Market Capitalization and Economic Growth Nexus A Mediation Analysis for selected countries

Abstract

The study examined the mediating role of market capitalization in the relationship between economic growth and macroeconomic variables in twenty countries, including foreign direct investment, gross fixed capital formation, government spending, and inflation. The study has used panel data of twenty countries from the period of 2002-2021. The selection of countries involves three criterions, first; the study selected three regions; Asia, Europe, and Mena region. Secondly, among those selected countries, the study tried to select all three categories, higher income countries, middle income countries, and upper middle-income countries. The selection of these countries follows the criteria of GDP growth rate of 2021. Thirdly, these economies are either emerging economies or the economies who have established the stock market and getting its benefits for sustained GDP growth rate e.g. Australia, China, and Germany etc. Panel regression results show that foreign direct investment, gross fixed capital formation, consumption expenditures, inflation, GDP per employed person, and education expenditures all contribute to economic growth in selected countries, whereas an increase in the real effective exchange rate reduces growth. Hayes (2022) employs a mediation analysis approach that confirms market capitalization as a partially mediating variable between the rate of economic growth and various control variables in case of selected 20 countries. Providing more favorable policies for investors and enterprises, such as special economic zones and free tax breaks. Furthermore, emphasis on the money supply and preserving the currency's balance between face and interior worth. Increased foreign direct investment raises the country's workforce demand.