Political Institutions and Financial Development: An Empirical Study

Abstract

This paper examines whether political institutional improvement promotes financial development, using a panel dataset of 90 developed and developing countries over 1960–99. The empirical evidence reveals a positive effect of institutional improvement on financial development at least in the short-run, particularly for lower income countries. The preliminary evidence by a before–after event study indicates that a democratic transformation is typically followed by an increase in financial development.