Essays on institutional development, financial development, and economic growth

Part I of this dissertation investigates the influence of financial development and policies of financial repression on economic growth and economic efficiency for 83 countries from 1970 to 1998 employing a cross-sectional GMM instrumental variable estimation, and a fixed effects dynamic panel data model (249 observations), within the endogenous growth model framework. The Hansen test addresses the question of whether differences in the legal origin, the protections' of creditors rights, and the quality and effectiveness of law enforcement, have a significant impact on economic growth beyond their ability to explain differences in financial development. Empirical evidence shows that the negative effects of inflation on economic growth can be traced to the indirect effect of the inflation tax on real rates of return. The findings suggest that interest rates are poor proxies for financial sector performance. The results also show that countries with better creditor protections and contract enforcement have better developed financial sectors, and this exerts a causal influence on long-run economic growth rates and capital efficiency.; Part II of this dissertation presents empirical evidence on the relationship between institutions of governance, public policy, and financial development. First, political accountability, regulation, and corruption are very important elements of financial development. Second, public policies of redistribution act as a tax on the process of financial intermediation lowering the efficiency of capital in the banking system. Third, cultural differences, ethnic heterogeneity, and differences in legal origin, are instrumental in accounting for institutional development and its effects on banking sector development, and the degree of financial repression, in a cross-section of 73 countries. Cultural factors are more important than differences in legal systems alone to explain the impact of governance and public policy on banking sector development. Results suggest differences in legal origin may be indicative of degrees of state intervention, supporting political theories of institutional development. An extension of the analysis to Latin America countries provides evidence of ineffective institutions of governance leading to poor macroeconomic policy choices. The data also reveal that Sub-Saharan African countries engage in a greater degree of redistributive public policies.