Unpacking the Drivers of Market Development in the Middle East: The Role of Growth, Price Stability, and Exchange Rate Efficiency

This study analyzes how economic growth (GDP), inflation (INF), and exchange-rate dynamics influence market development in the Middle East during the reform-intensive period of 2010–2024. As the region shifts toward a more diversified, innovation-oriented economy, macroeconomic stability has become central to shaping institutional capacity and sustainable financial development. Drawing on demand-following theory and the finance-growth nexus, the paper employs VAR modeling and variance decomposition to evaluate short- and long-run interactions among the variables. Results show that GDP growth remains a key driver of market expansion, though its marginal impact declines as markets mature. Inflation strongly undermines development by distorting price signals and weakening long-term contracting. Exchange-rate stability and gradual liberalization enhance weak-form efficiency and attract more durable capital inflows. The findings underscore the importance of low inflation and calibrated exchange-rate reform for building resilient financial systems that support broader development objectives.