Financial development and openness: Evidence from panel data

Badi H. Baltagi, Panicos O. Demetriades, Siong Hook Law

Research output: Contribution to journalArticlepeer-review

485 Scopus citations


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.

Original languageEnglish (US)
Pages (from-to)285-296
Number of pages12
JournalJournal of Development Economics
Issue number2
StatePublished - Jul 2009


  • Dynamic panel data analysis
  • Financial development
  • Financial liberalization
  • Financial openness
  • Trade openness

ASJC Scopus subject areas

  • Development
  • Economics and Econometrics


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