Institutions and the finance-growth nexus : empirical evidence from MENA countries

Abstract EN

This paper investigates the effect of institutional quality on the finance-growth nexus.

To this end, an empirical model with linear interaction between financial development and institutional quality is estimated.

Our main findings show that while most indicators of financial development have a significantly negative effect on economic growth, the sign of the coefficients of interaction variables are significantly positive, which provides strong evidence that institutional quality mitigates the negative effect of financial development on economic growth.

Looking to the subcomponents of our institutional index, our findings show that a development of the banking sector in a country with an important score in Law and Order, Bureaucracy and Investment Profile facilitate growth.

Also, countries with an important score of investment profile can benefit from stock market development in terms of economic growth.

These results suggest that to benefit from financial development, financial systems in MENA countries must be embedded within a sound institutional framework.