Democracy and Financial development: Does the Institutional Quality Matter (Version préliminaire)

Mercredi | 2012-11-23
Sully 10


This paper examines whether the effects of democracy on financial development are influenced by the quality of institutions using a panel dataset of a large sample of developed and developing countries over the period 1984-2006. The results indicate that democracy plays a direct important role in stimulating the financial development. Particularly, effects of democracy on financial development are enhanced by higher levels of economic institutions. Otherwise, development may be hampered if these institutions are below some threshold values. Furthermore, results indicate that parliamentary forms of government as well as a greater political polarization increase the effects of democracy on financial development. On the other hand, we found that to take full benefits from democracy, democratizing counties should promote economic institutions, encourage the independence of the bureaucracy from political power and divide the power between the central government and the political units. Eventually, results show that when democracy is not yet established, democratizing countries ought to opt for a presidential form of government since it represents a direct channel that promotes the development of the financial sector.