The relationship between financial sector development and individual economic well-being in Mena region: Panel feasible generalized least squares between 2005 and 2022

Abstract

This research explores the nexus between financial sector development and individual economic well-being in 29 countries in the MENA region using panel data models over the period 2005-2022, based on the R programming language. The key financial variables considered are bank branches per 100,000 adults (AI), liquid liabilities (OI), deposit assets (DI), stock market capitalization (DM), and market capitalization of listed national companies (CM). Furthermore, the study employs 9 panel data models to examine the interaction; these models include Pooled OLS, Fixed Effects models (with individual, time, and two-way effects) using different approaches (within and between), and Random Effects models. Specification tests suggest the importance of accounting for fixed effects and addressing heteroskedasticity in the analysis. To enhance the analysis, 3-Panel Feasible Generalized Least Squares models were adopted to address challenges encountered by the model. The PFGLS First-Difference individual effect model demonstrated higher explanatory power and statistical significance of coefficients explaining 97% of the data’s variability compared to the PFGLS Individual and Time Fixed Effects models, providing a more reliable framework for understanding the connection between financial indicators and individual economic well-being. The findings conclude the significant influence of financial fluctuations on the dynamics of individual economic well-being. It proposes that policymakers have to focus on promoting financial sector development to achieve sustainable economic growth and improve individual economic well-being.