“An Inch in A Miss Is As Good As An Ell” – Selecting The Right Financial Openness Indicators: Precision Matters in Modelling Financial Development

Empirical studies often employ financial openness indicators randomly without clear justification. This study re-estimates the association between financial openness and financial development (measured by financial depth, efficiency, and stability) using panel data of 87 countries spanning 1995 to 2019. Six financial openness indicators are considered, including both de facto and two de jure measures. Additional determinants of financial development include economic growth, trade openness, inflation, and institutional quality. Although the six indicators are strongly correlated, but the principal component analysis rejects the construction of a single composite indicator. This study offers that the KOF Globalization Index is a suitable proxy for modelling financial development. For researchers, analysts and policymakers, a systematic evaluation to selecting a financial openness indicator is required for robust analysis of the topic under study. Financial development has growth-promoting effect. contributing to social welfare gains.