Financial development and financial openness nexus: the precondition of banking competition

Wang Chen (), Shigeyuki Hamori and Takuji Kinkyo

Applied Economics, 2016, vol. 48, issue 12, 1130-1139

Abstract: We examine the dynamic relationship between financial development and financial openness using the pooled mean group estimator developed by Pesaran et al. (1999). Our results show that financial openness has a positive effect on financial development in the long run, but may have a negative effect in the short run. Using estimates of country-specific short-run coefficients, we also find that the adverse short-run effects of financial openness are associated with a lower degree of banking competition. The system GMM estimator also supports these findings, suggesting that the financial development and financial openness nexus is contingent on the degree of banking competition. A key policy implication is that a higher degree of banking competition is a precondition for financial openness to promote financial development.

Date: 2016
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Working Paper: Financial Development and Financial Openness Nexus: The Precondition of Banking Competition (2015)
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DOI: 10.1080/00036846.2015.1093087

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