Do Financial Markets in Developed Countries Continue Benefiting from Economic Openness? An Evidence from G10 Group

The interactions between economic openness with other variables including inflation and GDP growth help to capture the different channels through which economic liberalization can benefit financial market development. This paper examines the influences of economic openness measured by trade openness and financial openness, on the development of financial markets in developed economies proxied by the Financial Market Index, a composite index representing the sum of financial market depth, access, and efficiency measurements. Yearly panel data from World Bank and International Monetary Fund for G10 countries spanning the period 2001-2019 and Autoregressive Distributed Lag model (panel-ARDL) are employed for analysis, and main results follow. Trade openness, financial openness, and economic growth are crucial determinants of financial market development in the long-run. However, in the short run, only financial openness has a positive and a significant impact on financial market development. The empirical results also reveal that Inflation has a detrimental effect on the evolution of the financial markets in the short and long term. The error correction term is negative in sign and statistically significant suggesting a long run equilibrium relationship amongst our variables, where, 28% of disequilibria in financial market development is corrected annually; a fairly high speed of adjustment that takes around 3.5 years to restore equilibrium. Finally, decision-makers should be attentive regarding the economic openness, and able to assess and manage trade and financial openness, keeping a growing rate of economic growth and low inflation rate, in order to promote the stability of the financial markets, and allow developed economies to exploit the benefits of economic openness for financial markets development.