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

Thomas Gries, Manfred Kraft () and Daniel Meierrieks
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Manfred Kraft: University of Paderborn

No 17, Working Papers CIE from Paderborn University, CIE Center for International Economics

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.

Keywords: Financial Markets; Economic Growth; Openness; Hsiao’s Granger Causality; Latin America and Caribbean (search for similar items in EconPapers)
JEL-codes: C32 O16 O55 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2008-08
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Citations: View citations in EconPapers (3)

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