Vol. 2, Issue 2, Part K (2016)

Abstract
This study aims to examine the causality relationship between economic fluctuations and financial instability in an institutional environment. Utilizing the dynamic panel technique for 44 developing countries over the period 1996- 2010, we find that: 1. there is a bidirectional causality between economic fluctuations and financial instability 2. The impact of the latter is extremely high compared to that of macroeconomic volatility. Examining this relationship in an institutional environment, we conclude that institutions of developing countries are failing. Market oriented regulations reinforce the effects of volatile financial fluctuations and macroeconomic volatility. However, the positive impact of financial instability on macroeconomic volatility is reduced by greater performance in governance.