How Openness Policies Affect Financial Development in Ethiopia: An ARDL Approach

Economic openness is essential for financial growth. The advancement of the financial sector is integral to economic progress. Therefore, exploring factors influencing financial development can enhance understanding of how openness affects this area. This study analyzed data from 1980 to 2022, using the Autoregressive Distributed Lag (ARDL) bound testing method to assess short- and long-term impacts of economic openness policies on financial development in Ethiopia. Results indicate that trade openness positively influences financial development long-term, whereas gross domestic product negatively affects it in Ethiopia. In the short term, gross domestic product and fixed capital formation positively contribute to financial development. Conversely, government spending, trade openness, and inflation negatively affect financial development in Ethiopia. Although financial openness positively influences financial development in both periods, this effect is not statistically significant. The error correction model shows that the adjustment coefficient of the financial development index is -0.44, statistically significant at 5%. These findings suggest the government should enhance trade infrastructure and reform trade policies. Promoting financial openness aids financial development; hence, the government should facilitate financial openness.