Financial Depth and Economic Growth: Conditional Role of Party Ideology
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Abstract
A large body of theoretical and empirical literature has confirmed the positive impact of financial depth on economic growth. However, studies investigating financial depth's conditional effect on economic growth are scarce. This paper revisits whether the impact of financial depth on economic growth depends on party ideologies in the context of 46 middle-income countries during the 1996-2020 period. The system GMM approach developed for dynamic panels is applied here. By incorporating partisan theory into the nexus between finance and growth, this paper not only attempts to underline the potential importance of financial depth for economic growth but also show that government ideologies matter. The findings suggest that when right-wing governments are in power, the effect of financial depth on economic growth is positive but statistically insignificant, whereas when left-wing governments are in power, the effect is negative and significant in the long run. Our finding is compatible with the view that expansionary monetary policies lead to a temporary increase in economic activity when left-wing governments are in power.
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