Abstract
This paper seeks to investigate the relationship between savings and financial development in Zimbabwe using both autoregressive distributive lag (ARDL) and vector error correction model (VECM) approaches for comparison purposes with monthly time series data from January 2009 to August 2015. Four distinct hypotheses emerged from the literature and these are the savings-led financial development, financial development-led savings, feedback effect and the insignificant/no relationship hypothesis. The existence of diverging and contradicting views in empirical literature on the subject matter is evidence that the linkage between savings and financial development is still far from being concluded. Both F-Bounds and Johansen co-integration tests observed that there is a long run relationship between savings and financial development in Zimbabwe. What is even more unique about this study is that both ARDL and VECM noted the presence of a bi-directional causality relationship between savings and financial development in the short and long run in Zimbabwe. The implication of this study is that in order to increase economic growth, Zimbabwe authorities should increase savings mobilization efforts in order to boost financial development, which in turn attracts more savings inflow into the formal financial system.
Highlights
Theory states that savings contribute towards economic through its stimulating effect on investment activities and financial sector development (Lucas, 1988; Romer, 1986)
Variables definition and a priori expectation: Using monthly time series data obtained from the Reserve Bank of Zimbabwe website, this study examined the relationship between savings and financial development in Zimbabwe during the multicurrency regime period
vector error correction model (VECM) approach noted the existence of a bi-directional causality relationship between savings and financial development in the long run in Zimbabwe, result which is similar to the autoregressive distributive lag (ARDL) framework finding
Summary
Theory states that savings contribute towards economic through its stimulating effect on investment activities and financial sector development (Lucas, 1988; Romer, 1986). Previous time series studies on savings and financial development linkages have mainly used data whose number of observations is just above the minimum required, used at most one econometric estimation technique, either used quarterly or annual time series data, avoided economic and political volatile countries such as Zimbabwe. The comparison of results from two different econometric estimation techniques (ARDL and VECM) in a single study makes this paper a worthwhile contribution to the literature This is the first study the author is aware of, done in a country: (1) still reeling from a period of hyperinflation during which time the people’s savings in financial institutions had been completely wiped out and (2) which had adopted dollarization as a currency policy or in a multicurrency regime. The fifth section explains the research methodological framework, results and interpretation whereas the sixth section concludes and suggests areas for future research
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