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The Dynamics of Financial Development, Government Quality, and Economic Growth in Different Groups of Economies

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  • Shahid Iqbal

    (Department of Management Sciences, COMSATS University Islamabad, Wah Campus 47040, Pakistan
    Department of Management Sciences, Riphah International University, Islamabad 44100, Pakistan)

  • Abdul Qayyum Khan

    (Department of Management Sciences, COMSATS University Islamabad, Wah Campus 47040, Pakistan)

  • Muhammad Yar Khan

    (Department of Management Sciences, COMSATS University Islamabad, Wah Campus 47040, Pakistan)

  • Lamya Al-Aali

    (Saudi Central Bank (SAMA), Riyadh 11587, Saudi Arabia)

Abstract

This study examines the causal relationship between economic growth, financial development, and national governance. To analyze the three-way link of the stated variables, the Panel Vector Auto-Regressive (PVAR) model was applied to 115 economies between 1996 to 2018. The impact of each variable shock is explored through Impulse Response Function (IRF) and variance decomposition. The results indicate that the financial development and national governance shocks have a more persistent impact on economic growth in low-income economies than emerging and developed economies. In contrast, output shock influences long-term financial development in developed economies and affects national governance in a monotonic fashion in all three sets of economies. Moreover, national governance is explored as a critical factor for economic growth especially in low-income economies.

Suggested Citation

  • Shahid Iqbal & Abdul Qayyum Khan & Muhammad Yar Khan & Lamya Al-Aali, 2021. "The Dynamics of Financial Development, Government Quality, and Economic Growth in Different Groups of Economies," Sustainability, MDPI, vol. 13(14), pages 1-14, July.
    • Handle: RePEc:gam:jsusta:v:13:y:2021:i:14:p:7573-:d:589757
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