Finance and Growth Causality: A Test of the Patrick's Stage-of-Development Hypothesis

Yanique Carby · Summer Intern · Roland Craigwell · Allan Wright

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Monetary Policy and Economic Impact Economic Theory and Policy Economic Growth and Development

Abstract

This paper uses the financial system of Barbados over the period 1946 to 2011 to test the hypothesis of Patrick (1966) which states that the direction of causality between financial development and economic growth changes over the course of development. That is, at the early stage of development, the supply-leading impetus is evident but as real growth occurs in the economy, it will spark demand for financial services. The results from the Vector Error Correction Mechanism (VECM)/Vector Autoregression (VAR) models do not lend support for this thesis.

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1956A Contribution to the Theory of Economic Growth 1988On the mechanics of economic development 2003The Theory of Economic Development 1993Finance and Growth: Schumpeter Might Be Right 1984Financial Intermediation and Delegated Monitoring 2010Investigating Causal Relations by Econometric Models and Cross-Spectral Methods n.d.Financial Development and Economic Growth: Views and Agenda 1974Money and Capital in Economic Development.

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