Investigating the Effect of Institution s Financial Development on the Economic Growth in MENA Countries Using PSVAR and Markov Switching Models

The financial sector plays a crucial role in economic growth and development by serving as an intermediary in resource allocation, thus significantly contributing to long-term economic growth through cost reduction, the promotion of savings, and efficient resource utilization. Governments of oil-exporting nations often enter financial markets and implement changes based on oil revenues in an attempt to stimulate economic growth. However, available studies suggest that financial development does not invariably translate into economic growth. Remarkably, the role of financial development in economic growth has received limited attention in recent decades. This study addresses the impact of financial institutions development on economic growth, with a focus on the MENA member states from 1980 to 2019. The Panel Structural Vector Autoregressive (P-SVAR) method was employed to elucidate the directions of shocks. The choice of the PSTR model was influenced by the nonlinear relationship among research variables, and the Markov-Switching Time-Series Model was used to assess distinct periods. This research considers financial depth, access, and efficiency as indicators of financial institutions development. The findings reveal that all three components of financial institutions development exert a significant influence on economic growth, while tax revenues do not significantly impact economic growth.