Financial openness and financial development: an analysis using indices

Abstract

This paper examines the link between financial openness and financial development through panel data analysis on advanced and emerging market countries. Using indices, financial openness together with institutional and educational variables explains a large part of the variation in financial development across countries and over time. Our analysis demonstrates that different indexing strategies serve in finding better measures for financial openness and financial development in comparison to the individual indicators used in the literature. Our principal component type financial openness index conveys a positive effect on financial development independent from the lag structure or specifications used. JEL Codes: F36, F63, F65, O16

Does Financial Integration Matter for Financial Development? Evidence from the East Asian and Pacific Region

“…Owing to their ignorance of the extent of financial system integration, de jure measurements do not fully reflect the degree of financial openness. However, de facto measures, which possibly involve measurement errors, remain the superior measurement of financial integration (Kose et al 2006) and have been widely used in the literature (Rodrik and Subramanian 2009, Kose et al 2011, Ozkok 2015, Asongu and De Moor 2016. Therefore, we rely on de facto measurements as proxies for financial integration, including FDI inflows as a share of GDP (%) (FDIItoGDP) and the ratio of external debt to GDP (%) (EXDEBTtoGDP).…”

“…Empirical evidence about the nexus between financial integration and development has never reached a consensus. On the one hand, the first strand of research (Levine 2001, Klein and Olivei 2008, Baltagi et al 2009, Ozkok 2015, T.-H. Le et al 2017 documented a positive linkage between the openness of financial sector and its development.…”

“…Meanwhile, Demetriades and Law (2006) and Chinn and Ito (2006) focused on equity and stock markets. Ozkok (2015) provided a comprehensive look at most financial system components, including banking, bond, and stock markets.…”

“…These indicators, however, are criticized for focusing solely on private sector claims (Beck et al 2000a). In recent literature, a composite index of financial development constructed from different finance indicators has been largely used (David et al 2015, Ozkok 2015, T.-H. Le et al 2017 to capture the multidimensional nature of the financial sector rather than solely focusing on one aspect.…”

“…This allows us to account for possible differences in the nature and threshold conditions of different types of cross-border flows. Regarding dependent variables, we were inspired by David et al (2015), Ozkok (2015), and Le et al (2017) The remainder of this paper is structured as follows. Section II provides information on data and methodology.…”