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Motivated by trade and financial liberalisation policies have become
increasingly important in developing countries over the past two decades and the
existing gaps in the literature regarding financial development, economic growth, and
environmental quality research need to be addressed. Therefore, this thesis aims to
provide new evidence on the impacts of trade and financial openness on financial
development, the impact of financial development on economic growth, and the
impact of trade openness on environmental quality in 64 developing countries over
the period 2003-2017. One major contribution of this thesis for three objectives is the
adoption of the regression model based on Bayesian model averaging approach to
consider model uncertainty (Raftery et al., 1997; Hoeting et, al., 1999; Chipman et
al., 2001; Fragoso et al., 2018).
Regarding the impacts of openness on financial development, the thesis
demonstrates that the contribution of trade openness to financial development is
important in developing economies with better institutions. However, financial
openness has an insignificant positive effect on financial development. There is no
evidence to support the Rajan and Zingales hypothesis that the simultaneous openness
to both trade and capital flows promotes financial development. The findings also
indicate that a better institutions environment allows a developing economy to exploit
the benefits of openness to financial development.
Regarding the impact of financial development on economic growth, the
main findings indicate that financial development has a significant U-shaped effect
on economic growth, providing new insight concerning the relationship between
financial development and economic growth in developing countries. The results also
demonstrate that investment to gross domestic product ratio and foreign direct
investment have significant positive effects on economic growth, whereas population
growth has a significant negative impact on economic growth.
With regard to the impact of trade openness on environmental quality, the
empirical results reveal that trade openness in developing countries does not cause
environmental degradation. Besides trade openness, the findings provide strong
evidence in favour of financial openness and renewable energy consumption as two
of the most important determinants of environmental quality by reducing carbon
dioxide emissions. Meanwhile, inward FDI stock to domestic capital stock and
income have harmful effects on environmental quality in the context of developing
countries.
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