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Financial development and Economic Growth: The Case of Cape Verde

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  • Ogunyiola, Ayorinde

Abstract

This study empirically investigates the long-run relationship and short-run dynamics between financial development and economic growth in Cape Verde for the period 1980 - 2011. The study employs the Johansen and Juselius approach to cointegration, pairwise granger causality test for causality and the VECM approach was also explored. The analysis was carried out using three indicators to measure financial development which are the money supply as a percentage of GDP(M2), ratio of credit provided by commercial banks as a percentage of GDP(DCPB) and the ratio of domestic credit to the private sector as a percentage of GDP (DCTP). Control variables such as interest rate and population growth rate were included in the analysis. The empirical result indicates the existence of a long run relationship between economic growth and financial development variables in Cape Verde. However, no short run relationship exists between economic growth and financial development variables but between the control variables and economic growth. The study also found a unidirectional relationship running from financial development to economic growth when money supply( M2) is used as well as a bidirectional causality running from financial development to economic growth and vice versa, when domestic credit provided by commercial bank (DCPB) is used. The study found a unidirectional causality from economic growth to domestic credit to private sector (DCTP).

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 49783.

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Date of creation: 01 Sep 2013
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Handle: RePEc:pra:mprapa:49783

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Keywords: Financial Development; Economic Growth; Endogenous Growth; Cape Verde; VECM;

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  1. OZTURK, Ilhan, 2008. "Financial Development And Economic Growth: Evidence From Turkey," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 8(1), pages 85-98.
  2. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  3. King, Robert G. & Levine, Ross, 1993. "Finance, entrepreneurship and growth: Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 513-542, December.
  4. World Bank, 2013. "Africa Development Indicators 2012/13," World Bank Publications, The World Bank, number 13504, October.
  5. Pagano, Marco, 1993. "Financial markets and growth: An overview," European Economic Review, Elsevier, vol. 37(2-3), pages 613-622, April.
  6. World Bank, 2013. "World Development Indicators 2013," World Bank Publications, The World Bank, number 13191, October.
  7. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  8. Tafirenyika Sunde, 2012. "Financial sector development and economic growth nexus in South Africa," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 5(1), pages 64-75.
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