Title: Institutional spillover on financial development and economic growth: threshold and mediator impact analysis on global evidence

Authors: K. Dinesh Udana Devindra Fernando

Addresses: Graduate School of International Relations, International University of Japan, 777 Kokusai-cho, Minami Uonuma-shi, Niigata-ken, Japan

Abstract: The interaction of sound institutions in the financial sector to stimulate economic growth has received more attention in recent decades. Most of the findings of early studies are inconclusive and inconsistent. This study aims to explore the spillover effect of institutions (INS) on financial development (FD) and economic growth (EG), employing global panel data from 181 countries for the years 2002-2018. The two-step system generalised method of moment (GMM) and the three-stage least square (3SLS) techniques are used in this study. The results found an inverted U-shaped relationship with the financial market (FM) and its moderation towards EG. A nonlinear U-shaped and inverted U-shaped relationship appeared when INS mediated EG via FD. The unusual and complex institutions' relationships with the finance-growth nexus create the gap between standard economic models and reality. The in-depth study of the nonlinearity of the institutions has improved the literature on the institutional finance-growth nexus. Suitable institutions need to be identified and applied for the FM over the financial institutions (FI) to have an appropriate economic outcome.

Keywords: economic growth; financial development; generalised method of moment; GMM; institutions; spillover effect; three-stage least square; 3SLS.

DOI: 10.1504/IJEPEE.2024.140191

International Journal of Economic Policy in Emerging Economies, 2024 Vol.20 No.1, pp.1 - 37

Received: 13 Jun 2021
Accepted: 04 Jan 2022
Published online: 29 Jul 2024 *

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