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Abstract

This contribution investigates the causal interactions between financial deepening, trade openness and economic growth in 13 Latin American and Caribbean countries. We construct a composite indicator for financial deepening and use it to detect Granger causality within a modified Vector Autoregressive/Vector Error Correction Model (VAR/VECM) framework. We find almost no evidence for the popular hypothesis of finance-led growth. Evidence of bidirectional finance-growth causality is stronger but mostly instable in the long run. Most results indicate a demand following or insignificant causal relationship between finance and growth. There is also no evidence that finance indirectly induces growth via the channel of trade openness. Hence, policies that prioritize financial and trade sector development cannot be supported.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/00036846.2010.498352
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Bibliographic Info

Article provided by Taylor and Francis Journals in its journal Applied Economics.

Volume (Year): 43 (2011)
Issue (Month): 30 ()
Pages: 4729-4739

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Handle: RePEc:taf:applec:v:43:y:2011:i:30:p:4729-4739

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Find related papers by JEL classification:

• C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
• O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
• O55 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Africa

References

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Cited by:

1. Muhammad, Shahbaz & Mohammad, Mafizur Rahman & Abdul, Farooq, 2012. "Financial Development, International Trade and Economic Growth in Australia:New Evidence from Multivariate Framework Analysis," MPRA Paper 42023, University Library of Munich, Germany, revised 17 Oct 2012.
2. Dabos, Marcelo & Williams, Tomas, 2009. "A reevaluation of the impact of financial development on economic growth and its sources by regions," MPRA Paper 27297, University Library of Munich, Germany.

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