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Legal-Political Factors and the Historical Evolution of the Finance-Growth Link

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  • Michael D. Bordo
  • Peter L. Rousseau

Abstract

Recent cross-country investigations of the role of institutional fundamentals such as the protection of property rights in promoting financial development have extended a literature that has for decades maintained that financial factors can affect real outcomes. In this paper we pursue this new direction by considering relationships between finance, growth, legal origin, and political environment in a historical cross-section of 17 countries covering the period from 1880 to 1997. We find that relationships between a county's legal origin (i.e., English, French, German, or Scandinavian) and financial development are roughly consistent with earlier findings but are not persistent. At the same time, political variables such as proportional representation election systems, frequent elections, universal female suffrage, and infrequent revolutions or coups seem linked to larger financial sectors and higher conditional rates of economic growth. Despite the explanatory power of some of our measures of the deeper "fundamentals," however, a significant part of the growth-enhancing role of financial development remains unexplained by them.

Suggested Citation

  • Michael D. Bordo & Peter L. Rousseau, 2006. "Legal-Political Factors and the Historical Evolution of the Finance-Growth Link," NBER Working Papers 12035, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:12035 Note: DAE EFG LE
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    References listed on IDEAS

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    Cited by:

    1. Andrianova, Svetlana & Demetriades, Panicos & Xu, Chenggang, 2011. "Political Economy Origins of Financial Markets in Europe and Asia," World Development, Elsevier, pages 686-699.
    2. Degryse, Hans & Lambert, Thomas & Schwienbacher, Armin, 2013. "The Political Economy of Financial Systems: Evidence from Suffrage Reforms in the Last Two Centuries," CEPR Discussion Papers 9621, C.E.P.R. Discussion Papers.
    3. Emmanuel Carré & Guillaume L’Œillet, 2017. "Une revue de la littérature récente sur le nexus finance-croissance après la crise : apports, limites et pistes de recherche," Revue d'économie financière, Association d'économie financière, pages 271-290.
    4. Howard Bodenhorn, 2016. "Two Centuries of Finance and Growth in the United States, 1790-1980," Working Papers id:11352, eSocialSciences.
    5. Claessens, Stijn & Perotti, Enrico, 2007. "Finance and inequality: Channels and evidence," Journal of Comparative Economics, Elsevier, pages 748-773.
    6. Philip Arestis & Georgios Chortareas & Georgios Magkonis, 2015. "The Financial Development And Growth Nexus: A Meta-Analysis," Journal of Economic Surveys, Wiley Blackwell, vol. 29(3), pages 549-565, July.
    7. Beck, T.H.L., 2011. "The Role of Finance in Economic Development : Benefits, Risks, and Politics," Discussion Paper 2011-141, Tilburg University, Center for Economic Research.
    8. Morck Randall K & Yeung Bernard, 2010. "Corporatism and the Ghost of the Third Way," Capitalism and Society, De Gruyter, vol. 5(3), pages 1-61, December.
    9. Peter L. Rousseau, 2016. "The Politics of Financial Development: A Review of Calomiris and Haber's Fragile by Design," Journal of Economic Literature, American Economic Association, pages 208-223.
    10. Michael D. Bordo, 2008. "Growing up to Financial Stability," Working Papers 85, Bank of Greece.
    11. Bordo, Michael D. & Rousseau, Peter L., 2012. "Historical evidence on the finance-trade-growth nexus," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1236-1243.
    12. repec:eee:finsta:v:29:y:2017:i:c:p:13-35 is not listed on IDEAS
    13. Ahlin, Christian & Pang, Jiaren, 2008. "Are financial development and corruption control substitutes in promoting growth?," Journal of Development Economics, Elsevier, pages 414-433.
    14. Bordo, Michael D., 2008. "Growing up to Financial Stability," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 2, pages 1-17.
    15. Stephen Haber, 2008. "Differential Paths of Financial Development: Evidence from New World Economies," NBER Chapters,in: Understanding Long-Run Economic Growth: Geography, Institutions, and the Knowledge Economy, pages 89-120 National Bureau of Economic Research, Inc.
    16. Pierre Mandon & Clément Mathonnat, 2015. "Forms of Democracies and Financial Development," Working Papers halshs-01196108, HAL.
    17. Aldo Musacchio, 2010. "Law and Finance c. 1900," NBER Working Papers 16216, National Bureau of Economic Research, Inc.
    18. Rockoff, Hugh & White, Eugene N., 2012. "Monetary Regimes and Policy on a Global Scale: The Oeuvre of Michael D. Bordo," MPRA Paper 49672, University Library of Munich, Germany, revised May 2013.
    19. Pablo Paniagua, 2016. "The robust political economy of central banking and free banking," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 29(1), pages 15-32, March.
    20. Marc G Quintyn & Genevieve Verdier, 2010. "Mother, Can I Trust the Government? Sustained Financial Deepening; A Political Institutionsview," IMF Working Papers 10/210, International Monetary Fund.
    21. Stephen Haber & Enrico Perotti, 2008. "The Political Economy of Financial Systems," Tinbergen Institute Discussion Papers 08-045/2, Tinbergen Institute.
    22. Pierre Mandon & Clément Mathonnat, 2014. "Forms of Democracies and Financial Development," Working Papers halshs-01084679, HAL.
    23. Le Bris, David, 2013. "Customary versus Civil Law within Old Regime France," MPRA Paper 52123, University Library of Munich, Germany.
    24. Pierre MANDON & Clément MATHONNAT, 2015. "Forms of Democracies and Financial Development," Working Papers 201523, CERDI.

    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F3 - International Economics - - International Finance
    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations
    • N2 - Economic History - - Financial Markets and Institutions

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