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The causal relationship between financial development and investment in Botswana

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  • Muyambiri, Brian
  • Odhiambo, Nicholas M

Abstract

In this paper, we examine the causal relationship between financial development and investment in Botswana between 1976 and 2014, using the autoregressive distributed-lag (ARDL) bounds testing approach. Unlike some previous studies, our study divides financial sector development into two segments, namely bank-based and market-based financial development. We also employ a trivariate Granger-causality model in order to address the omission-of-variable bias associated with a bivariate causality model. In order to capture the breadth and depth of the financial sector in the study country, we employ both bank- and market-based financial development indices. These indices are constructed from an array of bank- and market-based financial development indicators. Our results show that there is a bidirectional Granger-causal relationship between both bank-based and market-based financial development and investment in the short run. However, in the long run, a distinct causal flow is found to prevail only from investment to bank-based financial development.

Suggested Citation

  • Muyambiri, Brian & Odhiambo, Nicholas M, 2017. "The causal relationship between financial development and investment in Botswana," Working Papers 22607, University of South Africa, Department of Economics.
  • Handle: RePEc:uza:wpaper:22607
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    Keywords

    Botswana; Investment; Bank-Based Financial Development; Market-Based Financial Development;

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