The Role of the State in Finance

Asli Demirgüç-Kunt
Martin Cihak
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World Bank: Global Financial Development Report
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This report reassesses the role of the state in finance, based on updated data, ongoing research, and World Bank Group experiences from around the world. Two building blocks underlie the report’s view of the role of the state in finance. First, there are sound economic reasons for the state to play an active role in financial systems. Second, there are practical reasons to be wary of the state playing too active a role in financial systems. The tensions inherent in these two building blocks emphasize the complexity of financial policies. Though economics identifies the social welfare advantages of certain government interventions, practical experience suggests that the state often does not intervene successfully. Furthermore, since economies and the state’s capacity to regulate differ across countries and over time, the appropriate involvement of the state in the financial system also varies case by case. Nevertheless, with ample reservations and cautions, this report teases out broad lessons for policy makers from a variety of experiences and analyses.

This paper was presented at the "Financial Deepening, Macro-Stability, and Growth in Developing Countries" conference, held jointly by the International Monetary Fund, the World Bank, the Consortium on Financial Systems and Poverty, and the UK Department for International Development in September of 2012. The corresponding presentation is also available.

Policy Evaluation
Financial Institutions
Econometrics and Statistical Methods