Deregulation, Financial Development and Economic Growth in Mexico: Long-Term Effects and Causality

Abstract

The literature on finance and economic growth establishes that a deregulated financial system increases economic growth in the long run. Mexican financial institutions have endured through two great stages: regulation until 1988 and liberalization after this date until today. Under this framework, it is investigated if in the long run financial development in Mexico has improved productive activity. Specifically, by using a cointegration model, two long-run effects are examined: 1) financial regulation has a negative effect on economic growth, and 2) financial intermediation has a positive impact on productive activity. Moreover, with a short-run causality test based on an error correction model, it is found that neither financial development nor regulation affects the dynamics of GDP; however, regulation does have a negative effect on financial development.

Keywords: financial development, deregulation, time series, Mexico

JEL Classification: O16, O47, O54, C22