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What determines Financial Development? Culture, Institutions, or Trade

Listed author(s):
  • Nils Herger
  • Roland Hodler
  • Michael Lobsinger

This paper endeavours to explain the vast differences in the size of capital markets across countries, by drawing together theories emphasising cultural values, dysfunctional institutions, or impediments to trade as obstacles to financial development. To account for endogeneity, instrumental variables pertaining to culture, geography, and colonial history are employed. We find that trade openness and institutions constraining the political elite from expropriating financiers exhibit a strong positive effect on the size of capital markets. Conversely, cultural beliefs and the cost of enforcing financial contracts seem not to introduce significant obstacles for financial development.

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File URL: http://degit.sam.sdu.dk/papers/degit_12/C012_033.pdf
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Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c012_033.

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Length: 28 pages JEL Classification: F36, G2, O16
Date of creation: Jun 2007
Handle: RePEc:deg:conpap:c012_033
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  1. Do, Quy-Toan & Levchenko, Andrei A., 2007. "Comparative advantage, demand for external finance, and financial development," Journal of Financial Economics, Elsevier, vol. 86(3), pages 796-834, December.
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  22. Huang, Yongfu & Temple, Jonathan, 2005. "Does External Trade Promote Financial Development?," CEPR Discussion Papers 5150, C.E.P.R. Discussion Papers.
  23. Jeffrey D. Sachs, 2003. "Institutions Don't Rule: Direct Effects of Geography on Per Capita Income," NBER Working Papers 9490, National Bureau of Economic Research, Inc.
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  27. Rafael Di Tella & Alberto Ades, 1999. "Rents, Competition, and Corruption," American Economic Review, American Economic Association, vol. 89(4), pages 982-993, September.
  28. Rajan, Raghuram G. & Zingales, Luigi, 2003. "The great reversals: the politics of financial development in the twentieth century," Journal of Financial Economics, Elsevier, vol. 69(1), pages 5-50, July.
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