Financial development and economic growth in Brazil

[We examine the association between economic growth and financial development for the Brazilian economy from 1997 to 2018. Vector-autoregressive (VAR) models and Granger causality tests are employed, with financial development represented by two different variables, the first being the “banking channel” (total bank loans to the private sector as a percentage of GDP), and the second being the “stock market channel” (market value of the companies listed at B3 - Brazilian Stock Exchange - as a percentage of GDP). Economic growth is measured by the real growth of Gross Domestic Product. The empirical analysis adopts the procedures developed by Toda and Yamamoto (1995). The main conclusions are that there exists strong evidence of unidirectional Granger causality between economic growth and financial development (from the latter to the former), when measured by both the banking and stock market channels, contradicting several results available in the literature.