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Financial liberalization, financial development and growth linkages in Sub-Saharan African countries: An empirical investigation

Abdullahi Ahmed

Studies in Economics and Finance, 2010, vol. 27, issue 4, 314-339

Abstract: Purpose - The purpose of this paper is to use the recent development in unit root tests and cointegration as applied to panel data and dynamic time series, to estimate the relationship between financial liberalization, financial development and growth. Design/methodology/approach - The paper assesses the dynamics of the relationship between financial development, financial liberalization and growth using the latest dynamic panel data framework and time series analyses comprising up to 15 Sub-Saharan African countries with annual observations over the period of 1976-2005. The research uses various measures of, or proxies for, financial intermediary development, including ratio of private sector credit and share of domestic credit to income. Findings - The results obtained from a heterogenous panel investigation and time series methodology such as Granger causality, indicate a long-run equilibrium relationship between financial development and economic growth. This is consistent with the view that financial development can act as an “engine of growth” and plays a crucial role in the process of economic development. However, there is little evidence to support the hypothesis that financial liberalization directly “leads” growth. Originality/value - Group mean panel fully modified ordinary least squares (FMOLS) and country-by-country time series investigations show evidence of causality running from financial development to growth. The analysis yielded limited evidence of financial liberalization Granger-causing economic growth. However, this is not to say that financial liberalization does not promote growth, as it could do so indirectly through fostering financial development.

Keywords: Financial performance; Economic growth; Economic development; Economic reform; Sub Saharan Africa (search for similar items in EconPapers)
Date: 2010
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