Financial Openness and Financial Development: An Analysis Using Indices

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.