Navigating Financial Reforms: Threshold Effects and Multidimensional Development in Asia's Vulnerable Economies

Financial openness is a key driver of financial development, capable of amplifying or dampening the influence of other determinants of financial development. Therefore, this paper examines the role of financial openness in influencing macroeconomic and institutional factors on multidimensional financial development in low and lower-middle-income Asian economies during 2001–2021. To achieve this goal, a panel smooth transition regression (PSTR) model is used. The transition variable is the Chinn-Ito index, which indicates financial openness. The estimation results show a threshold value of 0.3567 for the Chinn-Ito index. When the Chinn-Ito index value is less than this value, it indicates the first regime, and values higher than it indicate the second regime. The results show that in the first regime, institutional quality, GDP growth and fiscal policy have a positive effect on financial development. In contrast, in the second regime, both institutional quality and GDP growth are negatively associated with financial development, and the positive role of fiscal policy weakens. Trade openness remains positively and significantly linked to financial development in both regimes, but its amount is larger in the second regime. The results indicate that strong domestic institutions, GDP growth, and fiscal policies foster various dimensions of sustainable financial development only when there is financial openness below the threshold in these countries. JEL Classifications : G20, O16, F43, C23, E44