The Impact of Government Efficiency on Financial Development

This study aims to fulfill a gap in the existing literature by investigating the impact of government efficiency and corruption on financial development of thirty-one OECD countries from 2002 to 2015 inclusively. The panel data analyses were conducted with the use of fixed-effects (within), random-effects and feasible generalized least squares (FGLS) methods. For the robustness, the sample was then split into subsamples based on the political regimes, and each subsample was analysed once more. Findings of this study suggest that improvements in government efficiency lead to further financial development in the case of OECD countries. Also, there is substantial evidence to support the argument that corruption hinders financial development. The obtained results for the subgroups point out the importance of the political system on financial development. Given the importance of financial development on many macroeconomic fundamentals including economic growth, these empirical findings have several essential policy implications which are discussed in the conclusion section.