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

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.