Panel evidence on finance, institutions and economic growth

This article investigates whether the level of institutional development affects the link between financial development and economic growth. Using a range of cross-sectional and panel approaches we find that the positive effect of banking development on growth is reduced as the level of institutions (e.g. rule of law, lack of corruption) increases. We do not, however, find a similar result when we examine the joint effect of institutional level and stock market development on economic growth. We attribute these results to the ability of banks to perform functions similar to those provided by well-operating institutions, whereas stock markets do not perform such comparable functions.