Financial sector development and growth in small open economies

Sunday Osaretin Iyare and Winston Moore

Applied Economics, 2011, vol. 43, issue 10, 1289-1297

Abstract: This article investigates the Granger causal relationship between financial development and economic growth for four small open economies over the period 1960 to 2003. Both long- and short-run Granger causality tests are used to assess the finance-growth nexus. The results suggest that there is a positive association between financial development and growth in all countries. However, the long-run causality tests show that growth tends to lead financial development in Singapore and Jamaica, financial development leads growth in Trinidad and Tobago and there is a bidirectional link in Barbados. These results therefore suggest that cross-country studies could overstate the impact of financial development on growth, since they ignore differences - even in relatively homogenous groups.

Date: 2011
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DOI: 10.1080/00036840802600350

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