The impact of financial development and trade on the economic growth of Bolivia

The relationship of economic growth with financial development and trade openness is analyzed with annual time-series data for Bolivia during the 1940-2010 period. The analysis is an advance over previous work in several ways. First, the hypothesis of a long-run relationship between these variables is tested using bivariate cointegrated systems and employing the methodology of cointegration analysis. Second, causality tests utilizing standard Granger regressions and ECM models are carried out to determine the direction of causality between indicators of economic growth and financial development, and economic growth and trade openness. Lastly, the study comprises a period of seventy years, a first for a study of this kind on Bolivia. The empirical results demonstrate that there is indeed a long-run equilibrium relationship, and that unidirectional Granger causality runs from the indicators of financial development and trade openness to economic growth.