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Openness and Financial Development

Panel Data Evidence from Various Stages of Economic Development

Siong Hook Law is at the Department of Economics, Faculty of Economics and Management, Universiti Putra Malaysia, 43400 UPM Serdang, Selangor, Malaysia. E–mail: lawsh{at}putra.upm.edu.my

This article examines the effect of openness on financial development pertaining to the Rajan and Zingales (2003) hypothesis, namely that simultaneous openness of trade and capital flows has a positive influence on financial development.

They hypothesise that when a country's borders are open to both trade and capital flows, it will deliver benefits to the financial markets. The dynamic heterogeneous panel data results based on 68 countries for the period 1980–2001 indicate that simultaneously open product and capital markets do promote better financial development. Openness in terms of trade and capital are most potent in promoting financial development in middle–income countries, whereas its influence is relatively small in low–income and high–income countries.

Key Words: JEL Classification: F10 • JEL Classification: F40 • Trade openness • capital inflows • financial development • dynamic panel data analysis

Journal of Emerging Market Finance, Vol. 6, No. 2, 145-165 (2007)
DOI: 10.1177/097265270700600201


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