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

Author

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  • 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.

Suggested Citation

  • Thomas Gries & Manfred Kraft & Daniel Meierrieks, 2008. "Financial Deepening, Trade Openness and Economic Growth in Latin America and the Caribbean," Working Papers CIE 17, Paderborn University, CIE Center for International Economics.
  • Handle: RePEc:pdn:ciepap:17
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    Cited by:

    1. Phouphet Kyophilavong & Gazi Salah Uddin & Muhammad Shahbaz, 2016. "The Nexus between Financial Development and Economic Growth in Lao PDR," Global Business Review, International Management Institute, vol. 17(2), pages 303-317, April.
    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.
    3. Phouphet KYOPHILAVONG & Gazi Salah Uddin & Muhammad Shahbaz, 2014. "The Nexus Between Financial Development and Economic Growth in Laos," Working Papers 2014-447, Department of Research, Ipag Business School.
    4. 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, vol. 48(4), pages 2097-2119, July.
    5. Nahed Zghidi & Zouheir Abida, 2014. "Financial Development, Trade Openness and Economic Growth in North African Countries," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 17(53), pages 91-120, September.
    6. Christian Lambert Nguena, 2013. "Inclusive and Pro-Poor Financial System in Africa: Does Islamic Finance Development Matter?," AAYE Policy Research Working Paper Series 13_002, Association of African Young Economists, revised Nov 2013.
    7. Christian Lambert Nguena & Roger Tsafack Nanfosso, 2013. "What Drives and Limits Financial Deepening Dynamics? Fresh Empirical-based Policy Lessons for African Sub-Regions," AAYE Policy Research Working Paper Series 13_003, Association of African Young Economists, revised Nov 2013.
    8. NGUENA Christian-Lambert & NANFOSSO Roger, 2014. "Macroeconomic Factors and Dynamics of Financial Deepening: An empirical Investigation applied to the CEMAC Sub-region," Working Papers 14/015, African Governance and Development Institute..
    9. 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.
    10. Christian Lambert Nguena & Roger Tsafack Nanfosso, 2013. "Financial Deepening Dynamics and Implication for Financial Policy Coordination in a Monetary Union: the case of WAEMU," AAYE Policy Research Working Paper Series 13_005, Association of African Young Economists, revised Nov 2013.

    More about this item

    Keywords

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

    JEL classification:

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

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