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Modelling the effects of financial sector functions on economic growth in a developing country: a cointegration and error correction approach

Author

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  • David Tennant
  • Claremont Kirton
  • Abdullahi Abdulkadri

    () (University of the West Indies, Jamaica
    University of the West Indies, Jamaica
    University of the West Indies, Jamaica)

Abstract

This study develops proxies for each of Levine's (1997) five functions of the financial sector, and models the relationship between these functions and economic growth using methods that more accurately conform to theory, and which broaden our understanding of the mechanisms through which the financial sector impacts on growth. Our analytical models provide for inferences about the relative importance of each of the functions of the financial sector and cointegration and error correction methods are used to distinguish between the long and short-run impacts of financial sector intermediation on economic growth. Our results suggest that if financial sector reforms are to be more effective, greater focus has to be placed on mechanisms through which savings mobilization can be maximized, and the allocation of resources to productive uses can be facilitated. Policymakers should also not expect immediate results from such reforms, as although the functions of the financial sector were shown to have statistically significant long-run impacts on GDP, none of the functions had significant short-term effects on growth.

Suggested Citation

  • David Tennant & Claremont Kirton & Abdullahi Abdulkadri, 2011. "Modelling the effects of financial sector functions on economic growth in a developing country: a cointegration and error correction approach," Journal of Developing Areas, Tennessee State University, College of Business, vol. 44(2), pages 183-206, January-M.
  • Handle: RePEc:jda:journl:vol.44:year:2011:issue2:pp:183-206
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    File URL: http://muse.jhu.edu/journals/journal_of_developing_areas/v044/44.2.tennant.html
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    Cited by:

    1. Wycliffe Mukulu Musyoka & Evans Geoffrey Mogeni & David Musimbi Murunga & Pollyne Mbithe Mutunga, 2018. "Effect of Stock Market Development on Economic Growth: A Case of Nairobi Securities Exchange, Kenya," Noble International Journal of Economics and Financial Research, Noble Academic Publsiher, vol. 3(5), pages 59-70, May.

    More about this item

    Keywords

    Financial markets; financial crisis; economic growth; developing countries;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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