CPR Working Paper Series No. 107
Financial Development and Openness:
Evidence from Panel Data
Badi H. Baltagi, Panicos O. Demetriades, and Siong Hook Law
June 2008
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.You can download a PDF version of the paper and view it and print it using a FREE copy of Adobe Acrobat Reader.
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