Effect of Financial Depth on Output and Economic Growth

Abstract

A lot of theoretical insights have been provided on the relationship between the financial and real sectors of the economy. The emerging theoretical postulations, which are devoid of consensus, have since been the subject of empirical investigations in respect of which, again, there is no consensus, not to talk of unanimity. Thus, this state of lack of consensus in the findings of the existing empirical studies calls for further studies that are aimed at resolving the contradictions. This informs the objective of the study, which is to examine the effect of financial depth on output and economic growth across African countries spanning from 1980 to 2019. The theoretical background rests on neo-classical theory and the supply-leading hypothesis. The study employed the dynamic fixed effect (DFE) estimation technique. The result reported that the three alternative proxies for the level of financial depth have positive effects on both overall economic growth and sectoral output growth. Also, each of the seven conditioning variables has the expected effects on economic growth. Based on the findings, the study therefore recommends that policymakers take measures aimed at deepening the level of the different forms of finance in order to promote economic growth.