How to measure the level of financial development

Abstract

The aim of this chapter is twofold: first, to present in the most proper manner the definition of financial development, considering that bad definition leads to bad measurement and taking into account the discussions in the literature. Second, it aims to discuss how to measure the level of financial development. In line with these objectives, financial development index values for 1998-2011 are calculated by principal components analysis for 77 countries considering the suitable indicator in terms of the right definition of financial development. The calculated indices helps to obtain a composite measure that evaluates the size, access, efficiency and stability dimensions of financial development together.