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What matters for finance‐growth nexus? A critical survey of macroeconomic stability, institutions, financial and economic development

Kizito Uyi Ehigiamusoe and Mohamad Shaharudin Samsurijan

International Journal of Finance & Economics, 2021, vol. 26, issue 4, 5302-5320

Abstract: This paper analyses the variables that moderate the impact of financial development on economic growth based on theoretical and empirical evidences. We show that financial and economic development, institutions and macroeconomic stability are the fundamental variables that moderate the finance‐growth nexus. Specifically, higher levels of financial and economic development, institutional quality and macroeconomic stability promote the impact of financial development on economic growth, while lower levels of these variables could have the opposite effect. We also show that too much finance is deleterious to economic growth, suggesting the existence of a threshold level of financial development beyond which further finance inhibits, rather than enhances growth. The economic implication of this study is that a stable macroeconomic environment, higher level of institutional quality, optimum financial and economic development are necessary conditions for finance to accelerate growth. Hence, countries that want to promote economic growth through the financial sector should give adequate priority to these variables.

Date: 2021
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