I don't know about the use of magical realism in film. But I do think that if you know Italy, you appreciate how well these things worked (they wouldn't have worked as well in a film about an industrialist working in his office in Milan, for example).
There are so many saints revered in regions, towns, even just in families, in Italy. Faith and magic are part of life, even if the modern Italian seems blase about religion. Remember that these characters came from a rural area - the film begins with them climbing to a cross with stones in their mouths.
This is all very much like what some Mexican people recognize about Mexico. All the saints, the rituals, the magic - which is why 'Like Water for Chocolate' is Mexican, naturally, and beautifully.
The pennies falling on his face, the sign from God coming at the beginning of the film, the river of milk. All of it was perfect for this film and for Italians. Why a giant carrot? All I can think is that perhaps carrots were a staple crop in that area and everything may have depended on how the crop grew. Imagining and visualizing a giant carrot is a little unusual but not in the context of the culture of rural Sicily.
(later) AH! I just read the interview with Crialese, mentioned in a later thread. He himself talks about the postcards of giant vegetables that the men see at the beginning of the movie. So, yeah, the giant carrot makes sense now!
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