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The causal relationship between financial development and investment in Botswana

Listed author(s):
  • Muyambiri, Brian
  • Odhiambo, Nicholas M

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.

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File URL: http://uir.unisa.ac.za/bitstream/handle/10500/22607/The%20casual%20relationship%20between%20financial%20development%20and%20investment%20in%20Botswana.pdf
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Paper provided by University of South Africa, Department of Economics in its series Working Papers with number 22607.

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Date of creation: May 2017
Handle: RePEc:uza:wpaper:22607
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  1. Jordan Shan & Alan Morris, 2002. "Does Financial Development 'Lead' Economic Growth?," International Review of Applied Economics, Taylor & Francis Journals, vol. 16(2), pages 153-168.
  2. Perron, Pierre, 1997. "Further evidence on breaking trend functions in macroeconomic variables," Journal of Econometrics, Elsevier, vol. 80(2), pages 355-385, October.
  3. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
  4. Simplice A. Asongu, 2014. "Linkages between investment flows and financial development: Causality evidence from selected African countries," African Journal of Economic and Management Studies, Emerald Group Publishing, vol. 5(3), pages 269-299, August.
  5. Marques, Luís Miguel & Fuinhas, José Alberto & Marques, António Cardoso, 2013. "Does the stock market cause economic growth? Portuguese evidence of economic regime change," Economic Modelling, Elsevier, vol. 32(C), pages 316-324.
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  7. Shan, Jordan Z & Morris, Alan G & Sun, Fiona, 2001. "Financial Development and Economic Growth: An Egg-and-Chicken Problem?," Review of International Economics, Wiley Blackwell, vol. 9(3), pages 443-454, August.
  8. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth,in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934 Elsevier.
  9. Helmi Hamdi & Rashid Sbia & Hakimi Abdelaziz & Wafa Khlaifia hakimi, 2013. "Multivariate Granger causality between foreign direct investment and economic growth in Tunisia," Economics Bulletin, AccessEcon, vol. 33(2), pages 1193-1203.
  10. Xun Lu & Dietrich Fausten & Russell Smyth, 2007. "Financial Development, Capital Accumulation and Productivity Improvement: Evidence from China," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 5(3), pages 227-242.
  11. Jordan Shan & Jianhong Qi, 2006. "Does Financial Development 'Lead' Economic Growth? The Case of China," Annals of Economics and Finance, Society for AEF, vol. 7(1), pages 197-216, May.
  12. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
  13. Yongfu Huang, 2011. "Private investment and financial development in a globalized world," Empirical Economics, Springer, vol. 41(1), pages 43-56, August.
  14. Thorsten Beck & Asli Demirgüç-Kunt & Ross Levine, 2000. "A New Database on the Structure and Development of the Financial Sector," World Bank Economic Review, World Bank Group, vol. 14(3), pages 597-605, September.
  15. Xu, Zhenhui, 2000. "Financial Development, Investment, and Economic Growth," Economic Inquiry, Western Economic Association International, vol. 38(2), pages 331-344, April.
  16. World Bank, 2016. "World Development Indicators 2016," World Bank Publications, The World Bank, number 23969, April.
  17. Thorsten Beck & Asli Demirgüç-Kunt & Ross Levine, 2010. "Financial Institutions and Markets across Countries and over Time: The Updated Financial Development and Structure Database," World Bank Economic Review, World Bank Group, vol. 24(1), pages 77-92, January.
  18. Guglielmo Maria Caporale & Peter G. A Howells & Alaa M. Soliman, 2004. "Stock Market Development And Economic Growth: The Causal Linkage," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 29(1), pages 33-50, June.
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