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Political Origins of Financial Structure

  • Sambit Bhattacharyya

There is a growing policy interest in the role of financial structure in promoting development.� However, very little is known about how different financial structures emerge and evolve.� In this paper we empirically assess the political origins of financial structure.� Using difference-indifference estimaton and annual data, we study the effects of democratization on financial structure in a sample of 96 countries covering the period 1970 to 2005.� Democratization here corresponds to the event of becoming a democracy.� We find that democratization leads to a more market-based financial system.� Democractic change could also be incremental rather than a one off.� To identify the causal effect of incremental democratic change on financial structure we estimate a separate model and find that democracy matters.� We also find that countries with substantial democratic capital are more likely to have a market-based financial structure.� Our main results are robust to a variety of controls, instrumental variable estimation using commodity price and rainfall as instruments, Arellano-Bond GMM estimation, alternative measures of democracy and financial structure, and across different samples.

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File URL: http://www.csae.ox.ac.uk/workingpapers/pdfs/csae-wps-2011-20.pdf
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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number WPS/2011-20.

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Date of creation: 01 Oct 2011
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Handle: RePEc:oxf:wpaper:wps/2011-20
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  1. Torsten Persson & Guido Tabellini, 2006. "Democracy and Development: The Devil in the Details," NBER Working Papers 11993, National Bureau of Economic Research, Inc.
  2. Thorsten Beck & Asli Demirguc-Kunt & Ross Levine, 2002. "Law, Endowment, and Finance," NBER Working Papers 9089, National Bureau of Economic Research, Inc.
  3. Levine, Ross, 2002. "Bank-Based or Market-Based Financial Systems: Which Is Better?," Journal of Financial Intermediation, Elsevier, vol. 11(4), pages 398-428, October.
  4. Bruce D. Smith & John H. Boyd, 1998. "The evolution of debt and equity markets in economic development," Economic Theory, Springer, vol. 12(3), pages 519-560.
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  8. Sambit Bhattacharyya, 2008. "Unbundled Institutions, Human Capital and Growth," Departmental Working Papers 2008-14, The Australian National University, Arndt-Corden Department of Economics.
  9. Sambit Bhattacharyya & Paul Collier, 2011. "Public Capital in Resource Rich Economies: Is there a Curse?," Economics Series Working Papers WPS/2011-14, University of Oxford, Department of Economics.
  10. Solomon Tadesse, 2001. "Financial Architecture and Economic Performance: International Evidence," William Davidson Institute Working Papers Series 449, William Davidson Institute at the University of Michigan.
  11. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2004. "The Role of Social Capital in Financial Development," American Economic Review, American Economic Association, vol. 94(3), pages 526-556, June.
  12. Yang, Benhua, 2011. "Political democratization, economic liberalization, and growth volatility," Journal of Comparative Economics, Elsevier, vol. 39(2), pages 245-259, June.
  13. 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.
  14. Thorsten Beck & Ross Levine, 2002. "Industry Growth and Capital Allocation: Does Having a Market- or Bank-Based System Matter?," NBER Working Papers 8982, National Bureau of Economic Research, Inc.
  15. Thorsten Beck & Ross Levine, 2003. "Legal Institutions and Financial Development," NBER Working Papers 10126, National Bureau of Economic Research, Inc.
  16. Collier, Paul & Hoeffler, Anke, 2009. "Testing the neocon agenda: Democracy in resource-rich societies," European Economic Review, Elsevier, vol. 53(3), pages 293-308, April.
  17. Romain Wacziarg & Karen Horn Welch, 2008. "Trade Liberalization and Growth: New Evidence," World Bank Economic Review, World Bank Group, vol. 22(2), pages 187-231, June.
  18. Sambit Bhattacharyya & Roland Hodler, 2010. "Do Natural Resource Revenues Hinder Financial Development? The Role of Political Institutions," CSAE Working Paper Series 2010-40, Centre for the Study of African Economies, University of Oxford.
  19. Hausman, Jerry & Stock, James H. & Yogo, Motohiro, 2005. "Asymptotic properties of the Hahn-Hausman test for weak-instruments," Economics Letters, Elsevier, vol. 89(3), pages 333-342, December.
  20. Shankha Chakraborty & Tridip Ray, 2003. "Bank-based versus Market-based Financial Systems: A Growth-theoretic Analysis," University of Oregon Economics Department Working Papers 2003-6, University of Oregon Economics Department, revised 01 Feb 2002.
  21. repec:cup:cbooks:9780521117562 is not listed on IDEAS
  22. Sambit Bhattacharyya & Roland Hodler, 2008. "Natural Resources, Democracy and Corruption," Department of Economics - Working Papers Series 1047, The University of Melbourne.
  23. Daron Acemoglu & Simon Johnson, 2003. "Unbundling Institutions," NBER Working Papers 9934, National Bureau of Economic Research, Inc.
  24. Francesco Giavazzi & Guido Tabellini, 2004. "Economic and Political Liberalizations," NBER Working Papers 10657, National Bureau of Economic Research, Inc.
  25. Pagano, Marco & Volpin, Paolo, 2002. "The Political Economy of Finance," CEPR Discussion Papers 3231, C.E.P.R. Discussion Papers.
  26. Asli Demirgü�-Kunt & Erik Feyen & Ross Levine, 2013. "The Evolving Importance of Banks and Securities Markets," World Bank Economic Review, World Bank Group, vol. 27(3), pages 476-490.
  27. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
  28. Hamilton, Kirk & Clemens, Michael, 1999. "Genuine Savings Rates in Developing Countries," World Bank Economic Review, World Bank Group, vol. 13(2), pages 333-56, May.
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