Causality between financial development and economic growth: evidence from sub-saharan africa

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.