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Financial Deepening, Trade Openness and Economic Growth in Latin America and the Caribbean

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Author Info

  • Thomas Gries

    ()
    (University of Paderborn)

  • Manfred Kraft

    ()
    (University of Paderborn)

  • Daniel Meierrieks

    (University of Paderborn)

Abstract

This contribution investigates the direct and indirect causal interactions between financial deepening, trade openness and economic growth for 13 Latin American and Caribbean countries. Using a rather general approach to identify indicators for financial deepening and to detect Granger causality within a 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 unstable in the long run. Most results indicate a demand-following or insignificant relationship between finance and growth in Latin America. This finding seems to be consistent with regard to the weakness and deficiencies of the region's financial systems. Further, there is no evidence that finance indirectly and unilaterally induces growth via the channel of trade openness. Thus, policies that prioritize financial and trade liberalization cannot be supported by this study. Instead, a holistic policy approach seems to be preferable that promotes the determinants of both real sector growth and financial development. As a result, financial factors may positively and significantly contribute to economic development in the region.

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File URL: http://groups.uni-paderborn.de/wp-wiwi/RePEc/pdf/ciepap/WP17.pdf
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Bibliographic Info

Paper provided by University of Paderborn, CIE Center for International Economics in its series Working Papers CIE with number 17.

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Length: 36 pages
Date of creation: Aug 2008
Date of revision:
Handle: RePEc:pdn:ciepap:17

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Keywords: Financial Markets; Economic Growth; Openness; Hsiao’s Granger Causality; Latin America and Caribbean;

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Cited by:
  1. Qazi Hye & Wee-Yeap Lau & Marie-Aimée Tourres, 2014. "Does economic liberalization promote economic growth in Pakistan? An empirical analysis," Quality & Quantity: International Journal of Methodology, Springer, Springer, vol. 48(4), pages 2097-2119, July.
  2. Kyophilavong, Phouphet & Salah Uddin, Gazi & Shahbaz, Muhammad, 2014. "The Nexus Between Financial Development and Economic Growth in Lao PDR," MPRA Paper 57308, University Library of Munich, Germany, revised 14 Jul 2014.
  3. Phouphet KYOPHILAVONG & Gazi Salah Uddin & Muhammad Shahbaz, 2014. "The Nexus Between Financial Development and Economic Growth in Laos," Working Papers, Department of Research, Ipag Business School 2014-447, Department of Research, Ipag Business School.
  4. 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.

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