The Effects of Capital Flows and Openness on Financial Development in Emerging Markets

Abstract

Financial markets and institutions perform an important function in the economic development process, particularly through their role in allocating finance to various productive activities, including investment in new plant and equipment, working capital for firms and so on. This role has been well researched and documented in the empirical literature, using a variety of econometric techniques. By and large, empirical studies suggest that well-functioning financial institutions and markets promote long-run economic growth . provides an excellent overview of a large body of empirical literature that suggests that financial development can robustly explain differences in economic growth across countries. A country with better-developed financial markets tends to grow faster. Thus, establishing well-functioning financial markets and systems, which attract more savings, should be a policy priority for governments.