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Financial Development and Openness: Evidence from Panel Data

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Abstract
This paper addresses the empirical question of whether trade and financial openness can help explain the recent pace in financial development, as well as its variation across countries in recent years. Utilizing annual data from developing and industrialized countries and dynamic panel estimation techniques, we provide evidence which suggests that both types of openness are statistically significant determinants of banking sector development. Our findings reveal that the marginal effects of trade (financial) openness are negatively related to the degree of financial (trade) openness, indicating that relatively closed economies stand to benefit most from opening up their trade and/or capital accounts. Although these economies may be able to accomplish more by taking steps to open both their trade and capital accounts, opening up one without the other could still generate gains in terms of banking sector development. Thus, our findings provide only partial support to the well known Rajan and Zingales hypothesis, which stipulates that both types of openness are necessary for financial development to take place.

Suggested Citation

  • Badi H. Baltagi & Panicos O. Demetriades & Siong Hook Law, 2008. "Financial Development and Openness: Evidence from Panel Data," Center for Policy Research Working Papers 107, Center for Policy Research, Maxwell School, Syracuse University.
    • Handle: RePEc:max:cprwps:107
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    More about this item

    Keywords

    Financial development; trade openness; financial openness; financial liberalization; dynamic panel data analysis;
    All these keywords.

    JEL classification:

    • F19 - International Economics - - Trade - - - Other
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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