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Linkages between investment flows and financial development: causality evidence from selected African countries

  • Simplice A, Asongu

This paper introduces previously missing financial components(efficiency, activity and size) in the assessment of the finance-investment nexus. Using VAR models in the perspectives of VECM and short-run Granger causality, three broad findings are established: (1) while finance led investment elasticities are positive, investment elasticities of finance are negative; (2)but for Guinea Bissau, Mozambique and Togo, finance does not seem to engender portfolio investment; (3)contrary to mainstream literature, financial efficiency appears to impact investment more than financial depth. Four policy implications result: (1)extreme caution is needed in the use of single equation analysis for economic forecasts; (2)financial development leads more to investment flows than the other way round; (3) financial allocation efficiency is more relevant as means to attracting investment flows than financial depth; (4) the somewhat heterogeneous character of the findings also point to shortcomings in blanket policies that are not contingent on country-specific trends in the finance-investment nexus.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 38719.

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Date of creation: 10 May 2012
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Handle: RePEc:pra:mprapa:38719
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  1. Demetriades, Panicos O. & Hussein, Khaled A., 1996. "Does financial development cause economic growth? Time-series evidence from 16 countries," Journal of Development Economics, Elsevier, vol. 51(2), pages 387-411, December.
  2. Simplice A., Asongu, 2011. "Law and finance in Africa," MPRA Paper 34080, University Library of Munich, Germany.
  3. Simplice A., Asongu, 2011. "Law, finance, economic growth and welfare: why does legal origin matter?," MPRA Paper 33868, University Library of Munich, Germany.
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