Short Term External Debt and Economic Growth—Granger Causality: Evidence from Latin America and the Caribbean

Abstract

In this paper the direction of the causality relationship between economic growth and short-term external debt was investigated for 27 Latin American and Caribbean countries over the period 1970–2003. The empirical results suggest the existence of bidirectional causality relationships between the two variables for several countries, which means that the performance of both variables is interrelated. The main finding is that in the short- and long- runs Granger causality from economic growth to short-term external debt is present in 13 Latin American and Caribbean countries. With the evidence suggesting, in the majority of estimated cases, economic growth Granger caused short-term external debt, short-term policy decisions related to capacity absorption enhancement should be encouraged in Latin America and the Caribbean. Further work in this regard is encouraged in the form of panel studies or specific individual case studies inclusive of foreign trade linkage parameters to capture the potential effects of omitted variables.