The causality link between financial development and economic growth in Mexico

Abstract

To assess the nexus between financial development and economic growth in Mexico, we used an ARDL model over the period of 1978-2019. Domestic credit to the private sector is used as a proxy for the banking sector development; value of shares traded is used as a proxy for the financial market development. In the long-run, we find that the banking sector development has a positive impact on growth; an increase by 1% in the banking sector development causes an improvement of 0.098% in growth. Moreover, we find a negative relationship between the stock market development and growth; where an increase by 1% in the stock market development causes a decrease by 0.046% in growth. Findings from this paper suggest that Mexican authorities should accelerate in priority the financial reforms of the stock market, and reinforce the regulatory environment in order to stimulate economic growth in the long-run.