Institutions and Financial Deepening

This study investigates the extent to which institutional characteristics are related to countries' level of credit depth. The findings suggest that the development of formal property rights, contracting, and competition institutions is positively related to an increase in credit to the private sector as a ratio of GDP. This result remains robust when controlling for the effect of financial policy. The relation between institutional characteristics and banks' lending capacity and investment is mixed. However, overall, institutional development is positively related to credit deepening and investment.