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Forms of Democracies and Financial Development

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  • Pierre Mandon

    (CERDI - Centre d'Études et de Recherches sur le Développement International - UdA - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique)

  • Clément Mathonnat

    (CERDI - Centre d'Études et de Recherches sur le Développement International - UdA - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique)

Abstract

The political economy of finance literature emphasizes the critical role of political institutions in promoting financial development. Related empirical findings highlight a robust positive effect of democratic regimes on financial development compared to dictatorships. However, no study focused so far on identifying the precise political institutions explaining the financial development enhancing effect of democracies. In this paper, we study the effects of disaggregated political institutions on financial development along three institutional dimensions, namely forms of government, electoral rules and state forms. Using a large panel of 140 countries over 1984-2007, we show that institutional details are of crucial importance, since the positive effect of democracies on financial development clearly depends on the precise institutional dimensions at work, namely: parliamentary governments and, to a lesser extent federal states. Thus, our study contributes to the institutional design debate, by showing that the simple promotion of democratic regimes might not be sufficient to foster financial development.

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  • Pierre Mandon & Clément Mathonnat, 2015. "Forms of Democracies and Financial Development," Working Papers halshs-01196108, HAL.
    • Handle: RePEc:hal:wpaper:halshs-01196108
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01196108
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    1. Henri Atanga Ondoa & Arthur M. Seabrook, 2022. "Governance and financial development: Evidence from a global sample of 120 countries," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(3), pages 3405-3420, July.

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