An Interactive Effect of Institutional Quality and Banking Development on Economic Growth: The Applied of Financial Combined Indicator

Lida Gohari (), Zahra Karimi Moghari () and Shahryar Zaroki ()
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Lida Gohari: Ph.D. Candidate in Economics, University of Mazandaran
Zahra Karimi Moghari: Associate Professor of Economics, University of Mazandaran
Shahryar Zaroki: Assistant Professor of Economics, University of Mazandaran

Quarterly Journal of Applied Theories of Economics, 2018, vol. 5, issue 1, 183-212

Abstract: This paper considers the causes of the differences in economic growth by the interactive effect of institutional quality and the development of the banking sector. For this purpose, 24 upper middle-income countries were selected and their financial development and institutional quality for the period 1996 to 2015 were derived. The weighted average of three financial development indexes was calculated by the principal component analysis method. Then, GMM-Sys estimator, in the form of conditional convergence model, was used to calculate the interactive effect of institutional quality and financial development on economic growth. The results show that financial development has a negative effect on economic growth in selected countries, but the interactive effect of institutional quality and financial development decreases this negative effect; as institutional quality along with its positive effect on economic growth, reduces the negative impact of the banking sector development. Also, in oil exporting countries, the institutional quality has lower effect on economic growth; and financial development has more unfavorable impact on economic growth. Finally, to make a positive impact of financial development on economic growth, an effectiveness threshold of institutional quality is calculated

Keywords: Institutional quality; Banking development; Economic growth; GMM-Sys. (search for similar items in EconPapers)
JEL-codes: G21 O11 O43 (search for similar items in EconPapers)
Date: 2018
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