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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. César Calderón & Lin Liu, 2002. "The Direction of Causality Between Financial Development and Economic Growth," Working Papers Central Bank of Chile 184, Central Bank of Chile.
  2. Asongu Simplice, 2011. "Law and Finance in Africa," Working Papers 11/009, African Governance and Development Institute..
  3. Forssbaeck, Jens & Oxelheim, Lars, 2008. "Finance-specific Factors as Drivers of Cross-border Investment – An OLI Perspective," Working Paper Series 767, Research Institute of Industrial Economics.
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  7. Asongu Simplice, 2011. "Finance and Democracy in Africa," Working Papers 11/020, African Governance and Development Institute..
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