The Role of Institutions in Finance-Growth Nexus: Empirical Evidence from Emerging Market Economies

The study examines the role of institutions in the finance-growth nexus in 22 emerging market economies (EMEs) for the period 1998-2022. The Generalized Method of Moments (GMM) System approach has been used for the estimation of panel data. A composite index of financial development comprising various indicators of financial depth and efficiency is constructed to measure financial development. Using the four-way classification of institutions, the empirical results show that the role of institutions in explaining the finance-growth nexus is significant. The empirical results reveal that financial development is indispensable to promoting economic growth, but too much finance is detrimental to growth. Moreover, institutions can play a vital role in intermediating the negative impact of too much financial development on growth. The outcomes are robust to the use of alternative indicators of institutional quality. Overall, the empirical findings suggest policy guidelines to boost the level of output by using financial development and institutions as economic tools.