Abstract
The relationship between financial development and investment has become the central focus for empirical studies since the emergence of endogenous growth models. Bank-based measures and Financial markets-based measures have often been used as proxies for financial development in many studies. However, results based on these proxies have often yielded different interpretations since the concept of financial development is broad and a multidimensional process. The Financial development index of the International Monetary Fund (IMF) presents a more comprehensive measure for financial development, and it is also useful for investigating financial development and other economic outcomes. Also, investment is a versatile concept since it takes on many forms and sources. We adopt the panel VAR estimation techniques to examine the endogenous relationship between financial development and investment using the Financial development index, general government investment, private investment, and foreign direct investment (FDI) as dependent variables. The study reveals that private investment has a positive endogenous relationship with financial development. Moreover, the causal relationship between financial development and private investment is bilateral. Also, financial development has a positive influence on FDI. Furthermore, the study suggests that financial development has a strongly exogenous relationship with General government investment. Keywords : Financial development index; Private investment; General government investment; Foreign direct investment; Panel VAR. DOI: 10.7176/JESD/10-14-09 Publication date: July 31 st 2020
Highlights
The impact of financial development on economic growth is well entrenched in economic literature (see Goldsmith, (1969); Beck et al, (2000); Demetriades and Hussein, (1996); King (1993); Levine (1997); Levine and Zervos (1998); Demirgüç-Kunt and Levine (2004); Rousseau and Wachtel (2011))
The main results for the panel vector autoregressive models (VAR) estimation, Forecast Error Variance Decomposition (FEVD), Impulse Response Functions (IRFs), and Granger causality test are discussed
The results suggest that a percentage increase in private investment is associated with 0.107% increase in financial development in the short run, at a 1% significance level on average ceteris paribus
Summary
The impact of financial development on economic growth is well entrenched in economic literature (see Goldsmith, (1969); Beck et al, (2000); Demetriades and Hussein, (1996); King (1993); Levine (1997); Levine and Zervos (1998); Demirgüç-Kunt and Levine (2004); Rousseau and Wachtel (2011)). From the endogenous growth point of view, financial development leads to increased savings, which raises the level of capital accumulation for investment, and leads to productivity (Demetriades and Hussein (1996); Levine (1997)). A typical situation which mirrors the endogenous growth explanation is the recent gains in the economic growth of some sub-Saharan African countries where in the past financial development was lagging as a result of macroeconomic and political instability which plunged many countries the subregion into economic woes and widespread poverty. According to an IMF report, the sub-Saharan African region is becoming the fastest growing after Asia (IMF, 2016)
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