Investigating the Effect of Democracy on Financial Development of MENA Countries: Panel Smooth Transition Regression Approach

Theories of institutional economics emphasize the importance of the method of political governance as a determinant of financial market development. In the economic literature, based on theoretical perspectives, there are two completely different and contradictory perspectives on the impact of democracy on financial development. In fact, in theory, democracy may have a positive or negative effect on financial development. Therefore, empirical studies should be performed on a specific sample to determine the positive or negative relationship. Accordingly, the purpose of this paper is to investigate the relationship between democracy and financial development in the Middle East and North Africa (MENA) using the Panel Smooth Transition Regression (PSTR) model during the period 2002-2021. In this study, a two-regime model with a transfer function and one threshold was determined and the results of estimating the first and second regimes show that democracy in both regimes has a negative and significant effect on financial development and since increasing the numerical values of the democracy index in this study means that the level of democracy is deteriorating, so the results show that improving the level of democracy leads to promoting financial development.