Title: The relationship between financial risk, financial openness, trade openness, and financial development in Southern Mediterranean countries

Authors: Fatih Ayhan; Feyza Arica

Addresses: Department of Economics, Faculty of Economics and Administrative Sciences, Bandirma Onyedi Eylul University, Balıkesir, Turkey ' Department of Economics, Biga Faculty of Economics and Administrative Sciences, Canakkale Onsekiz Mart University, Biga-Canakkale, Turkey

Abstract: This study mainly aims to find the effects of financial openness, trade openness, and financial risk on financial development for nine Southern Mediterranean countries over the period 1984-2014 with panel analysis. Westerlund's (2007) panel cointegration and error correction test is applied. The findings of common correlated effects (CCE) estimation show that financial openness positively affects financial development in Egypt, Tunisia, and Turkey, while it negatively affects financial development in Algeria and Lebanon. Additionally, according to the estimation results, a lower financial risk causes higher financial development in Algeria and Turkey. When the relationship between financial development and trade openness is investigated, while trade openness affects financial development negatively in Libya, it has a positive effect in Jordan, Tunisia, and Turkey. We conclude that financial openness and trade openness is beneficial to financial development for developing economies, while financial risk harms the financial development of economies. To overcome the economic bottlenecks in developing countries, policymakers should take action to reduce the financial risk levels of the economies and remove financial and trade barriers so as to increase financial development.

Keywords: financial risk; financial openness; financial development; panel analysis; trade openness.

DOI: 10.1504/IJEPEE.2024.138471

International Journal of Economic Policy in Emerging Economies, 2024 Vol.19 No.2, pp.107 - 122

Received: 30 Jun 2021
Accepted: 05 Mar 2022
Published online: 07 May 2024 *

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