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Financial System Size in Transition Economies: The Effect of Legal Origin
Author(s) -
HARPER JOEL T.,
MCNULTY JAMES E.
Publication year - 2008
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2008.00156.x
Subject(s) - explanatory power , transition countries , economics , soviet union , transition economy , transition (genetics) , rule of law , gross domestic product , economy , international economics , market economy , macroeconomics , law , political science , biochemistry , chemistry , politics , gene , philosophy , epistemology
Gorton and Winton (1998) link the size of the banking system in transition economies to financial stability. We provide empirical evidence consistent with their notion that the size of the financial system will be smaller in these countries. This effect holds even after controlling for the effect of rule of law and/or legal origin, and other relevant variables. Transition economy status, thus adds additional explanatory power to traditional law and finance explanations of financial development. Classification of transition economies by legal origin reveals that Russian legal origin has a strong negative effect on financial development. Regression analysis shows claims on the private sector/gross domestic product (GDP) to be 46 to 60 percentage points lower in the countries of the former Soviet Union, and 23 to 39 percentage points lower in non‐Soviet transition economies compared to countries of English legal origin. There is a positive relation between claims on the private sector and the rule of law for a broad cross section of countries.