The Relationship Between Financial Development and Economic Growth in Latin American Countries: The Role of Banking Crises and Financial Liberalization

This paper examines the effects of banking crises and financial liberalization on the relationship between financial development and economic growth in a panel of 16 Latin American countries over the period 1973-2005. Applying the dynamic panel method that incorporates Generalized Method of Moments system, the main findings show that financial liberalization did not result in a positive relationship between financial development and economic growth due to the emergence and recurrence of banking crises. Our findings also confirm those of theoretical approaches that suggest financial liberalization can generate banking crises, while bringing into question approaches that support a positive relationship between financial development and economic growth.