Financial Openness and Economic Growth

An ongoing controversy in economics relates to the effect of financial openness on economic growth. Despite their longstanding nature, these questions are not easily resolved. Theoretically, capital market liberalization can lower the cost of capital. Given perfect international capital mobility, this can cause factor price equalization and finally accelerate economic growth. In contrast with the strong theoretical argument, empirical studies on the effect financial openness have on growth are still inconclusive. Given the diverse perspective, the goal of this paper is to further investigate the role and effect of financial openness on economic growth in different time periods and at different levels of accumulated wealth as well as in the presence of credit market imperfection. In the rest of the paper, chapter 1 introduces the indices for financial openness and sees how we can choose among them. Chapter 2 employs the dimensionality reduction technique to investigate the effect of financial openness on economic growth. Using five indices of financial openness, which are publicly available, I found that the de jurerelated component (or factor) shows the negative effect on growth, which outweighs de facto related component (or factor). In chapter 3, I categorize countries into 3 income levels, low, middle, and high, by World Development Indicator categorization and track what countries transition from one level to another level. Using GMM-SYS methodology and two financial openness indices (KA, LMF), I investigated the effect of financial openness on the economic growth of countries at different levels of income. In Chapter 4, instead of using a single index at a time, PCA and FA of five publicly available financial openness are adopted in order to identify the common pattern of financial openness indices. Using fixed effect methodology, I investigated the effect of financial openness on economic growth at the industry level