Abstract
This study investigated the link between financial development and economic growth in Togo for the period 1981-2010. The study employed Johansen’s cointegration and Granger causality testing procedure in the context of Vector Error Correction Method (VECM). The result shows a positively and statistically significant effect of financial development on economic growth in Togo and Granger causality test supports supply-leading view that comes from financial development to economic growth. This means that the causal relationship between financial development and economic growth in Togo is unique and is running from financial development to economic growth. The empirical results further confirm a unique cointegration relationship among real GDP per capita, financial development, inflation, primary completion rate, openness, foreign direct investment and real exchange rate. In addition, the variable primary completion rate, foreign direct investment and real exchange rate contribute positively to economic growth in Togo while inflation and openness discourage the economic growth in the Togo. The findings of the study call for the introduction of effective policy measures to deepen financial sector since financial development is an essential precondition for the positive impact of FDI on economic growth. Key words: Financial development, economic growth, devaluation, Togo.
Highlights
A significant number of empirical studies have attempted to investigate the link between financial sector development and the economic growth
In order to achieve the objective of the study, Financial Development, Primary completion rate, Devaluation and Foreign direct investment are expected to have positive effect on economic growth in Togo while Inflation and Openness are expected to have a negative effect on economic growth in Togo
Lyt = natural logarithm of real GDP per capita, Fdt = measure of financial development proxy by variable credit facilities available to domestic sector, Inf t = inflation, consumer prices, Opt = openness measured as exports plus imports as a percentage of GDP, Pm t = primary completion rate used as measure of human capital development, LFDI t = natural logarithm of foreign direct investment, Rexch t = real exchange rate between USA dollars and franc CFA, variable introduced to capture the effect of the franc-CFA devaluation, e t = error term
Summary
Some other authors argue that there is no link between financial development and economic growth (Lucas, 1988; Mohamed, 2008) This argument seems not to be true since when we experience financial crisis, countries economic growth tend to slow down. There were privatizations of financial institutions in recent past, which were initially owned by government It is for these reasons that this study is set out to investigate the impact of financial development on economic growth in Togo. This study is set out to explore the relationship between financial development and economic growth in Togo while taking into account the endogeneity issue and the currency devaluation.
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