Analysis of the relationship between financial development and economic growth in South Africa

Abstract

Using 1980 - 2018 annual data, this study investigates the relationship between financial development and economic growth using country-specific time series data. Focusing on South African economy, the study attempts finding out if South Africa displays its own peculiar /specific finance–growth nexus. To address the use of single variable, this paper uses the financial development index recently developed as a broad measure of financial development released by the International Monetary Fund. This index captures several multidimensional aspects of the financial system. Given the numerous advantages over previously used cointegration tests, the Autoregressive Distributed Lag (ARDL) approach is used in this paper to examine both the long run and short run relationship between financial development and economic growth. The results of this study show evidence that the impact of financial development (financial institutions and financial markets) on economic growth is mixed and sensitive to variables used as measures of financial development. However, this study finds that the causal relationship flows from financial institutions and financial markets development to economic grow, though financial institution development predominates.