Impact of institutional environment on financial development: a literary review

Abstract

This literary review is focused on outlining approaches to institutional environment and financial development nexus, described in modern Western literature. Its existence is necessitated by the insufficient use of such sources in domestic studies on the subject, which results in inconsistencies in categorical apparatus, methodic approaches and of acquired results. The review is limited to practical Western studies with sufficient statistical apparatus and is concentrated on their choice of representative variables, expected and factual interrelations between said variables and on plausibility of their results. Based on the reviewed literature, it was possible to come up with a number of conclusions, such as: lack of general theoretical model of institutional-financial development nexus behind reviewed regression models; insufficiency of narrowly defined financial depth index to represent financial development as a whole, and need to compliment it with financial institutions’ operational effectiveness indicators, as well as other financial system components’ resource potential indicators, and recipients’ access to financial resources indicators; limitation of currently available institutional development indicators to two sets, both of which are expert-defined aggregated indicators; existence of substantial difference in factors of institutional development influencing financial system in developed and underdeveloped countries. Also, some of the further research perspectives are outlined, such as examining institutional-financial development nexus using PCA-aggregated extended financial development indicators, and researching institutional-financial development nexus using data envelopment analysis based on the statistical data on developed countries.