The Political Economy of Financial Development

Sourafel Girma () and Anja K. Shortland ()

No 04/21, Discussion Papers in Economics from Department of Economics, University of Leicester

Abstract: Political economy theories of financial development argue that in countries where a narrow elite controls political decisions, financial development may be obstructed to deny access to finance to potential competitors. We use panel data on developed and developing countries from 1975- 2000 to examine this hypothesis, as well as looking at the effect of regime stability on financial development. Our results show that the degree of democracy and political stability are significant explanatory factors in determining the speed of financial development. The banking sector benefits from regime stability and increasing democracy, while stock market capitalisation grows fastest in fully democratic regimes.

Keywords: Financial markets; Financial Development; Politics; Law and Economics (search for similar items in EconPapers)
JEL-codes: G18 K0 O16 P16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev, nep-fin, nep-mfd, nep-pke and nep-pol
Date: 2004-07, Revised 2004-10
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Working Paper: The Political Economy of Financial Development (2004)
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