Citation
Baltagi, Badi H. and Demetriades, Panicos O. and Law, Siong Hook
(2009)
Financial development and openness : evidence from panel data.
Journal of Development Economics, 89 (2).
pp. 285-296.
ISSN 0304-3878
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. Utilising annual
data from developing and industrialised 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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