The Finance - Growth Nexus in Lesotho: Causality Revelations From Alternative Proxies

P L Mohapi and S I Motelle

Studies in Economics and Econometrics, 2007, vol. 31, issue 3, 43-59

Abstract: While it is generally felt that financial development enhances economic growth, the conflicting hypothesis in the causal role of finance in growth suggests that for any country that role is an empirical question. This paper takes up this task for the Lesotho economy. Causality between five alternative proxies of financial intermediation on the one hand and real GDP growth on the other is the subject of this paper. Time series properties of the variables - from unit roots to cointegration - are studied in order to establish the appropriate causality test to use between the Granger causality test and the VECM-based causality test. Four out of five proxies together with the growth variable are non-stationary. The non-stationary proxies are in turn not cointegrated with growth. Only one proxy Granger causes growth while for the rest there is no causality in either direction between them and growth. No-cointegration coupled with non-causality robustly reveals that the finance - growth nexus does not hold for the Lesotho economy.

Date: 2007
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DOI: 10.1080/10800379.2007.12106435

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