The role of the government in financial sector development

This study examines the impact of two dimensions of the government, namely, size and quality, on two dimensions of the financial sector, size and efficiency, in a cross section of 71 economies. The study finds that increased quality of the government as measured by governance and legal origin positively influences both financial sector size and efficiency. The size of the government proxied by government expenditure and the government ownership of banks has a negative effect on financial sector efficiency, and a positive impact on financial sector size, particularly in the low income economies.

Research Highlights► This study examines the influence of the size and quality of the government on the size and efficiency of the financial sector. ► The quality of the government positively influences financial sector size and efficiency. ► The size of the government negatively affects financial sector efficiency, and positively affects financial sector size especially in the developing economies.