Abstract
This paper examines the impact of the financial system; the banking sector development and the stock market development on economic growth in 17 selected African countries from 1980-2017. The paper employs the panel auto-regressive distributed lag (ARDL) with the pooled mean group (PMG) estimator to explore the short and long-run relationship among the variables. The empirical findings reveal the existence of cointegration among the variables and show that stock market capitalization; a measure of the stock market development has a significant long-run relationship with economic growth and this supports the claims of (Arestis et al., 2001) that stock market capitalization is statistically important and positively correlated with economic growth. FDI also has a significant long-run relationship with economic growth. Bank credit, an indicator of the banking sector development has a significant short-run relationship with economic growth. This study suggests that African countries should ameliorate the credit allocation process by privatizing national banks, tightening credit management, and increase competition in the banking sector. Measures should also be put in place to minimize excessive volatility in stock prices which would allow the stock markets in the African countries to stimulate economic growth. Keywords: panel autoregressive distributed lag (ARDL), stock market development, banking sector development, pooled mean group (PMG), economic growth. JEL Classification: G21, O16, C33, O47 DOI: 10.7176/EJBM/13-8-02 Publication date: April 30 th 2021
Highlights
The relationship between economic growth and the financial system, whose constituents are the stock markets and the banking sector, has generated significant deliberation for years (e.g. Beck and Levine, 2004; Goldsmith, 1969; Levine, 1991; Schumpeter, 1912)
This paper examines the impact of the banking sector development and the stock market development on economic growth using panel data from 17 African countries
The findings indicated that stock market development is a good and positive predictor of long-term economic growth
Summary
The relationship between economic growth and the financial system, whose constituents are the stock markets and the banking sector, has generated significant deliberation for years (e.g. Beck and Levine, 2004; Goldsmith, 1969; Levine, 1991; Schumpeter, 1912). Numerous studies are examining this relationship, there is no consensus on the effect of the financial system on economic growth. Studies from (Beck and Levine, 2002) show inconsistent predictions about the impact of the financial system on growth and the separate effects of stock markets and banks on economic growth. While models from (Bencivenga et al, 1995); (King and Levine, 1993a); (McKinnon, 1973); (Shaw, 1973) emphasize that a wellfunctioning financial sector promotes long-run growth, Studies of (Meier and Seers, 1984); (Joan Robinson,1952) disagree about the role of the financial sector on economic growth and conclude that financial development does not impact growth. Research from (Huybens and Smith, 1999) and (Demirguc-Kunt and Levine, 2001) emphasize that it is not banks or markets, it is banks and markets; these different components of the financial system enhance the effects of information and transaction costs
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