Abstract:
The relationship between economic growth and financial development has been one
of the most researched topics. Theoretically, there are three basic causal
relationships between these two economic variables. These are finance-led growth,
demand following and feedback relationship. Consensus is not also reached among
researchers as far as empirical studies are concerned. The objective of this study is
to examine the direction and significance of causality between these two variables.
Economic growth is measured by annual growth rate of GDP while financial
development is measured by broad money ratio to GDP. It uses panel data analysis
for 24 sub-Saharan African countries for the period 2005-2014. GLS AR (1)
regression model is used to correct for autocorrelation problem. After conducting
for unobserved effects, we found that the causality between these two variables is
bidirectional and the relationships are found to be negative.
