Financial intermediaries, capital markets, and economic growth: empirical evidence from six countries

This paper investigates the dynamic causal relationship between financial systems and economic growth in three developing countries ? South Africa, Brazil and Kenya ? and three developed countries ? the United States of America, the United Kingdom and Australia ? during the period from 1980 to 2012. The study includes both bank-based and market-based financial systems. The study includes savings as an intermittent variable ? thereby creating a trivariate Granger-causality model. The method of means-removed average is employed to construct bank- and market-based financial development indices. Using the ARDL bounds testing approach, the empirical results of this study reveal that the causality between financial systems and economic growth is indistinct; and it varies widely across countries and over time. Overall, the study finds that there is a long-run causal flow from bank-based financial development to economic growth in the UK and Australia; a distinct feedback loop in the case of Brazil; and a neutrality relationship in the case of Kenya, South Africa and the USA. For market-based financial development, the study finds evidence of bidirectional causality in the case of Kenya; a demand-following hypothesis in South Africa and Brazil; and a neutrality relationship in the case of Australia and the UK. The study, therefore, repudiates the traditional argument, which contends that the finance-growth nexus follows a supply-leading phenomenon