Financial development, financial openness and growth: an empirical investigation

Ünaldı Akgün, Burçin
The economic literature posits that a well-functioning economy requires a well-regulated financial system, and a sound financial system is essential to the fundamentals of an economy, however, even the most influential economists disagree sharply about the role of the finance-growth relationship in economic development. One of the most important questions concerning financial openness is whether it spurs long-run economic growth, and if yes, do these benefits outweigh the risks for developing countries. In addition, the conventional economic theory often postulates that a more developed financial sector provides a productive ground for higher economic growth. Is financial development a major prerequisite for economic growth? Additionally, institutional quality has also received a considerable attention since it is thought of a significant channel in the financegrowth relationship. This thesis aims to investigate the links between financial integration, financial development, and growth, taking institutional quality and the level of the development of the economy into consideration. To this end, a large panel data set is used and panel data estimation techniques are employed. The results show that emerging economies benefit the most from financial openness regardless of any preconditions. On the other hand, developing economies should be cautious since financial openness may hinder growth unless institutional development is healed before financial openness policies take speed. Moreover, the results indicate that, financial development fosters growth and the level of institutional development is an important determinant of the finance-growth relationship in the overall.


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Citation Formats
B. Ünaldı Akgün, “Financial development, financial openness and growth: an empirical investigation,” Ph.D. - Doctoral Program, Middle East Technical University, 2011.