Revisiting the Finance–Growth Nexus in Sub‐Saharan Africa: Results from Error Correction‐based Panel Cointegration Tests

Yabibal Walle

African Development Review, 2014, vol. 26, issue 2, 310-321

Abstract: This paper re‐examines the long‐run finance‐growth nexus in sub‐Saharan Africa (SSA) using data from 17 countries over the period 1975–2005. We apply error correction‐based panel cointegration tests that take into account cross‐sectional dependence among countries. Our results — unlike a previous study using the same data — indicate the existence of a long‐run relationship between financial and economic development in SSA countries. Moreover, our results clearly show that the long‐run causality runs from financial to economic development, although a muted support for the reverse causal impact is observed when financial development is measured by the percentage of liquid liabilities in GDP. The estimated long‐run parameters measuring the finance–growth link are positive and statistically significant. Therefore, our results strongly support policies aimed at developing the financial sector in SSA in order to promote long‐run economic development.

Date: 2014
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