Abstract
PurposeThe purpose of this paper is to contribute to empirical evidence by recognizing the importance of stock markets in the financial system and consequently its causality to economic growth and vice versa.Design/methodology/approachThe study used the autoregressive distribute lag model (ARDL) with bound testing procedures, the sample covered quarterly time-series data from 2001q1 to 2019q2 in Tanzania.FindingsThe results suggest that stock market development have both negative and positive causality for both short-run dynamics and long-run relationship with economic growth. Economic growth is found to only cause and relate negatively to liquidity both in the short-run and in the long-run. The results show predominantly a unidirectional causality flow from stock market development to economic growth and finds partial causality flow from economic growth to stock market development, as represented by stock market turnover which proxied liquidity.Originality/valueThe use of quarterly data to reflect more realistically the dynamics of the variables because yearly data may sometimes cover-up specific dynamics that may be useful for prediction and policy planning. The study uses indices to capture general aspects within the stock market against economic growth as an intuitive way to aggregate the stock market development effects.
Highlights
The debate on causality between financial development and economic growth have hatched more questions than solutions. This debate has its genesis in the work of Schumpeter (1911), he theorized that a healthy financial system allocates economic resources efficiently among technologically innovative entities which in turn spur economic growth
The results suggest that stock market development have both negative and positive causality for both short-run and long-run causality with economic growth
It is recommended that regulators need to embark on improving stock market regulations and information flow because stock markets serve to improve domestic resources mobilization and allocation into productive sectors of the economy for growth channeling, more efficiently and effectively if policies, regulations and laws are effective
Summary
The debate on causality between financial development and economic growth have hatched more questions than solutions. This debate has its genesis in the work of Schumpeter (1911), he theorized that a healthy financial system allocates economic resources efficiently among technologically innovative entities which in turn spur economic growth. Published in Review of Economics and Political Science. I acknowledge the anonymous reviewers from the "Review of Economics and Political Science" Journal who helped to critically improve this work.
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