Determinants of Financial Development in Iran: Do Financial Repression Policies Hinder Financial Development?

ABSTRACT: It has been widely discussed in the financial development literature that repressive financial policies have an adverse impact on financial development process in developing countries. Against this backdrop, the purpose of this thesis is to investigate the determinants of financial development in Iran in its post-revolution era and to assess whether financial repression has a significant impact on financial development using annual data spanning the period between 1965 and 2006. For this purpose, the time-series econometric technique of Johansen Cointegration analysis has been used. The results of the cointegration tests suggest that trade openness, savings and economic growth are statistically significant with a positive coefficient, which means that these variables have a positive impact on financial development in the case of Iran. On the other hand, financial repression index and reserve requirement ratio have a negative coefficient, which suggest that repressive financial policies have indeed a negative impact on financial development process in the case of Iran. An interesting finding of the thesis is that inflation has a positive impact on financial development in the case of Iran. This is an interesting result as theoretically inflation is expected to inhibit financial development process. Nevertheless, this finding is in line with the theory that there is a critical inflation rate, below which a modest rise in inflation can encourage real activity and promote financial development rather than obstructing financial development. Keywords: Financial Development, Financial Repression, Johansen Cointegration. ……………………………………………………………………………………………………………………………………………………………………………………………………………………