Yes. Broad money to GDP ratio is a proxy for financial development.
Other proxies includes: financial system deposit to GDP ratio, stock market capitalisation to GDP ratio, total banking sector liabilities to GDP ratio, etc.
However, I want to address the point about 'good' proxy. No proxy is 'good' or 'best' because each proxy is just a variable that is the assumed to be closest representation of the actual phenomena we intend to measure. So, if you can justify why the proxy you choose is a fair representation of the actual phenomena, then you'll win the argument. That is, if you can justify why 'broad money to GDP ratio' is a fair representation of financial development, then you are close to winning the argument. But then...there is one problem - financial development as a concept is very broad. You need to be careful here.
Be mindful that financial development is broad, and encompass a lot of things including 'access to finance', financial sector development, depth of the financial system, breath of the financial system, financial intermediation, capital market development etc. In this sense, each financial development proxy captures one aspect of financial development than others. For example, broad money to GDP ratio reflects breath of financial markets (which is an aspect of financial development). On the other hand, broad money to GDP ratio does not appropriately capture access to finance, financial intermediation, etc. So, i'll advise that you make sure you identify what you mean by financial development, and the type/aspect of financial development you want to focus on. Then you can choose the proxy that best reflects the aspect/type of financial development you wish to focus on. This would help you choose the 'best or good' proxy for financial development.
yes broad money is used by many researchers in the field of financial liberalization. besides you can also use investments, advances by banks, or even number of banks, stock market liberalization, trade liberalization and so on
Three important measures of financial openness, there must be credit intermediation, proper system for liquidity management and risk management.
as you mentioned one of the important ratio that is used by many studies is the ratio of the (M2)/GDP that is broad money to gross domestic product (GDP). Studies use this ratio to reflect the size of financial sector development, debt of financial sector and motivation toward investment. World Bank and IMF also standardize this ratio across a country that‟s why many researchers prefer to use it. But it same time this measure has been criticize by researchers. It deals with only banking sector while it ignores other important aspects of financial sector.
Besides it ignores two important aspects of financial debt, first one is it ignores risk factor and second is access to information. the risk sharing and information services can some what be addressed by incorporating bank deposit money and its ratio to domestic assets and the second is bank deposit money domestic assets plus
Dr. Uddin: I believe that Peterson and Muhammad are correct. What remains is data availability. The most available data are m2 and GDP so this may be preferred with a footnote.
This database http://data.worldbank.org/data-catalog/global-financial-development will be very useful to explore a good proxy for financial development.
Generally speaking, Many researcher take one of the monetary aggregates over GDP as a proxy for financial development. And if it can explain something it's a good proxy. But of course in regards to specific purpose, financial system may be (under)developed in a many way and for a specific purpose specific measure needs to be defined. So generally, any monetary aggregate could be a proxy for financial development (as whole).
Hi Dr. Uddin, slightly off topic, it's interesting to note that in the U.S. the linkage between broad money and GDP has generally been weakening since the early 1990's.
Dear Steven, Yes, it would be interesting to see for other developed countries. What might be the explanation of this? I reckon financial deregulation/liberalization/innovation might be one of the potential reasons for that. Would like to know your opinion regarding this?
Hi Dr. Uddin, I have thought about this and it appears that until 1975 increases in M2 made an impact on GDP (red arrow in my attached graph), then afterwards increasing or decreasing rates of impact. I believe those fluctuating periods are related to either: 1) rate of worker technological productivity enhancements (or lack of growth in certain periods), by this I mean internet, computers, excel, cell phones, etc. that enhance productivity and/or (in some combination), demographic shifts in population resulting in fluctuating rates of the number of working age peoples in the United States. In other words, I believe the raw number of entrants (or exits) in the workforce has an impact at these critical junctions and for a period thereafter. This is a little harder to plot on the chart, but I've included that in the second graph.