Economic Growth, Institutional Quality and Financial Development in Middle-Income Countries

43 Pages Posted: 21 Nov 2019

Date Written: November 19, 2019

Abstract

This paper aims to investigate the relationship between economic growth, institutional quality and financial development whitin a sample of middle-income countries. We generate three hypothesis on the potential relationships between those three dimensions by reviewing the existing literature and test them in the framework of a Panel Vector Autoregressive (PVAR) model. The main results, derived from the Impulse Response Function (IRF) analysis, are two-fold. First, we find a unidirectional positive relationship from economic growth to financial development. Second, institutional quality and economic growth are positively related but the causality direction depends on the nature of the institutional quality proxies. Legal institutional quality has an impact on economic growth while the latter causes an improvement in public sector institutional quality.

Keywords: economic growth, economic convergence, institutional quality, financial development

JEL Classification: O11, O16, O43

Suggested Citation

Heras Recuero, Laura and Pascual González, Roberto, Economic Growth, Institutional Quality and Financial Development in Middle-Income Countries (November 19, 2019). Banco de Espana Working Paper No. 1937, Available at SSRN: https://ssrn.com/abstract=3489866 or http://dx.doi.org/10.2139/ssrn.3489866

Laura Heras Recuero (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Roberto Pascual González

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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