A Survey of Government Regulation and Intervention in Financial Markets
There has been renewed focus on financial systems, especially in the light of recent literature that documents a positive and robust relationship between development of financial systems and economic growth. Irrespective of how financial developmen...
| Main Authors: | , |
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| Format: | Publication |
| Language: | English |
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World Bank, Washington, DC
2012
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| Online Access: | http://documents.worldbank.org/curated/en/2005/01/5847273/survey-government-regulation-intervention-financial-markets http://hdl.handle.net/10986/7326 |
| Summary: | There has been renewed focus on
financial systems, especially in the light of recent
literature that documents a positive and robust relationship
between development of financial systems and economic
growth. Irrespective of how financial development is
measured, there is a clear causal relationship with per
capita income. King and Levine (1993) was the first paper
that examined economic growth for a dataset that spans from
1960-1989 and found predictive power of financial systems in
growth. Another richer dataset from 1960-1995 reinforces the
existing relationship between finance and growth, while
taking into account the issue of reverse causality (Levine,
Loayza and Beck 2000). The idea of reverse causality is that
it is also possible that economic growth may encourage
development of financial systems and these results may
reflect reverse feedback rather than any effect of finance
on growth. The authors use the recent discovery that systems
with English common law tend to have deeper financial
systems, to employ legal origins as an effective instrument.
Their results rule out the thesis that the relationship
between finance and growth is driven by reverse causality.
The policy prescription the authors provide is that
developing countries should not attempt to engineer credit
expansion and financial system development. Instead they
should create an environment conducive for participation of
individuals in the market system, for financial system to
deliver services effectively and functions most required by
an economy are provided by finance (World Bank 2001). Any
policies where government actively seeks to influence
financial market outcomes are likely to have adverse
effects. The ensuing discussion in this report highlights
the pervasive negative influence of the government in
finance, in most emerging economies. It underscores and
points out cases of efficiently performing financial systems
in countries where government has limited its involvement to
developing a sound business environment. |
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