Abstract
In this study, we employed the dynamic autoregressive distributed lag bounds test, co-integration test and granger causality test to examine the long-run and short run interrelationship among financial deepening, stock market development and economic growth for eight (8) countries in Africa using annual data for the period 1996-2019 to establish the interrelationship between Africa’s developing capital markets and the real side of their economies. While we found the series in five countries (Nigeria, Algeria, Namibia, Kenya and Mauritius) to be co-integrated; three other countries were not. The result from the granger causality test established bi-directional causality between economic growth (lnGDP) and stock market development (STMCAP/GDP) in Algeria, Namibia and Mauritius as the remaining five countries recorded only unidirectional causality from economic growth (lnGDP) to stock market development (STMCAP/GDP). Our panel analysis revealed a positive relationship between stock market development (STMCAP/GDP) and financial deepening (M2/GDP). There is a positive relationship between economic growth (lnGDP) and financial deepening (M2/GDP) for all the countries except for Eswatini and Mauritius. Further analysis of the interrelationship with economic growth (lnGDP) as dependent variable found significant and varying results for the time series across countries. However, the results from the panel regression found no significant effect from both financial deepening (M2/GDP) and stock market development (STMCAP/GDP) in Africa. To this end, we recommend swift and systematic reforms tailored towards improving the efficiency for their capital markets.
Highlights
The roles of financial markets and the deepening of the financial systems are very crucial to the advancement of all modern societies
In this paper we examine the interrelationship among financial development, stock market development and economic growth in eight (8) Africa countries (Nigeria, Algeria, Namibia, Kenya, Mauritius, Eswatini, South Africa and Tunisia) using annual data for the period 1996 to 2019 to highlight the interrelationship between the financial sector and the real side of the economy
We showed from the granger causality test that stock market development only causes economic growth in Algeria, Namibia and Mauritius whilst a unidirectional causality from economic growth to stock market development was found in Kenya, Nigeria, Tunisia, Eswatini and South Africa
Summary
The roles of financial markets and the deepening of the financial systems are very crucial to the advancement of all modern societies. This is in line with modern growth theories highlighting the significance of stock markets and financial development in the pursuit of macroeconomic goals even though both the empirical and theoretical literature remains inconclusive and populated with mixed findings. The ratio of stock market capitalisation to GDP is our measure for stock market development, the ratio of broad money (M2) to GDP is our measure for financial deepening and annual series of GDP as our measure of economic growth.
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