The short-run and long-run effects of trade openness on financial development: Some panel evidence for Europe

This paper analyses the short- and long-run effects of trade openness on financial development in a panel including data on 35 European countries over the period 2001-2019. For this purpose, it uses the pooled mean group (PMG) estimator for dynamic panels developed by Pesaran et al. (Journal of the American Statistical Association, 1999;94:621). The results differ depending on the income, governance and financial development level of the countries considered. In particular, it appears that in the middle-income countries trade openness tends to strengthen financial development in the long run but to have an adverse effect in the short run. By contrast, in the case of high-income countries with better institutions and a higher level of financial development, there is a positive and significant impact in the short run. Some policy implications of these findings are drawn.