FINANCE AND GROWTH CAUSALITY

Author(s): CRAIGWELL, ROLAND; WRIGHT, ALLAN; CARBY, YANIQUE; (2012)

Created 23 Jul, 2012
Categories Working Papers Roland Craigwell Special Collection
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There exists a wealth of literature that aims to establish what causal relationship exists between financial development and economic growth. That is, whether financial development causes economic growth, the “supply-leading hypothesis” or is it that economic growth leads financial development, the “demand-following hypothesis”. Despite the number of research done in the area, there is a gap as it relates to studying the relationship between finance and growth over the course of development in the country. This study seeks to test the hypothesis of Patrick (1966) in the financial system of Barbados, which states that the direction of causality between financial development and economic growth changes over the course of development; i.e., at the early stage of development the supply-leading impetus is evident but as the real growth occurs in the economy, it will spark demand for financial services. The ratio of M2 to GDP is used as a measure of financial development and real GDP as a measure of economic growth. The results lend support for the demand-following hypothesis throughout the entire sample and sub-samples.

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