This study investigates the non‐linear effect of fiscal policy (measured by total domestic public sector debt) on the level of financial development, using a balanced panel of 22 economies in the Asia‐Pacific region. Governments in less developed financial institutional infrastructure (for instance, emerging markets) tend to abuse their power by intervening in the domestic debt market. This study shows that better financial institutional infrastructure helps to discipline governments. The results suggest a negative effect of domestic public sector debt on financial development, but only at low level of financial freedom and integration. Higher financial freedom and financial integration would reduce the crowding‐out effect of domestic public sector debt.