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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.

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Bibliographic Info

Paper provided by Center for Policy Research, Maxwell School, Syracuse University in its series Center for Policy Research Working Papers with number 107.

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Length: 32 pages
Date of creation: Jun 2008
Date of revision:
Handle: RePEc:max:cprwps:107

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Keywords: Financial development; trade openness; financial openness; financial liberalization; dynamic panel data analysis;

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  1. Badi Baltagi & Panicos Demetriades & Siong Hook Law, 2007. "Financial Development, Openness and Institutions: Evidence from Panel Data," Money Macro and Finance (MMF) Research Group Conference 2006 166, Money Macro and Finance Research Group.
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  16. Rajan, Raghuram G. & Zingales, Luigi, 2003. "The great reversals: the politics of financial development in the twentieth century," Journal of Financial Economics, Elsevier, vol. 69(1), pages 5-50, July.
  17. Huang, Yongfu & Temple, Jonathan, 2005. "Does External Trade Promote Financial Development?," CEPR Discussion Papers 5150, C.E.P.R. Discussion Papers.
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