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Economic growth, institutional quality and financial development in middle-income countries

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  • Laura Heras Recuero

    (Banco de España)

  • Roberto Pascual González

    (Banco de España)

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.

Suggested Citation

  • Laura Heras Recuero & Roberto Pascual González, 2019. "Economic growth, institutional quality and financial development in middle-income countries," Working Papers 1937, Banco de España.
    • Handle: RePEc:bde:wpaper:1937
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    More about this item

    Keywords

    economic growth; economic convergence; institutional quality; financial development;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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