Abstract
This paper evaluates the dynamic causal relationship between financial development, savings, investment and economic growth in Botswana from 1976-2014 by employing a multivariate causality model. Results reveal that it is chiefly investment that drives the bank-related and stock exchange-based financial sectors in the short run. Stock exchange-based financial development drives bank-related financial development and savings in both the short run and the long run. While, savings are found to Granger-cause investment. Economic growth Granger-causes investment and savings, both, in the short run and long run. Further, only bank-related financial development is found to Granger-cause economic growth in Botswana.
Highlights
There is an ongoing argument among scholars concerning the direction of causality between bank-related and stock exchange-based financial development and savings, investment and economic growth
There are four views that have been empirically proven to exist in literature, that is, the supply-leading hypothesis, demand-following hypothesis, bidirectional-causality view and the fourth view stipulating that financial development and economic growth have no causal relationship (Nyasha and Odhiambo, 2015)
The relationship between financial development and investment is articulated as having four main conclusions by Muyambiri and Odhiambo (2017), that is: a) Financial development Granger-causes investment (Xu, 2000; Caporale et al, 2005, Rousseau and Vuthipadadorn 2005; Chaudry, 2007; Carp, 2012; Hamdi et al, 2013; Asongu, 2014); b) Investment Granger-causes financial development (Odhiambo, 2010); Muyambiri & Chabaefe / The Finance – Growth Nexus in Botswana c) There is a bidirectional causality between financial development and investment (Shan et al, 2001; Shan and Jianhong, 2006; Lu et al, 2007; Nazlioglu et al, 2009; Huang, 2011); and d) No causal relationship exists between the two variables (Majid, 2008; Shan and Morris, 2002; Marques et al, 2013)
Summary
There is an ongoing argument among scholars concerning the direction of causality between bank-related and stock exchange-based financial development and savings, investment and economic growth. There are four views that have been empirically proven to exist in literature, that is, the supply-leading hypothesis, demand-following hypothesis, bidirectional-causality view and the fourth view stipulating that financial development and economic growth have no causal relationship (Nyasha and Odhiambo, 2015). The relationship between financial development and investment is articulated as having four main conclusions by Muyambiri and Odhiambo (2017), that is: a) Financial development Granger-causes investment (Xu, 2000; Caporale et al, 2005, Rousseau and Vuthipadadorn 2005; Chaudry, 2007; Carp, 2012; Hamdi et al, 2013; Asongu, 2014); b) Investment Granger-causes financial development (Odhiambo, 2010); Muyambiri & Chabaefe / The Finance – Growth Nexus in Botswana c) There is a bidirectional causality between financial development and investment (Shan et al, 2001; Shan and Jianhong, 2006; Lu et al, 2007; Nazlioglu et al, 2009; Huang, 2011); and d) No causal relationship exists between the two variables (Majid, 2008; Shan and Morris, 2002; Marques et al, 2013)
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