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Effect of financial development on economic growth in sub-Saharan Africa

Muazu Ibrahim and Paul Alagidede

Journal of Policy Modeling, 2018, vol. 40, issue 6, 1104-1125

Abstract: This paper examines the overall economic growth effect when the growth in finance and real sector is disproportionate relying on panel data for 29 sub-Saharan African countries over the period 1980–2014. Results from the system generalized methods of moments (GMM) reveal that, while financial development supports economic growth, the extent to which finance helps growth depends crucially on the simultaneous growth of real and financial sectors. The elasticity of growth to changes in either size of the real or financial sector is higher under balanced sectoral growth. We also show that rapid and unbridled credit growth comes at a huge cost to economic growth with consequences stemming from financing of risky and unsustainable investments coupled with superfluous consumption fueling inflation. However, the pass-through excess finance–economic growth effect via the investment channel is stronger.

Keywords: Economic growth; Real sector; Financial Development; Excess finance (search for similar items in EconPapers)
JEL-codes: O16 O40 E44 C33 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:jpolmo:v:40:y:2018:i:6:p:1104-1125