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Institutions, Trade, and the Political Economy of Financial Development

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  • Roland Hodler

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.

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  • Roland Hodler, 2011. "Institutions, Trade, and the Political Economy of Financial Development," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 167(3), pages 445-464, September.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201109)167:3_445:itatpe_2.0.tx_2-5
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    References listed on IDEAS

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    Cited by:

    1. Irlacher, Michael & Unger, Florian, 2018. "Capital market imperfections and trade liberalization in general equilibrium," Journal of Economic Behavior & Organization, Elsevier, vol. 145(C), pages 402-423.
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    3. Yongqi Feng & Xinye Yu, 2021. "The impact of institutions on financial development: Evidence from East Asian countries," Australian Economic Papers, Wiley Blackwell, vol. 60(1), pages 122-137, March.

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    More about this item

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • F1 - International Economics - - Trade
    • G1 - Financial Economics - - General Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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