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The Politics of Financial Development - The Role of Interest Groups and Government Capabilities

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  • Oscar Becerra
  • Eduardo Cavallo
  • Carlos Scartascini

    ()

Abstract

Although financial development is good for long-term growth, not all countries pursue policies that render full financial development. This paper builds on an extensive political economy literature to construct a theoretical model showing that the intensity of opposition to financial development by incumbents depends on both their degree of credit dependency and the role of governments in credit markets. Empirical evidence for this claim is provided, and the results suggest that lower opposition to financial development leads to an effective increase in credit markets’ development only in those countries that have high government capabilities. Moreover, improvements in government capabilities have a significant impact on credit market development only in those countries where credit dependency is high (thus, opposition is low). This paper therefore contributes to this rich literature by providing a unified account of credit market development that includes two of its main determinants, traditionally considered in isolation.

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Bibliographic Info

Paper provided by Inter-American Development Bank, Research Department in its series Research Department Publications with number 4686.

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Date of creation: Sep 2010
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Handle: RePEc:idb:wpaper:4686

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Keywords: Financial development; Interest groups; Political economy; Government capabilities;

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Cited by:
  1. Buck, Florian & Schliephake, Eva, 2012. "Political Economy of Banking Regulation," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62018, Verein für Socialpolitik / German Economic Association.
  2. James B. Ang, 2013. "Are modern financial systems shaped by state antiquity?," Development Research Unit Working Paper Series 38-13, Monash University, Department of Economics.
  3. Becerra, O. & Cavallo, E. & Scartascini, C., 2012. "The politics of financial development: The role of interest groups and government capabilities," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 626-643.
  4. Florian Buck & Eva Schliephake, 2012. "The Regulator's Trade-off: Bank Supervision vs. Minimum Capital," CESifo Working Paper Series 3923, CESifo Group Munich.
  5. Robert Blotevogel, 2013. "Measuring and Mending Monetary Policy Effectiveness Under Capital Account Restrictions," IMF Working Papers 13/77, International Monetary Fund.

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