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On the political economy of financial reform


  • Yongfu Huang



This paper studies what induces governments to undertake reforms aimed at financial development. Its starting point is Abiad and Mody (AER 95(1), 2005). Rather than their ordered logit technique, it uses a within groups approach allowing for error dependence across countries and over time. This paper finds that policy change in a country is negatively rather than positively associated with its liberalization level, while the regional liberalization gap does not appear relevant. On the effects of shocks and crises, it suggests that some of the Abiad and Mody (2005) findings are robust, but others are fragile. Furthermore, it claims that the extent of democracy is important for this analysis, and identifes a negative effect of the extent of democracy on policy reform.

Suggested Citation

  • Yongfu Huang, 2006. "On the political economy of financial reform," Bristol Economics Discussion Papers 06/586, Department of Economics, University of Bristol, UK.
  • Handle: RePEc:bri:uobdis:06/586

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    References listed on IDEAS

    1. Chinn, Menzie D. & Ito, Hiro, 2006. "What matters for financial development? Capital controls, institutions, and interactions," Journal of Development Economics, Elsevier, vol. 81(1), pages 163-192, October.
    2. Michael Bordo & Barry Eichengreen & Daniela Klingebiel & Maria Soledad Martinez-Peria, 2001. "Is the crisis problem growing more severe?," Economic Policy, CEPR;CES;MSH, vol. 16(32), pages 51-82, April.
    3. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, vol. 81(5), pages 1146-1155, December.
    4. Yongfu Huang, 2005. "Will political liberalisation bring about financial development?," Bristol Economics Discussion Papers 05/578, Department of Economics, University of Bristol, UK.
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    Cited by:

    1. Yongfu Huang, 2009. "The political economy of financial reform: are Abiad and Mody right?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(7), pages 1207-1213.
    2. Yongfu Huang, 2005. "What determines financial development?," Bristol Economics Discussion Papers 05/580, Department of Economics, University of Bristol, UK.
    3. Yallwe, Hagos Alem & Buscemi, Antonino, 2011. "Money laundry and financial development," MPRA Paper 32219, University Library of Munich, Germany.

    More about this item


    Financial liberalization; Financial reform; Political economy; Cross country dependence;

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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