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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.

Suggested Citation

  • 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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    1. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
    2. Sourafel Girma & Anja Shortland, 2008. "The political economy of financial development," Oxford Economic Papers, Oxford University Press, vol. 60(4), pages 567-596, October.
    3. Aizenman, Joshua, 2008. "On the hidden links between financial and trade opening," Journal of International Money and Finance, Elsevier, vol. 27(3), pages 372-386, April.
    4. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth,in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934 Elsevier.
    5. Efraim Benmelech & Tobias J. Moskowitz, 2010. "The Political Economy of Financial Regulation: Evidence from U.S. State Usury Laws in the 19th Century," Journal of Finance, American Finance Association, vol. 65(3), pages 1029-1073, June.
    6. Yongfu Huang & Jonathan Temple, 2005. "Does external trade promote financial development?," Bristol Economics Discussion Papers 05/575, Department of Economics, University of Bristol, UK.
    7. Andrianova, Svetlana & Demetriades, Panicos & Shortland, Anja, 2008. "Government ownership of banks, institutions, and financial development," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 218-252, February.
    8. Nils Herger & Roland Hodler & Michael Lobsiger, 2008. "What Determines Financial Development? Culture, Institutions or Trade," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 144(3), pages 558-587, October.
    9. Baltagi, Badi H. & Demetriades, Panicos O. & Law, Siong Hook, 2009. "Financial development and openness: Evidence from panel data," Journal of Development Economics, Elsevier, vol. 89(2), pages 285-296, July.
    10. repec:hrv:faseco:30728041 is not 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.
    2. Nikishina, Elena, 2016. "The impact of socio-cultural factors on transaction costs and the competitive advantages of the company," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 105-120, February.

    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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