Nexus between financial innovation and economic growth in Lesotho: evidence from ARDL and nonlinear ARDL approaches

Abstract

This paper sets out to explore the relationship between financial innovation and economic growth in Lesotho using time series data spanning 1980-2016. The autoregressive distributed lag (ARDL) bounds testing approach is applied to gauge long-run cointegration while the nonlinear ARDL (NARDL) model is used to test validity of short and long-run symmetric effects of financial innovation on economic growth. Results of the bounds tests revealed existence of long-run cointegration between financial innovation and economic growth in Lesotho. Positive changes in financial innovation related positively with economic growth in the long-run but had a statistically insignificant impact in the short-run. Furthermore, negative changes in financial innovation were found to have no significant impact on Lesotho's economic growth in the short and long-run. The Government of Lesotho is recommended to foster greater financial innovation in the financial system to assist financial services expansion and efficient financial intermediation to support sustainable economic growth.