The Role of Institutions Quality in Effect of Liquidity Growth on Economic Growth (PSTR Approach)

Document Type : Research Paper


1 Master of Science (Economics). Faculty of Economics and Management, Urmia University, Urmia, Iran

2 Assistant Professor of Economics, Faculty of Economics and Management, Urmia University, Urmia, Iran


One of the recent challenges in Iran’s economy is management of liquidity and its impact on different markets. Despite policymakers have stated that the purpose of liquidity direction is to achieve high economic growth, how liquidity is generated and directed may affects the economy disparately. As regards the authority of government over the liquidity generation and its direction especially in developing countries in which central bank has no independency, the quality of institutes plays an important role. Therefore the purpose of this study is to investigate how quality of institutes can affect the impact of liquidity increase on economic growth. This research uses the PSTR approach in developing countries, including Iran, over the years 2002-2017 and the quality of institutions considered as the transfer variable. The results of model estimation rejects the linearity hypothesis. Considering a transfer function with a threshold limit that represents a dual model is enough to define the nonlinear relationship between the studied variables. The results show that the increase of liquidity has a negative effect in the first regime and in the second regime has a positive effect on economic growth. It means that in a society with high quality of institutions increasing the liquidity amount can result in high economic growth. As well, trade liberalization, has a positive effect in both regimes. Direct foreign investment has a negative effect in first regime and positive on the second one. Also the size of government has a negative effect on economic growth in both regimes.
JEL Classification: E02, O43, P24  


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