –0.059*** (0.006) | –0.067*** (0.006) | –0.094*** (0.006) |
Country fixed effect | Yes | Yes | Yes | Yes |
Year fixed effect | No | Yes | Yes | Yes |
Month fixed effect | No | No | Yes | Yes |
Personal characteristic fixed effect | No | No | No | Yes |
Observations | 272,720 | 272,720 | 271,082 | 180,262 |
R-squared | 0.087 | 0.101 | 0.104 | 0.231 |
Number of countries | 71 | 71 | 71 | 61 |
Number of years | 31 | 31 | 25 | |
Panel B: Government action through tightening policies | ||||
Domestic credit to private sector (DCTPS) | 0.003*** (0.000) | 0.001* (0.000) | 0.001** (0.000) | 0.002*** (0.001) |
DCTPS × (ω1) | 0.004*** (0.001) | 0.001* (0.001) | 0.000 (0.001) | –0.021*** (0.004) |
Country fixed effect | Yes | Yes | Yes | Yes |
Year fixed effect | No | Yes | Yes | Yes |
Month fixed effect | No | No | Yes | Yes |
Personal characteristic fixed effect | No | No | No | Yes |
Observations | 272,720 | 272,720 | 271,082 | 180,262 |
R-squared | 0.087 | 0.101 | 0.104 | 0.230 |
Number of countries | 71 | 71 | 71 | 61 |
Number of years | 31 | 31 | 25 |
This paper presents evidence linking financial soundness with financial subjective well-being and the efficiency of government interventions. We confirm that (i) obviously, improvements in domestic credit to the private sector have a positive influence on the financial satisfaction of individuals, at least for more than 200,000 people globally. This finding is supported by theoretical frameworks, such as Levine’s (2005), and may be even more pronounced in developing countries.
Interestingly, we observe a correlation between government interventions — regardless of direction — and decreased financial satisfaction, given the episode of increased financial soundness. It is highly likely that either (i) government interventions are ineffective or (ii) the government serves as a “scapegoat” for public dissatisfaction. It is less likely that governments will respond and adapt to public dissatisfaction. Regardless of the underlying cause, our findings suggest that government actions responding to increased financial soundness do not align well with enhancing the financial satisfaction of their citizens. Whether public dissatisfaction is justified or not, Arendt and Thoreau (2024, p. 8) seem correct in asserting “that government is best which governs least.”
What remains for policymakers to consider? To achieve governmental legitimacy, public trust and sentiment are crucial. It is undeniable that effective government interventions can yield positive economic development outcomes. However, with growing financial soundness, a proactive yet imprudent government may take what the public subjectively perceives as unnecessary risks. This state of affairs could be due to the ineffectiveness of interventions or because such government actions may serve as convenient scapegoats for public discontent in various situations.
Two precautions should be considered before any governmental intervention aimed at optimizing citizens’ financial welfare. Firstly, as robustly supported by evidence, to achieve optimal economic and financial efficiency, policy activities should focus on correcting market failures and reducing transaction costs in the economy rather than imposing policies that restrict the market’s operational autonomy, at least in the long term. We concur with
Secondly, following the discussion by
Future research could further explore the impact of various aspects of financial soundness on financial well-being. Researchers might consider examining facets of objective well-being to assess the consistency of the impacts under review. Regarding heterogeneous effects, the exploration could extend to measure these effects within specific macroeconomic contexts (e.g., low-income, lower-middle-income, and high-income countries). We believe that investigating these dynamics across different national contexts could provide valuable insights for policymakers globally. Notably, researchers could focus on better addressing endogeneity issues through the scrutiny of specific case studies where instrumental variables are prominent. Lastly, a detailed exploration of specific government policies that positively or negatively influence the relationship under consideration could significantly influence development scenarios in particular countries.
Variable | VIF | 1/VIF |
Domestic credit to private sector | 1.160 | 0.861 |
State of health: Very good (baseline) | ||
State of health: Good | 1.570 | 0.636 |
State of health: Fair | 1.610 | 0.621 |
State of health: Poor | 1.230 | 0.813 |
State of health: Very poor | 1.030 | 0.973 |
Belief in God (Yes) | 1.130 | 0.886 |
Male | 1.010 | 0.991 |
Income scale: the lowest step (baseline) | ||
Income scale: second step | 1.840 | 0.544 |
Income scale: third step | 2.130 | 0.470 |
Income scale: fourth step | 2.290 | 0.436 |
Income scale: fifth step | 2.660 | 0.376 |
Income scale: sixth step | 2.290 | 0.437 |
Income scale: seventh step | 2.030 | 0.493 |
Income scale: eight step | 1.670 | 0.600 |
Income scale: ninth step | 1.280 | 0.784 |
Income scale: tenth step | 1.250 | 0.799 |
Age | 1.140 | 0.880 |
Unemployed | 1.040 | 0.965 |
Mean VIF | 1.570 |