TRADE OPENNESS, FINANCIAL OPENNESS, AND FINANCIAL DEVELOPMENT IN EUROZONE: EVIDENCE FROM DYNAMIC PANEL DATA

This paper investigates the impact of trade and financial openness on financial development, sampling 19 Eurozone countries with data spanning from 2000 to 2015. We use two of the most important indicators of financial development-private credit and stock market capitalization. The empirical results, using dynamic panel estimation techniques (GMM), suggest that both trade and financial openness are statistically significant determinants of financial development. Our results also suggest that the marginal effects of trade (financial) openness are negatively related to the degree of financial (trade) openness, indicating that relatively closed economies stand to benefit most from opening up their trade and/or capital accounts. Our findings provide partial support to the well known Rajan and Zingales hypothesis, which stipulates that both types of openness are necessary for financial development to take place