The Finance-Growth Nexus and the Role of Institutional Development: A Case Study of the Western Balkan Countries

This paper empirically investigates the impact of finance and institutions on the economic growth of the Western Balkan economies – Albania, Bosnia and Herzegovina, Montenegro, North Macedonia, and Serbia – using a panel data analysis covering 2000-2020. While individually, neither finance nor institutions significantly impact economic growth, they increase the sample countries’ GDP when the two interact. Furthermore, the results suggest that the finance-growth relationship is non-linear, with a positive impact having a threshold. This relationship also depends on the sample’s institutional development (and vice versa). Similarly, this relationship depends on the proxy used, and hence, we need to be careful when making conclusions.