Financial soundness and subjective financial well-being: Do government policies matter?

Does government policy intervention enhance citizens’ financial well-being, particularly when considering the increased financial soundness attributed to the private sector? This study empirically addresses this question, using data from more than 200,000 individuals worldwide. To provide causal evidence, we employ a two-stage least squares (2SLS) ­approach with a high-dimensional fixed-effect estimator, which captures multiple levels of control and addresses endogeneity concerns. Our findings suggest that (i) improvements in financial soundness — proxied by domestic credit development — significantly ­increase financial satisfaction, whereas (ii) surprisingly, government interventions, whether in the form of policies tightening or loosening, tend to erode this positive effect. This outcome may reflect either (i) ineffective interventions or (ii) the government ­serving as a scapegoat for a decline in subjective financial well-being. Our findings imply that to optimize public satisfaction, governments should approach interventions in the private sector with caution, thereby strengthening government legitimacy.