Effect of Openness on Financial Sector Development in Asian Emerging Markets: A System Dynamic Panel Data Approach

Abstract

Openness has become an imperative feature of contemporary economic systems in this globalized world. Trade and financial openness may lead to financial sector development in the emerging market economies (EMEs). A developed financial sector is necessary to control financial vulnerability and boost economic growth by channeling funds to the most productive and profitable investments. This study aims at investigating the impact of trade and financial openness on financial development in Asian emerging economies. A modern estimation technique of Arellano-Bover/Blundell-Bond linear dynamic panel data generalized method of moments (GMM) system is applied considering seven Asian emerging economies for the period 1999-2019. The empirical results indicate that both types of openness significantly contribute to the financial sector development. However, the marginal effect of financial and trade openness is negative which reflects the more benefits of openness to the relatively closed economies. Hence, empirical findings partially support the Rajan and Zingales hypothesis suggesting a sequential approach towards opening up of trade and capital accounts instead of simultaneous openness.