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Oxford Economic Papers Advance Access published online on November 21, 2007
Oxford Economic Papers, doi:10.1093/oep/gpm040
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© Oxford University Press 2007 All rights reserved

The political economy of financial development

Sourafel Girma* and Anja Shortland{dagger}

*University of Nottingham
{dagger}Brunel University. Department of Economics and Finance, Brunel University, Uxbridge Middlesex UB8 3PH; e-mail: Anja.Shortland{at}brunel.ac.uk


  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 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.

JEL classifications: G18; K0; O16; P16.


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