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Does democratic transition spur financial development?

Author

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  • Wafa Ghardallou

Abstract

Purpose - The literature studying the effect of democratic political systems on financial development has found conflicting results. Besides, recent work has focused on the level effects of democracy on financial outcomes showing evidence of positive, negative and no direct impact. This paper aims to investigate the dynamic effects of democratic transition on financial development, namely, short run and long run effects. Design/methodology/approach - The author wants to see whether financial development improves after a transition to a democratic system and, if it does, for how long. Using a panel data set of 48 events of democratic transitions, the paper relies on an event study and on the estimation of dynamic panel after controlling for other potential determinants. Findings - The author finds that transition to a democratic system raises the development of the financial sector. Particularly, these positive effects occurred in the long run, i.e. about 5 years following the democratic transition. However, in the short run, the author finds that the move to democracy does not impact financial outcomes. Originality/value - The author contributes by studying the role of political system change on financial development finding that democratic transition increases the development of the financial system. Further, the author contributes by finding that the move to democracy produces positive effect only in the long term.

Suggested Citation

  • Wafa Ghardallou, 2016. "Does democratic transition spur financial development?," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 8(4), pages 499-513, November.
    • Handle: RePEc:eme:jfeppp:jfep-10-2015-0063
    DOI: 10.1108/JFEP-10-2015-0063
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    Citations

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    Cited by:

    1. Nedra Baklouti & Younes Boujelbene, 2022. "Corruption, Democracy, and Public Debt: a Case of the Arab Countries," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 13(1), pages 574-586, March.
    2. Kashif Islam & Ahmad Raza Bilal & Syed Anees Haider Zaidi, 2022. "Symmetric and asymmetric nexus between economic freedom and stock market development in Pakistan," Economic Change and Restructuring, Springer, vol. 55(4), pages 2391-2421, November.
    3. Wafa Ghardallou, 2021. "Political origins of financial structure in developing countries," Review of Development Economics, Wiley Blackwell, vol. 25(2), pages 895-915, May.
    4. Wafa Ghardallou, 2022. "Financial System Development and Democracy: a Panel Smooth Transition Regression Approach for Developing Countries," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 13(2), pages 1714-1735, June.
    5. Sèna Kimm Gnangnon, 2019. "Effect of Export Upgrading on Financial Development," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 10(03), pages 1-37, October.

    More about this item

    Keywords

    Financial development; Political economy; Democratic transition; G18; O16; P1;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • P1 - Political Economy and Comparative Economic Systems - - Capitalist Economies

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