Banks, stock market development and economic growth in South Africa: a multivariate causal linkage

Abstract

This article investigates the dynamic causal relationship between bank-based financial development, stock market development and economic growth in South Africa – during the period 1980–2012. The study includes savings and investment as intermittent variables – thereby creating a multivariate Granger-causality model. Using the newly developed autoregressive distributed lag (ARDL)-bounds testing approach, the empirical results of this study reveal that there is a distinct short- and long-run unidirectional causal flow from stock market development to economic growth in South Africa. The results also indicate that there is a unidirectional causal flow from bank-based financial development to stock market development in the short run. The study, however, fails to find any causality between bank-based financial development and economic growth. The study, therefore, concludes that the development of the real sector in South Africa is largely driven by stock market development.