Research papers on financial development and economic growth

Studies on financial development and economic growth in sub-Saharan Africa

However, this research explores the issues surrounding co-integration analysis and the Error Correction model within the Distributed Lag model framework that is, the Autoregressive Distributed Lag Approach to co-integration. Where, Y t is the dependent variable with its lags as independent variables. Generally, using the lag operator L applied to each component of a vector. A detail specification of the model with respect to the variables of this study is presented below.

After the estimation of the above model, the long-run causality test is carried out by comparing the results from the F-statistics of the Wald test. Implying the null hypothesis of the test will be:. The Wald test used is meant to verify if there exist short-run causality from financial development to economic growth. The two sets of critical values reported in Pesaran et al. If the calculated F- statistics lies above the upper level of the band, the null hypothesis is rejected indicating the presence of co-integration. On the other hand, if the calculated F -statistics is below the upper critical value, we cannot reject the null hypothesis of no co-integration.

However, if the critical value lies between the bounds, a conclusive inference cannot be made without knowing the order of integration of the underlying regressors. Recently, Narayan argues that existing critical values which are based on large sample sizes cannot be used for small sample sizes. Hence, Narayan regenerated the set of critical values for the limited data ranging from 30 to 80 observations by using the Pesaran et al.

With a limited annual time series data on Cameroon financial development and economic growth, this study employs the critical values of Narayan for the bounds F-test rather than Pesaran et al. If the probability of R-squared is significant, the null hypothesis is accepted and concluded that the model has no serial correlation, but if it is insignificant, the null hypothesis is rejected and concluded that the model is serially correlated.

In addition, due to the structural changes in the Cameroon economy, it is likely that macroeconomic series may be subjected to one or multiple structural breaks. It is very important to know the optimal lag length, especially in order to estimate the direction of causality. The Akaike and Schwarz criterion is used in this study. Table 4 below shows the results of these tests. The Akaike information and Schwarz criteria used for determination of optimal lag length requires that, the lag length with the smallest critical value for both criterions be chosen.

We see from above that lag 1 have the smallest Akaike and Schwarz information criteria. With information on the lag length, it is now possible to verify if the variables are co-integrated using the bound test technique. The table above indicates estimates of the finance-growth nexus, the effect of credit to private sector, money supply and deposits on economic growth was assessed. The results show that the 1 period lag has a positive and significant impact in the long run.

Acta Universitatis Danubius. Œconomica, Vol 13, No 3 (2017)

This therefore means there is a long run relationship between financial development and economic growth. The table above confirms the bound test results with a positive and significant long run relationship between the financial development indicators and economic growth. This positive and significant impact is coherent with the findings by Khan et al.

The supply of money M2 has a positive and significant impact on economic growth in the short-run, thus using the banking sector to increase the supply of money would facilitate the financing of the economy. The regression results show a negative but significant impact on economic growth in the short-run. This is principally due to the over-liquid nature of the financing system where deposits are dominated with short term deposits Piabuo et al. However, in the long-run, deposits can be used as a vital resource for long term investments which have significant effects on output and economic growth.

The error correction mechanism ECM is used to verify the short-run relationship between credit to private sector, deposits, monetary mass M2 and economic growth GDP. The rule for the existence of a short-run relationship between financial development and economic growth is that the coefficient of the error correction term should be negative and it should be significant.

Our results above confirms this, thus we can conclude that the there is a return to equilibrium in case of disequilibrium at a rate of adjustment of This implies The divergence of results in the short-run and long-run equilibrium explains the fragility of the financial system of Cameroon.

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The system cannot quickly adjust to shocks in the short-run, this is principally due to the dominance of the banking sector which is over liquid and information efficiency is very low in the system. The financial system is made up of the Douala stock exchange which is still at its embryonic stage Piabuo et al. The underdeveloped nature of the financial system is equally characterized by high information asymmetry which limits the effective financing of the private sector by banks thus reducing short run benefits to the economy.

The table above shows that there is no serial correlation and that our model is good. To further verify this, the stability test is used to see if our model is stable in the long-run. When the CUSUM line lies in-between the lines of the level of significance, it shows the model is stable. From the graph above, it can be seen that the CUSUM of Squares line lays in-between the lines of the level of significance.

This implies the model is stable and thus can be used for causality, bound test and long-run association. The different tests carried out above have proven our model is suitable to estimate the causal link as well as the long and short-run relationship between financial development and economic growth. The findings in this paper have broadly confirmed the conventional view which sustains that financial development has a positive and significant impact on economic growth.

Although the view may not be universal, it is widely believed that financial system development boosts economic activities in an economy which leads to economic growth. These results confirm those of Tabi et al. These results as well collaborates with the findings of a study carried out by Beck et al. Evidence of long-run co-integration between financial development and economic growth in this study collaborates with the verifications made by Luintel and Kaln using the Multivariate Vector Auto Regressive model and found a double-causality link between financial development and economic growth in sample of 90 countries.

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However, these results contradict with the findings of Aghion et al. The long- run relationship between financial development and economic growth in this study is in collaboration with the works of Mandiefe which shows that improvement in the financial sector consistently mitigates investment and therefore boosts growth in an economy. Hence, the structural reforms such as financial liberalization which was engineered by the IMF in the s and has been adopted by policy makers in Cameroon play most of the part to financial sector development.

The objective of these reforms has been to reduce trade barriers and increase foreign investment in the country Asongu However, it is interesting to note that effective economic freedom has consistently been found to improve on financial allocation efficiency Asongu d which diminishes issues of surplus liquidity. This eventually recourse both formal and informal financial services and therefore leads to investment in both formal and informal sectors Piabuo et al. In addition, with advancement in ICTs, the Cameroonian banking industry is increasingly becoming synchronized that is, the rate at which banks adjust when is shocks is growing leading to a fall is bank crisis.

The mechanism that translates financial development to economic growth is divergent in Africa. This is principally because the level of financial development and liberalization is not uniform among countries. The results of this study indicates that there is a long-run relationship between financial development and economic growth, in the short-run, credit to private sector and investment have a positive impact on economic growth.

Mandiefe highlights thatcountries with well-developed financial system turn to converge towards their long-run equilibrium faster than countries with less developed financial system. This study outlines the importance of suitable financial policies in Cameroon and goes further to extend literature on the positive impact of financial development on economic growth.

From the empirical results which was based on financial system development, it has been proven consistently that financial development is a fundamental determinant of economic growth of many nations with Cameroon inclusive and an increase in the activities of this sector further mitigates growth. The principal policy recommendation therefore is that adequate consideration and proper recognition such as provision of suitable financial reforms should be given to the financial sector in Cameroon as a determinant of economic growth.

This paper highlights the positive and significant impact of financial development on economic growth which was earlier analyzed by authors such as Bangehot and Schumpeter The unit root, co-integration and the granger causality tests were conducted to reveal these interesting results. The results from this study show that all variables included in the model were integrated in the same order. It equally shows that there exist co-integration between financial development and economic growth; there is a long-run relationship between the variables in the study. In addition, unilateral relationships were discovered to run between variables in this study. This therefore implies that by increasing the amount of money supply in the economy, improving the functions of financial institutions and intermediaries, and improving the investment environment of Cameroon will boost economic growth, which will eventually lead to economic development. We Thank Dr. Chupezi Julius for his advice and encouragement while we were working on this paper. Funding for this paper is entirely by the authors. Sir, I will be very happy to have my article published in your prestigious Journal.

Accept expressions of my greatest satisfaction and joy. This work was carried out in collaboration between all authors. Author PJT designed the study developed the theoretical and empirical literature review equally contributed in the discussion of results. Author SMP performed the statistical data analysis and discussion of results.

Lecture : 05 Financial Development and Economic Growth

Both authors read and approved the final manuscript. Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Skip to main content Skip to sections. Advertisement Hide. Download PDF. Financial Innovation December , Cite as. Financial sector development and economic growth: evidence from Cameroon. Open Access. First Online: 07 November Background The accumulation of financial assets at a more rapid rate than the accumulation of non-financial assets is called financial development according to Shaw Empirical investigation of the relationship between financial development and economic growth is abundant globally.

Empirical evidence over time has not been conclusive on this relationship with three prominent outcomes from these studies; positive, negative and no impact. The tables below shows a summary of studies in different countries or regions, their major findings and it equally indicates the methodology used. Table 1 Literature review excluding Cameroon.

Bloch and Tang 75 countries Time-series analysis They found that there existed no significant relationship between economic growth and development of financial sector. King and Levine 80 countries Contemporaneous regressions and sensitivity analyses They determined a strong correlation between economic growth and development of financial sector.

Jeanneney et al. Hakeem and Oluitan 24 sub-Saharan countries Panel co-integration test, impulse-response and sensitivity analyses They found there existed unidirectional causality from real output to development of financial sector.

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De Gregorio and Guidotti A large number of countries panel data regressions with random effects Negative impact in Latin America Adu et al. Table 2 Financial development and economic growth in Cameroon. Mandiefe Cameroon and South Africa VECM - Positive Long-run relationship between two variables Cameroon -Short-run relationship between bank deposits and economic growth, long-run relationship between economic growth financial development and South Africa. Model The empirical link between financial development and economic growth to be estimated in this paper is adapted from a simple model developed by De Gregorio and Guidotti and Abduroluman In this model the financial development variable is included in an endogenous growth model.