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

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

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

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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
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment
O55 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Africa

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