Moderating the effect of institutional quality on the finance–growth nexus: insights from West African countries

• Published in: Economic change and restructuring Vol. 54; no. 1; pp. 43 - 74
• Main Authors: Olaniyi, Clement Olalekan, Oladeji, Sunday Idowu
• Format: Journal Article
• Language: English
• Published: New York Springer US 01-02-2021; Springer Nature B.V
• Subjects: Development Economics; Economic development; Economic Growth; Economic Policy; Economics; Economics and Finance; Finance; Generalized method of moments; International Economics; Macroeconomics/Monetary Economics//Financial Economics; Political Economy/Economic Systems; West Africa; N27; D53; E44; Economic growth; GMM; West Africa; E02; Financial development; Institutional quality; Threshold
• ISSN: 1573-9414; 1574-0277
• DOI: 10.1007/s10644-020-09275-8

This study examines the moderating effect of institutional quality on the finance–growth nexus in the West African region via dynamic panel generalized method of moments. The findings reveal that the linear financial development has a separate positive influence on growth, while the interaction between financial development and institutional quality has a negative effect on growth. It implies that institutional quality constitutes a drag that diminishes and leaks out the growth benefits of financial development in West Africa. The threshold level of institutional quality beyond which financial development accelerates economic growth in the region is found to be 4.77 on the ordinal scale of 10 points. It is, however, evident that most of the countries in West Africa operate below the threshold. Hence, it is concluded that the institutional framework weakens the impact of finance on growth in the subregion of sub-Saharan Africa.