Does democratic transition spur financial development?

Wafa Ghardallou

Journal of Financial Economic Policy, 2016, vol. 8, issue 4, 499-513

Abstract: Purpose - The literature studying the effect of democratic political systems on financial development has found conflicting results. Besides, recent work has focused on the level effects of democracy on financial outcomes showing evidence of positive, negative and no direct impact. This paper aims to investigate the dynamic effects of democratic transition on financial development, namely, short run and long run effects. Design/methodology/approach - The author wants to see whether financial development improves after a transition to a democratic system and, if it does, for how long. Using a panel data set of 48 events of democratic transitions, the paper relies on an event study and on the estimation of dynamic panel after controlling for other potential determinants. Findings - The author finds that transition to a democratic system raises the development of the financial sector. Particularly, these positive effects occurred in the long run, i.e. about 5 years following the democratic transition. However, in the short run, the author finds that the move to democracy does not impact financial outcomes. Originality/value - The author contributes by studying the role of political system change on financial development finding that democratic transition increases the development of the financial system. Further, the author contributes by finding that the move to democracy produces positive effect only in the long term.

Keywords: Financial development; Political economy; Democratic transition; G18; O16; P1 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:jfep-10-2015-0063

DOI: 10.1108/JFEP-10-2015-0063

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