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Financial Development and Openness: Evidence from Panel Data

Badi Baltagi (), Panicos Demetriades () and Siong Hook Law ()

No 107, Center for Policy Research Working Papers from Center for Policy Research, Maxwell School, Syracuse University

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.

Keywords: Financial development; trade openness; financial openness; financial liberalization; dynamic panel data analysis (search for similar items in EconPapers)
JEL-codes: F19 G29 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2008-06
New Economics Papers: this item is included in nep-cfn and nep-dev
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