An Investigation of the Effects of Government Effectiveness and Financial Development on Economic Growth: Some Evidence from Developing-8 Countries

اقتصاد و توسعه منطقه ای

Article 5, Volume 22, Issue 9, December 2015, Pages 161-187   

Document Type: Research article

DOI: 10.22067/erd.v22i9.42665

Authors

Hassan Heidari^* ; Roghayyeh Alinezhad

Urmia University

Abstract

This study investigates the effects of the government effectiveness and financial development indices on economic growth in D-8 countries over the period 1996-2012, by applying the Panel Smooth Transition Regression (PSTR) model. For this purpose, we use Non-Linear Least Squares (NLS) method for estimation of model. The estimation results reject the linearity hypothesis, and estimate two regimes that give a threshold at government effectiveness of 0.192 for the countries under investigation. Moreover, our results demonstrate that the positive impact of government effectiveness and financial development indices on economic growth increases in high levels of calculated threshold for government effectiveness. The results also indicate education expenditure and openness index have a positive impact in both regimes, agricultural raw materials exports variable has a negative impact in first regime and positive impact in the second regime and inflation rate has a negative impact in both regimes on economic growth. Hence, improvement of government effectiveness and financial development and an efficient administrative system as well as efficient financial markets and banks in the D-8 countries lead to an increase in the economic growth and development.

Keywords

Government Effectiveness; Financial development; Economic Growth; Smooth Transition Regression Model (PSTR); Non-Linear Least Squares (NLS)

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