|Financial Development Index (Index Value)|
The financial development index is constructed using a standard three-step approach found in the literature on reducing multidimensional data into one summary index: (i) normalization of variables; (ii) aggregation of normalized variables into the sub-indices representing a particular functional dimension; and (iii) aggregation of the sub-indices into the final index. This procedure follows the OECD Handbook on Constructing Composite Indicators (OECD, 2008), which is a good reference for methodological suggestions. There are a number of examples in the literature of constructing composite indices that compare and rank country performance. These include the IMF Financial Stress Index (Cardarelli, Elekdag, and Lall, 2008; Cardarelli, Elekdag, and Lall, 2009), various financial inclusion indices (Amidžić, Massara, and Mialou, 2014; Camara and Tuesta, 2014), and the United Nations Development Programme well-being indices, such as the Human Development Index, Gender-Inequality Index, Gender Development Index, and Multidimensional Poverty Index (UNDP, 2014).