The political economy of financial development

• Published in: Oxford economic papers Vol. 60; no. 4; pp. 567 - 596
• Main Authors: Girma, Sourafel, Shortland, Anja
• Format: Journal Article
• Language: English
• Published: Oxford Oxford University Press 01-10-2008; Oxford Publishing Limited (England)
• Subjects: Bank markets; Bank stocks; Banking crises; Civil law; Consumption; Democracy; Developing countries; Development economics; Development theory; Economic development; Economic growth; Economic theory; Finance; Financial development; Financial economics; Financial services; Financial systems; G18; Interest rates; Investments; LDCs; Mortality; O16; P16; Political economy; Political systems; Polities; Relationship banking; Securities markets; Stock markets; Studies; Trade development; P16; K0; O16; G18
• ISSN: 0030-7653; 1464-3812
• DOI: 10.1093/oep/gpm040

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 the effect of a country's democracy characteristics and regime change on financial development. Our results show that regime stability and democracy promote financial development, with additional benefits from fully democratic regimes.