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Causal Relationship Between Financial Development And Economic Growth In South Africa

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  • Edward E GHARTEY

Abstract

The contributions of financial development and economic growth in South Africa are examined over the period 1965 to 2007, after accounting for unknown exogenous structural changes. Two cointegrated relations exist between the real income and each of the real financial development proxies excluding the real domestic credits which yielded a single cointegrated relation with real income. The Granger causality test is conducted after using both unit roots test and bound testing approaches to determine the level relationships between the variables. Generally, both versions of Hsiao’s stepwise Granger causality tests support ‘demand-following’ phenomenon in the short-run, while estimated factor loadings for long-run weak exogeneity tests between each of the real financial development proxies and economic growth support ‘supply-leading’ phenomenon, with the exception of liquid liabilities which showed a feed-back effect. Only the market capitalization ratio is Granger caused by real income in both short- and long-run. Thus supporting ‘demand following’ phenomenon in both periods. Policy-makers are advised to employ policies to enhance the role of domestic credits, and deepened the stock market to improve its contributions to the nation’s economic development.

Suggested Citation

  • Edward E GHARTEY, 2015. "Causal Relationship Between Financial Development And Economic Growth In South Africa," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 15(1), pages 125-142.
    • Handle: RePEc:eaa:aeinde:v:15:y:2015:i:1_10
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    More about this item

    Keywords

    Financial market; stock market; economic growth; bounds test; long-run weak exogeneity test; Granger causality test.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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