Re-examining the financial development and openness nexus: A nonparametric evidence for developing countries

Abstract

This paper re-examines the nexus between financial development and openness in developing countries. Specifically, we test whether both financial and trade openness explain financial development and its variations across 44 developing economies. Questioning the functional specifications in previous studies, we propose a fully nonparametric modelling approach to validate the simultaneous openness hypothesis. Our findings from the parametric approach suggest that both openness dimensions positively impact financial development, providing a loose support for the simultaneous openness hypothesis. The results based on the nonparametric approach suggest a negative effect of closed economies (economies with relatively closed trade and capital accounts) on financial development, supporting the strong version of the simultaneous openness hypothesis. Correct model specification test results support the nonparametric model relative to the parametric model as appropriate for the sampled data. Our conclusion is therefore based on the nonparametric finding, which supports the simultaneous openness hypothesis for the selected developing countries.