Openness and financial development: time series evidence for Turkey

Our study investigates whether trade openness and financial openness have significant impact on financial development using time series data on Turkey for the 1989:1-2007:2 periods. We also investigate Rajan and Zingales (2003) hypothesis that both trade and capital accounts should be simultaneously liberalised in order to achieve financial development. We use four different financial development indicators, commonly employed in the previous literature. The bounds testing and autoregressive distributed lag approaches to cointegration, developed by Pesaran et al. (2001) are used in the estimation process. The empirical findings indicate that all financial development measures show a long-run levels relationship with financial openness, trade openness and real GDP. Consequently, our estimates imply that both financial and trade openness have led to financial development in Turkey. The findings also support the hypothesis of Rajan and Zingales (2003). Marginal effects of financial and trade openness on the financial development indicators imply that Turkey may benefit from trade openness and/or liberalised capital accounts.