Institutional Quality in Fostering Financial Development in Emerging Market Economies

Abstract

This research explores the role and importance of institutional quality in promoting financial development in emerging market countries. The panel dataset was conducted on 26 emerging countries for the period covering 1999-2019. The dataset was collected from major sources including World Governance Indicators (WGI) from World Bank, International Financial Statistics office (IFS), and World Development Indicators (WDI). We used GMM and 2SLS methods to analyze the behavior of the components of institutional quality including political stability, regulatory quality, rule of law, control over corruption, government effectiveness, and voice and accountability in influencing financial development. According to the results obtained, well-functioning institutions have the capability to promote financial development. Countries that have improved their institutional quality and governance systems have scored high rates of financial development. A unit increase in the components of institutional quality has a positive and significant influence on financial development. This indicates that poor institutions lead to poor financial growth.

Keywords: Institutional Quality, Emerging Market Economies, Financial Development, Institutions,

Regulatory Framework.

DOI: 10.7176/RJFA/12-10-01

Publication date:May 31^st 2021