FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH: SOME CARIBBEAN EMPIRICAL EVIDENCE

The paper examines the role of financial development and economic growth in Barbados, Jamaica and Trinidad and Tobago. Causality tests conducted by using the stepwise Granger causality method, after addressing respective unknown exogenous structural changes, and using bounds testing approach to determine the level relationships between economic growth and each respective real financial development proxies, produced more robust results. Thus, economic growth drives real financial development in the short-run in all three countries, with Trinidad-Tobagoi¯s results being overwhelming. Long-run weak exogeneity tests from respective factor loadings indicate similar demand-following phenomenon in Jamaica, although results are mixed in Barbados and Trinidad-Tobago. Policymakers are therefore advised to make the overall economic growth of Jamaica their policy priority, and not favor its financial market with special policies over both near term and long-run. Similar policy is strongly recommended for both Trinidad-Tobago and Barbados. However, in Barbados and Trinidad-Tobago, mixed Granger causal relationship results suggest that extending resources as incentives to boost up both financial market development and economic growth will benefit them over the long-run.