Does fiscal capacity and governance matter in finance-growth nexus? Evidence from high and middle-income countries
Bhanu Pratap Singh(a*) and (b)Yadwanada Neog

a) Economics Section
Mahila Mahavidyalaya (MMV)
Banaras Hindu University
Varanasi (U.P.)-221005 INDIA
*Email: bpsingheco[at]bhu.ac.in

&

b) Department of Economics & Finance
BITS Pilani
K.K. Birla Goa Campus
Goa- 403726, INDIA

Abstract

The current study investigates the role of fiscal capacity and governance in the finance-growth nexus in a large sample of high and middle-income countries from 2002 to 2017. The panel fixed effect regressions are applied to estimate finance^s linear and threshold effects on economic growth. Estimation results based on threshold regression confirm that the too-much-finance-is-bad hypothesis is not valid in high-income countries. In contrast, the tipping point beyond which finance negatively affects economic growth is found in middle-income countries. Furthermore, complementarity between bank and market finance is only found in high-income countries. In addition, the level of economic development, trade openness, and human capital significantly affect the finance-growth nexus. Finally, fiscal capacity and governance are found vital in determining the finance-growth nexus, but its effect varies with the level of economic development.

Keywords: Financial development- economic growth- governance- fiscal capacity- threshold regression

Topic: Development economics