The causal relationship between financial development and real sector in sub-Saharan Africa (1986–2015)

Abstract

This study focused on investigating the causal relationship between financial development and real sector in sub-Saharan Africa during the period 1986–2015. This study used panel data containing 38 countries, while two-step generalised method of moment was used as the estimation techniques. In the full sample consisting of 38 countries, the study found bidirectional causality between financial development and real sector. In low-income countries, a bidirectional causality was found between financial development and real sector in the short run. The study found no causal relationship between financial development and real sector in the lower-middle-income countries except when domestic credit to the private sector was used as an indicator of financial development. The difference in the direction of causality of low-income countries and lower-middle-income countries was attributed to the heterogeneous characteristics of the income groups. The results also show that different income groups produce different causality relationships between financial development and real sector which is an indication that the causal relationship varies among different countries.