Cultures, finance and growth

The literature on economic growth has recently emphasized the role of institutions but has not thoroughly explored the impact of different religious and cultural backgrounds on institution building. In this paper we argue that religious differences among countries are crucial determinants of the evolution of financial and non financial institutions. Moreover, we find that a positive link between finance and growth arises only in those countries whose cultural background allowed them to reach a sufficient degree of institutional development. This result is consistent with predictions of a nonlinear relationship between finance and growth from a recent vintage of theoretical models. The religious background-institutional development nexus is finally used in the paper to demonstrate that the effect of institutions on growth is for a significant part exogenous.