How does openness affect the growth of economies? The spotlight on different dimensions of the financial channel

The economic performance of countries is affected by factors such as financial and trade openness, but their impact on economic growth remains debated. This paper uses parametric panel estimation to analyse how different aspects of commercial and financial openness influence long-term economic growth across 167 economies from 1960 to 2019. The findings reveal that the relationship between financial openness and economic growth differs based on a country’s development level and the specific aspect of financial openness. For high- and low-income countries, a higher ratio of total foreign assets and liabilities to GDP negatively affects growth. Conversely, in middle-income economies, a higher ratio of portfolio equity assets and liabilities to GDP is positively linked to growth. For this group, reducing capital controls is associated with lower growth, while there is some evidence of a positive relationship between a reduction in controls and growth for the high-income group. Trade openness suggests a positive relationship with growth for the whole sample and for high-income countries but is more ambiguous for low- and middle-income countries. Moreover, a negative correlation between real appreciation and growth seems to be statistically robust, especially when financial openness indicators are included for low- and middle-income countries.