Institutions, Trade, and the Political Economy of Financial Development

Roland Hodler

Journal of Institutional and Theoretical Economics (JITE), 2011, vol. 167, issue 3, 445-464

Abstract: We study how financial development depends on trade openness and different types of institutions. In our model the elite can repress the financial market to keep their capital costs low and to preclude ordinary citizens from producing capital-intensive goods. Financial repression thus raises the price of these goods under autarky. For most world market prices, trade openness therefore makes financial repression less attractive and increases financial development. Better political institutions increase financial development by making financial repression more costly for the elite. Better contracting institutions have countervailing effects on financial development. These predictions are consistent with the existing empirical evidence.

JEL-codes: D73 F1 G1 G18 O16 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (3)

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