“Mother Can I trust the Government?”:Sustained Financial Deepening - A Political Institutions View

This paper sheds new light on the debate whether financial development leads, follows, or matters at all for economic growth and the findings lend support to the political institutions view. It analyzes the conditions under which financial accelerations have taken place in a large sample of countries since the early 1960. The paper’s main conclusions—and contributions to the literature—are as follows: (i) only about one-quarter of all financial accelerations in the past 50 years have led to long-term financial deepening; (ii) short-term accelerations are intimately associated with financial liberalization, but are in general negatively associated with the quality of prevailing political institutions (iii) long-term phases, on the contrary, are positively and closely linked with the quality of political institutions before and at the time of the start of the acceleration.