Munich Personal RePEc Archive

Financial sector development and economic growth nexus in South Africa

Sunde, Tafirenyika (2012): Financial sector development and economic growth nexus in South Africa.

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Abstract

The main purpose of this study was to establish the nexus between financial sector development and economic growth in South Africa. The main motivation of the study is that although many studies on this nexus have been carried out in both developed and developing countries very few similar studies have been carried out in Sub-Saharan countries which include South Africa. This has led to the dearth of relevant literature in Sub-Saharan Africa. Cointegration and error correction methodology together with Granger causality tests were used to establish how economic growth and financial sector development are related in South Africa. The results of the study show that economic growth is explained by the financial sector variables (broad money stock as a percentage of GDP and total credit to the private sector as a percentage of GDP) and control variables (inflation, exchange rate, and real interest rates). The Granger causality test results show that there is generally a bidirectional relationship between economic growth and financial sector development which implies that if the economy grows the financial services sector also grows and vice versa. We recommend that more studies using more growth and financial indicators than the ones included in this study need to be carried out using the same methodology applied in this study. In addition, the role of equity markets in economic growth also needs to be investigated.

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