Finance,
Volatility and Growth in Brazil (1870-2003): Non-Linear Time-Series Evidence
with Menelaos Karanasos and Jihui
Zhang
June 2011
Although there is ample consensus among economic historians that Brazil
is one of the fastest growing
economies in the world, it grew intercalating periods of stellar (e.g.
the 1960s “Miracle”) with periods of
disastrous performance (e.g. the 1980s “Lost Decade”). There is a dearth
of econometric studies analysing
such episodes in a long-run framework. For this paper, we put together
a unique annual time series historical
data set and use the power-ARCH (PARCH) estimator to evaluate the main
explanations economic historians
have offered for the remarkable economic performance of Brazil from 1870
to 2003, namely domestic financial
development, international finance, trade openness, and public deficits.
The major findings are as follows:
(1) financial development and trade openness both show a strong positive
direct effect on economic growth,
(2) public deficits affect economic growth in Brazil but mostly indirectly,
through the volatility channel, and
(3) the effects of financial development and trade openness on growth are
strongly negative in the short-run
but they are positive in the long-run and considerably larger.