Dynamic effects of trade openness on financial development

Dong-Hyeon Kim, Shu-Chin Lin and Yu-Bo Suen

Economic Modelling, 2010, vol. 27, issue 1, 254-261

Abstract: This paper employs the Pooled Mean Group (PMG) approach of Pesaran et al. (1999) to study the dynamic effects of trade openness on financial development. The advantage of the PMG estimator over other dynamic panel econometric techniques is that it allows short-run coefficients, speeds of adjustment and error variances to vary across countries, with cross-country homogeneity restrictions only on long-run parameters. Our results spanning 88 countries over 1960-2005 show that a positive long-run relationship between trade openness and financial development coexists with a negative short-run relationship. But when splitting the data into different income or inflation groups, this finding is observed only in relatively low-income countries or high-inflation economies.

Keywords: Financial; development; Trade; openness; Pooled; Mean; Group; estimator (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (113)

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