The Role of Financial Development for Economic Growth in Caribbean Islands

Gordon, Leo-Rey (2009): The Role of Financial Development for Economic Growth in Caribbean Islands.

Abstract

Aghion, Howitt and Mayer Foulkes postulate that one mechanism by which financial development enhances economic growth is by increasing a nation’s ability to obtain frontier technology, which then increases the rate at which productive activity expands. This study empirically tests this hypothesis for a sample of 12 small island open economies of the Caribbean between 1980 and 2004. Possible simultaneity in the relationship between financial development and economic growth is accounted for by introducing a new proxy for financial development, for which its determination is uncorrelated with economic growth. The results of the empirical analysis shows that financial development enhances economic growth in the Caribbean by increasing country’s steady state level of income per capita, and not by the mechanism put forward by Aghion, Howitt, and Mayer Foulkes (2006).

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial Intermediaries; Economic Growth; Caribbean
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; N - Economic History > N2 - Financial Markets and Institutions > N26 - Latin America ; Caribbean; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence

References

Acemoglu, D., Aghion, P.,and Zilibotti, F. (2002). Distance to Frontier, Selection, and Economic Growth. NBER Working Paper, 9066.

Aghion, P., Comin, D., and Howitt, P., (2006). When Does Domestic Saving Matter for Economic Growth. NBER Working Paper 12275.

Aghion, P., Howitt, P.,and Mayer-foulkes (2005). The Effect of financial Development on Convergence: Theory and Evidence. The Quarterly Journal of Economics, 120 (1), 173-222.

Allen, F., and Gale, D. (1997). Financial Markets, Intermediaries, and Intertemporal Smoothing. Journal of Political Economy, 105 (3), 523-546.

Atkins, F., and Boyd, D., (1998). Convergence and the Caribbean. International Review of Applied Economics, 12 (3), 381-96.

Blackburn, K., and Hung, V. (1998). A Theory of Growth , Financial Development, and Trade. Economica 65, 107-24

Diamond, D., and Dybvig, P. (1983). Bank runs, Deposit Insurance, and Liquidity”. Journal of Political Economy, 91, 401-419.

Frankel, M., (1962). The Production Function in Allocation and Growth: A Synthesis. The American Economic Review 52(5),996-1022.

de la Fuente, A., and Marin, J. (1996). Innovation, Bank Monitoring, and Endogenous Financial Development. Journal of Monetary Economics,38 (2), 269–301.

Galindo, A., & Micco, A. (2004). Do State Owned Banks Promote Growth? Cross-Country Evidence for Manufacturing Industries. Economics Letters, 84(3), 371-376.

King, R.,and Levine, R. (1993). Finance and Growth: Schumpeter Might Be Right. Quarterly Journal of Economics, 108(3), 717-37.

Levine, R., Loayza, N., and Beck,T. (2000). Financial Intermediation and growth: Causality and Causes. Journal of Monetary Economics 46,31-77.

Rioja, F., and Valev, N., (2004) Finance and the sources of Growth at Various Stages of Economic Development. Economic Inquiry, 42:27-40.

Solow, R., (1956). A Contribution to the Theory of Economic Growth. The Quarterly Journal of Economics, 70(1),65-94.