Financial development, institutions, and economic growth nexus: a spatial econometrics analysis using geographical and institutional proximities

Ahmad, Mahyudin and Siong Hook, Law (2022): Financial development, institutions, and economic growth nexus: a spatial econometrics analysis using geographical and institutional proximities.

Abstract

This paper investigates the nexus between financial development (FD), institutions, and economic growth by employing a spatial autoregressive model on a panel dataset covering 82 countries from 1990 to 2019. The spatial dependence between countries is measured via geographical and institutional proximities, the latter hitherto has rarely been explored in the finance-growth literature. Institutional proximity concept postulates that institutionally similar countries are expected to have similar level of economic growth and greater size of spillover once the spatial effects of FD and institutional quality are controlled for. Overall, the findings give empirical support to the above proposition, as FD and political institutions are shown to have significant positive effects on growth. In the case of FD, its growth-effect is beneficial up to a certain threshold beyond which it becomes negative. The results also find significant positive spatial lag growth term in the model indicating the presence of indirect spillover effects of FD and institutions onto the growth of neighbouring countries, both in geographical institutional spheres. Furthermore, the spatial growth model with institutional proximity matrix is shown to have higher rate of convergence and greater size of spillover than the model with geographical proximity. These findings are robust to various model specifications, and the paper concludes with some policy recommendations.

• Item Type: MPRA Paper
• Language: English
• Keywords: economic growth; financial development; institutional proximity; spatial fixed effects; spatial lag model
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C31 - Cross-Sectional Models ; Spatial Models ; Treatment Effect Models ; Quantile Regressions ; Social Interaction Models; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O43 - Institutions and Growth

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