Effect of Good Governance and Government Size on Financial Development in Selected Countries

Growth of financial economics literature in recent decades has clearly shown that financial development facilitates economic growth. Important question is that why some countries have more developed financial sectors than others. In this study، effect of government size and good governance on financial development was considered by using statistical data، including 76 developing and developed countries in time period of 1996 to 2011. The relationship between the variables was estimated with Generalized Moment Method (GMM). The results showed that government size and good governance has negative and positive effects on financial sector development، respectively. Also، for the purpose of adapting and improving of the results، effect of government size and good governance on financial sector development was separately examined in developing and developed countries، which supported the previous results. The results confirmed the political view and the analysis of results also demonstrated that inflation has the highest influence on financial sector development in developing countries.