Stock Markets, Banks, and Economic Growth: Empirical Evidence from the MENA Region

Abstract:     
Since few decades, a wide theoretical debate is concerned with the fundamental relationship between financial development and economic growth as well as the separate impact of banks on growth and financial markets on growth. Recent studies shed some light on the simultaneous effect of banks and financial development on growth. The empirical study is conducted using an unbalanced panel data from ten MENA region countries. Econometric issues will be based on estimation of a dynamic panel model with GMM estimators. Thus, peculiarities of MENA region countries will be detected. The empirical results reinforce the idea of no significant relationship between banking and stock market development, and growth. The association between stock markets and growth is even negative after controlling for bank development. This lack of relationship must be linked either to underdeveloped financial systems in the MENA region that hamper economic growth or to unstable growth rates in the region that affect the quality of the association between finance and growth. Moreover, in most transition economies the stock markets are very thin. This may lead to excessively volatile share prices. According to Singh (1997), stock price volatility may seriously hamper economic development.

Keywords: bank development, stock market development, economic growth, dynamic panel

Working Paper Series