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Financial Development and Openness: Evidence from Panel Data

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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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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  1. Chinn,M.D. & Ito,H., 2005. "What matters for financial development? : capital controls, institutions, and interactions," Working papers 4, Wisconsin Madison - Social Systems.
  2. Ashoka Mody & Abdul Abiad, 2005. "Financial Reform; What Shakes It? What Shapes It?," IMF Economic Issues 35, International Monetary Fund.
  3. Svetlana Andrianova & Panicos Demetriades & Anja Shortland, 2006. "Government Ownership of Banks, Institutions, and Financial Development," WEF Working Papers 0011, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
  4. Daron Acemoglu & Simon Johnson & James Robinson, 2004. "Institutions As The Fundamental Cause Of Long-Run Growth," DOCUMENTOS CEDE 002889, UNIVERSIDAD DE LOS ANDES-CEDE.
  5. Badi H. Baltagi & Panicos O. Demetriades & Siong Hook Law, 2007. "Financial Development, Openness and Institutions: Evidence from Panel Data," Discussion Papers in Economics 07/05, Department of Economics, University of Leicester.
  6. Panicos Demetriades & Svetlana Andrianova, . "Finance and Growth: What We Know and What We Need To Know," Discussion Papers in Economics 03/15, Department of Economics, University of Leicester.
  7. Peter Blair Henry, 2000. "Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices," Journal of Finance, American Finance Association, vol. 55(2), pages 529-564, 04.
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  9. Claessens, Stijn & Laeven, Luc, 2002. "Financial Development, Property Rights and Growth," CEPR Discussion Papers 3295, C.E.P.R. Discussion Papers.
  10. Ross Levine, 2003. "More on finance and growth: more finance, more growth?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 31-46.
  11. Yongfu Huang & Jonathan Temple, 2005. "Does external trade promote financial development?," Bristol Economics Discussion Papers 05/575, Department of Economics, University of Bristol, UK.
  12. Geert Bekaert & Campbell R. Harvey & Christian Lundblad, 2000. "Emerging Equity Markets and Economic Development," NBER Working Papers 7763, National Bureau of Economic Research, Inc.
  13. Michael Klein & Giovanni Olivei, 1999. "Capital account liberalization, financial depth, and economic growth," Working Papers 99-6, Federal Reserve Bank of Boston.
  14. Beck, Thorsten, 2001. "Financial development and international trade : is there a link?," Policy Research Working Paper Series 2608, The World Bank.
  15. Stephen Knack & Philip Keefer, 1995. "Institutions And Economic Performance: Cross-Country Tests Using Alternative Institutional Measures," Economics and Politics, Wiley Blackwell, vol. 7(3), pages 207-227, November.
  16. Svaleryd, Helena & Vlachos, Jonas, 1999. "Markets for Risk and Openness to Trade: How are they Related?," SSE/EFI Working Paper Series in Economics and Finance 327, Stockholm School of Economics, revised 10 Sep 2000.
  17. repec:ner:tilbur:urn:nbn:nl:ui:12-3125515 is not listed on IDEAS
  18. Panicos O. Demetriades & Khaled A.Hussein, 1995. "Does Financial Development Cause Economic Growth? Time-Series Evidence from 16 Countries," Keele Department of Economics Discussion Papers (1995-2001) 95/13, Department of Economics, Keele University.
  19. 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.
  20. Levine, Ross, 2001. "International Financial Liberalization and Economic Growth," Review of International Economics, Wiley Blackwell, vol. 9(4), pages 688-702, November.
  21. Claessens, Stijn & Demirguc-Kunt, Asl[iota] & Huizinga, Harry, 2001. "How does foreign entry affect domestic banking markets?," Journal of Banking & Finance, Elsevier, vol. 25(5), pages 891-911, May.
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  23. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
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