Analysing the Mediating Influence of Share Markets on the Relationship between GDP Growth and Macroeconomic Variables in MENA and Developed Countries

Abstract

This study examined the relationship between GDP growth and different macroeconomic variables including foreign direct investment, gross fixed capital formation, government expenditure on education, consumption expenditure, GDP per person employed, exchange rate, market capitalization, and inflation in case of MENA and developed countries. Furthermore, it tried exploring the mediating role of the share market in the relationship between economic development and various macroeconomic variables MENA & developed countries. The study has used panel data from the period of 2002-2021. The data has been taken from multiple sources i.e. World Development Indicators (WDI) by The World Bank, International Financial Statistics (IFS), several economic surveys of respective countries and Central Bank’s publications. The study reveals mixed order of integration among variables. Consumption expenditure is stationary in both panels, while expenditure on education is non-stationary. Real effective exchange rate is stationary under both panels, while GDP per employed persons is non-stationary. GDP growth rate, inflation, and market capitalization are stationary for both developed and Mena countries. However, gross fixed capital formation is stationary at first difference. The correlation matrix results show a weak correlation between consumption expenditure and educational expenditure, with a 9 percent negative correlation. For Mena countries, the study found a negative association between consumption expenditure and educational expenditure, with a 23% correlation. Real effective exchange rate is negatively associated with foreign direct investment, GDP per employed person, gross fixed capital formation, inflation, and market capitalization. For developed countries, the coefficient of FDI increases GDP growth rate by 97%, while gross fixed capital formation decreases GDP growth rate by 10.2 units due to 1 unit increase in gross fixed capital formation. Consumption expenditures increase GDP growth rate by 2% due to 1 unit increase, while inflation increases it by 5.9 units. Exchange rate is also positively related with GDP growth rate, with a 1% increase in exchange rate boosting it by 29%. The study found partial mediation of market capitalization in developed countries and uni-directional causality in Mena countries. Keywords: Market Capitalization, Mediation Analysis, Mena Countries, Economic Growth, Panel Data Analysis