Finance and Growth: Is there a link between the Portuguese financial system and aggregate productivity?

Mestrado em Economia Monetária e FinanceiraThe empirical and theoretical research on finance and growth literature shows that a well-developed financial system is supposed to have positive impact on economic growth, through the reduction of information and transaction costs, channeling more savings' for higher return investment projects and better project managers. In this paper, I address the finance and growth relationship by studying the links between/the Portuguese financial system and Portuguese productivity growth, through a VAR analysis. By estimating four VAR models with different combinations of variables, I provide evidence that the Portuguese financial system has an impact on growth over the 1960-2008 observation period. However, it is not totally clear that the impact is either positive or negative, depending on the type of financial intermediaries concerned. Specifically, the results show that domestic credit (from monetary financial institutions) and credit risk guarantees (from insurance activity) generally had a negative impact, at least in the short run, while traded financial securities (our proxy for liquidity stock market) show up in all four models with positive impact on Portuguese productivity growth. It also shows that the inverse causality of growth in finance is strong, especially in the long term