Human Capital and Economic Development: Allowing for Causality and Feedback Effects in a VAR Framework

Existing literature has delat inadequately with the casuality lissue in the ink between financial development and economic growth. The paper investigates the empirical link between financial development and economic performance for the small island developing state of Mauritius using a unique time series data set over the period 1952-2004. The analysis uses a VECM framework which allows for dynamic and feedback effects. The results suggest that financial development has been contributing to the output level of the economy in both the short and long-run. It thus highlights the economic importance of financial development and provides new evidence for the case of island economies using the recent cointegration approach.