Impacts of openness on financial development in developing countries: Using a Bayesian model averaging approach

Abstract

This study investigates the influences of trade and financial openness on financial development over the period 2003–2017 from a sample of 64 developing countries, employing a Bayesian model averaging approach to take into account model uncertainty. The results demonstrate that the contribution of trade openness to financial development is important in developing economies with better institutions. However, financial openness has an insignificant positive effect on financial development. There is no evidence to support the Rajan and Zingales hypothesis that the simultaneous openness to both trade and capital flows promotes financial development. Our findings also indicate that a better institutions environment allows a developing economy to exploit the benefits of openness to financial development.