Mother, Can I Trust the Government? Sustained Financial Deepening: A Political Institutionsview

IMF Working Papers, September 1, 2010

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Only a minority of countries have succeeded in establishing a developed financial system, despite widespread financial liberalization.
The political institutions view claims that sustained financial deepening is most likely to take place in institutional environments where governments effectively impose constraints on their own powers in order to create trust.
The paper identifies over 200 post-1960 episodes of accelerations in financial development in a large cross-section of countries.
The likelihood of an acceleration leading to sustained financial development increases greatly in environments that have high-quality political institutions.

Identified over 200 post-1960 episodes of accelerations in financial development.
Sustained financial development is strongly associated with high-quality political institutions.
Effective self-constraint by governments (to create trust) is central to the political institutions explanation for sustained financial deepening.

Subjects: Banking, Credit, Credit booms, Financial crises, Financial markets, Financial sector development, Legal support in revenue administration, Money, Revenue administration
Keywords: Asia and Pacific, Credit, Credit booms, Eastern Europe, Financial development, financial liberalization, Financial sector development, GDP t-1, growth rate, Legal support in revenue administration, liberalization index, moving average, political institutions, Post-acceleration Credit, regime change, Sub-Saharan Africa, Western Hemisphere, WP

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