Does bank-based financial development spur economic growth? Empirical evidence from the Democratic Republic of Congo (DRC)

Nicholas Odhiambo and Sheilla Nyasha

No 25710, Working Papers from University of South Africa, Department of Economics

Abstract: In this study, we examined the dynamic causality between financial development and economicgrowth in the Democratic Republic of the Congo (DRC), using time-series data from 1965 to2015. Unlike some previous studies, the current study used three proxies to examine thislinkage. These are liquid liabilities as a percentage of GDP (FD1), deposit money bank assetsas a percentage of GDP (FD2), and bank deposits as a percentage of GDP (FD3). In addition,the study used savings and inflation as intermittent variables, thereby creating a multivariateGranger-causality model, and limiting the omission-of-variable bias, which has been found insome previous studies. Using the ARDL bounds testing approach, the study found that there isa short-run causal relationship between financial development and economic growth in theDRC, but the direction of causality is dependent on the proxy used to measure the level offinancial development. When financial development was proxied by liquid liabilities as apercentage of GDP, unidirectional Granger-causality was found to prevail in the short run,running from economic growth to financial development. However, when deposit money bankassets as a percentage of GDP and bank deposits as a percentage of GDP were used as proxies,causality between financial development and economic growth was found to be bidirectional,but only in the short run. The study recommends that policy efforts in the DRC should bedirected at developing both the financial sector and the real sector in the short run as bothsectors have been found to be mutually beneficial to each other in the main, in this study.

Keywords: Financial Development; Economic Growth; Granger-Causality Test; Democratic Republic of Congo; DRC (search for similar items in EconPapers)
Date: 2019-08
New Economics Papers: this item is included in nep-afr, nep-fdg and nep-gro
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:uza:wpaper:25710

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