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

Abstract

his 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.