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The interest group theory of financial development: evidence from regulation

  • Cagatay Bircan

    ()

    (EBRD)

  • David Hauner

    (IMF)

  • Alessandro Prati

    (IMF)

We use a new dataset of de jure measures of trade, capital account, product market and domestic financial regulation for 91 countries from 1973 to 2005 to test Rajan and Zingales’s (2003) interest group theory of financial development. In line with the theory, we find strong evidence that trade liberalisation is a leading indicator of domestic financial liberalisation. This result is robust to the use of different data frequencies, estimation methods and a check for non-linear effects. However, in contrast to the theory, we do not find consistent evidence of an effect of capital account liberalisation on financial development.

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Paper provided by European Bank for Reconstruction and Development, Office of the Chief Economist in its series Working Papers with number 150.

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Length: 26 pages
Date of creation: Oct 2012
Date of revision:
Publication status: Published in Working papers 150, European Bank for Reconstruction and Development
Handle: RePEc:ebd:wpaper:150
Contact details of provider: Postal: One Exchange Square, London EC2A 2JN
Web page: http://www.ebrd.com/pages/research/publications/workingpapers.shtml

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