Institutions, Financial Development and Economic Growth

This paper contributes to the literature by examining the impact of rule of law and regulatory quality on economic growth through their impact on the stock market development and banking development. In the study, panel vector autoregressive model is employed for the EU-15 countries over the period of 1996-2012 in order to account the endogenous interrelations among these variables. Estimation results indicate that both indicators of institutions increase banking development as well as stock market development. Additionally, the findings indicate that banking development complements with stock market development. It is found that capital market development increases income per capita whereas banking development decreases income per capita