Financial Development, Institutions and Economic Growth : An Empirical Evidence

Abstract: What is the impact of financial development on economic growth and how institutional quality affects the role of financial development on economic growth? This thesis attempts to answer to these questions using a fixed effects estimation and two-step GMM estimator on a panel dataset of 93 countries from 2000-2007. The preposition is that financial sector development increases the availability of extra finance thereby increasing firms investment, which is essential for economic growth. The findings suggest that bank credit has anegative impact on economic growth. However when interacted with protection of property rights, bank credit has a positive impact economic growth. Additionally results further indicate that stock market capitalization is important for economic growth. For Countries that exhibit low levels of protection of property rights, stock market capitalization has a negative impact but countries that exhibit high protection of property rights the impact of stock market capitalization on growth is positive.