What Determines Financial Development? Culture, Institutions, or Trade
Review of World Economics, Forthcoming
30 Pages Posted: 13 Feb 2008 Last revised: 30 Sep 2013
Date Written: October 1, 2008
Abstract
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.
Keywords: Financial Development, Culture, Institutional Quality, Trade
JEL Classification: F36, G2, O16
Suggested Citation: Suggested Citation
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