Review of World Economics

, Volume 144, Issue 3, pp 558–587 | Cite as

What Determines Financial Development? Culture, Institutions or Trade

  • Nils Herger
  • Roland Hodler
  • Michael Lobsiger


This paper endeavours to determine in how far theories emphasising cultural values, dysfunctional institutions or impediments to trade can explain the vast differences in the size of financial systems across the globe. To account for endogeneity, an instrumental variables approach is pursued. For a cross-section of countries, we find that trade openness and institutions constraining the political elite from expropriating financiers tend to promote financial development. Conversely, there is only limited evidence that cultural beliefs and the cost of enforcing financial contracts significantly hamper financial development.


Financial development culture institutional quality trade 


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Copyright information

© Kiel Institute 2008

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of BerneBerneSwitzerland
  2. 2.University of MelbourneMelbourneAustralia

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