The Finance-Growth Link in Latin America

Posted: 23 Jul 2009

See all articles by Luisa R. Blanco

Luisa R. Blanco

Pepperdine University School of Public Policy

Date Written: July 1, 2009

Abstract

This paper analyzes the relationship between financial development and economic growth in Latin America with a Granger causality test and impulse response functions in a panel vector autoregression (VAR) model. With annual observations from a sample of 18 countries from 1962 to 2005, it is shown that while economic growth causes financial development, financial development does not cause economic growth. This finding is robust to different model specifications and different financial indicators. Interestingly, when the sample is divided according to different income levels and institutional quality, there is two-way causality between financial development and economic growth only for the middle income group and for countries with stronger rule of law and creditor rights. The impulse response functions show that a shock to financial development has a positive impact on economic growth only for these subsamples, but the net effect of financial development on growth is relatively small.

Keywords: Financial Development, Latin America

JEL Classification: G20, O16, O54

Suggested Citation

Blanco, Luisa R., The Finance-Growth Link in Latin America (July 1, 2009). Southern Economic Journal, Vol. 76, No. 1, 2009. Available at SSRN: https://ssrn.com/abstract=1437749

Luisa R. Blanco (Contact Author)

Pepperdine University School of Public Policy ( email )

24255 Pacific Coast Highway
Malibu, CA 90263
United States

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