Abstract
Purpose The purpose of this study is to empirically weigh the evidence for financial depth, liquidity and efficiency role to economic growth, and test for the existence of cointegration between financial development variables and economic growth in Tanzania. Design/methodology/approach The study used the autoregressive distributed lag model with bound testing procedures. The sample covered yearly time-series data from 1980 to 2017, i.e. 38 years. Findings The results suggest that financial system depth is positively related to economic growth in the short run and that financial system liquidity and efficiency is strongly negatively associated with economic growth both in the short and long run. Further, it is found that financial development is cointegrated with economic growth. Thus, financial reforms and liberalisation have not fully brought the desired positive effects on economic growth yet. Originality/value The study uses principal component analysis to capture specific dimensions within the financial system as an intuitive way to aggregate financial development effects. Unlike studies that included several countries with heterogeneous characteristics, which are sometimes difficulty to homogenise, in recognition of countries’ unique experiences, this study uses data from Tanzania as a specific case. It documents pertinent pieces of evidence for a developing economy necessary for financial policy adjustments post the financial and economic liberalisation and reforms period. It nevertheless sheds light on financial policies for other comparable developing economies during and after both financial and economic liberalisation settings.
Highlights
In 1986, the Tanzanian economy embarked on economic transformation programmes
PC1 and PC2 are sub-indices developed from principal component analysis (PCA) to aggregate financial development measures into fewer indicators as much as possible
The analysis was based on four measures of financial development, which was aggregated into two proxies
Summary
In 1986, the Tanzanian economy embarked on economic transformation programmes. Economic liberalisation and later financial reforms were instituted. This current study covers the period from 1980 to 2017. It can be split into three main epochs (Robinson et al, 2011). The first epoch spans from 1980 to 1985, which covered the end phase of Ujamaa socialism. Policies characterising it were state control of the economy and stateownership of all major enterprises. The pricing and exchange rates were not based on market economy, devaluation and expansionary fiscal and monetary policies were the norm
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