Do Financial Sector Reforms Lead to Financial Development? Evidence From a New Dataset

Abstract

This paper studies whether the policies that, over the past decades,liberalized bankingsystems around the world have resulted in deepercredit markets. To measure banking sectorreforms we use a new indexthat tracks policy changes in five separate areas for 91 countriesover1973-2005. We find that reforms have led to financial deepening,but only in countrieswith institutions that place checks and balanceson political power. We interpret this asevidence of a complementaritybetween financial sector reforms and political institutions thatprotectproperty rights. Other country characteristics do not seem to significantlyinfluencethe effect of banking reforms on financial development.