Revisiting Financial Opening and Financial Development: A Regulation Heterogeneity Perspective

Abstract

Abstract The current literature on the effect of financial opening and financial development provides conflicting results. Based on the performances of financial markets in different regulatory settings, we argue that the quality of regulation plays a vital role in determining the effect of financial openings. We apply the dynamic panel threshold model to the data of 114 economies ranging from 2008 to 2019 to estimate the existence of financial regulation threshold and the impact of financial opening on the depth and efficiency of financial development. Results demonstrate that financial opening in less-regulated markets accelerates credit market expansion while does not promote financial efficiency. Although the expansion effect is less remarkable in well-regulated markets, the overall efficiency is increased. This threshold effect indicates the importance of regulatory capacity-building as a precondition for effective financial opening. Our conclusions provide policy implications for emerging markets in accelerating proactive financial opening. Subject classification codes: G21; F36; C23