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The Role of Financial Development for Economic Growth in Caribbean Islands

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  • Gordon, Leo-Rey

Abstract

Aghion, Howitt and Mayer Foulkes postulate that one mechanism by which financial development enhances economic growth is by increasing a nation’s ability to obtain frontier technology, which then increases the rate at which productive activity expands. This study empirically tests this hypothesis for a sample of 12 small island open economies of the Caribbean between 1980 and 2004. Possible simultaneity in the relationship between financial development and economic growth is accounted for by introducing a new proxy for financial development, for which its determination is uncorrelated with economic growth. The results of the empirical analysis shows that financial development enhances economic growth in the Caribbean by increasing country’s steady state level of income per capita, and not by the mechanism put forward by Aghion, Howitt, and Mayer Foulkes (2006).

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 49566.

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Date of creation: Dec 2009
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Handle: RePEc:pra:mprapa:49566

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Keywords: Financial Intermediaries; Economic Growth; Caribbean;

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References

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  1. Philippe Aghion & Diego Comin & Peter Howitt, 2006. "When Does Domestic Saving Matter for Economic Growth?," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c011_030, DEGIT, Dynamics, Economic Growth, and International Trade.
  2. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  3. Ross Levine & Norman Loayza & Thorsten Beck, 2002. "Financial Intermediation and Growth: Causality and Causes," Central Banking, Analysis, and Economic Policies Book Series, Central Bank of Chile, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (S (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 2, pages 031-084 Central Bank of Chile.
  4. de la Fuente, Angel & Marin, JoseMaria, 1996. "Innovation, bank monitoring, and endogenous financial development," Journal of Monetary Economics, Elsevier, Elsevier, vol. 38(2), pages 269-301, October.
  5. Franklin Allen & Douglas Gale, 1995. "Financial Markets, Intermediaries, and Intertemporal Smoothing," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 95-02, Wharton School Center for Financial Institutions, University of Pennsylvania.
  6. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  7. Felix Rioja & Neven Valev, 2004. "Finance and the Sources of Growth at Various Stages of Economic Development," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 42(1), pages 127-140, January.
  8. repec:fth:wobaco:1083 is not listed on IDEAS
  9. Fiona Atkins & Derick Boyd, 1998. "Convergence and the Caribbean," International Review of Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 12(3), pages 381-396.
  10. Arturo Galindo & Alejandro Micco, 2003. "Do State-Owned Banks Promote Growth?: Cross-Country Evidence for Manufacturing Industries," IDB Publications 6506, Inter-American Development Bank.
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