A Study on the Dynamic Relationship Between Financial Development and Investment: Evidence from Sub-Saharan Africa

Abstract

The relationship between financial development and investment has become the central focus for empirical studies since the emergence of endogenous growth models. Bank-based measures and Financial markets-based measures have often been used as proxies for financial development in many studies. However, results based on these proxies have often yielded different interpretations since the concept of financial development is broad and a multidimensional process. The Financial development index of the International Monetary Fund (IMF) presents a more comprehensive measure for financial development, and it is also useful for investigating financial development and other economic outcomes. Also, investment is a versatile concept since it takes on many forms and sources. We adopt the panel VAR estimation techniques to examine the endogenous relationship between financial development and investment using the Financial development index, general government investment, private investment, and foreign direct investment (FDI) as dependent variables. The study reveals that private investment has a positive endogenous relationship with financial development. Moreover, the causal relationship between financial development and private investment is bilateral. Also, financial development has a positive influence on FDI. Furthermore, the study suggests that financial development has a strongly exogenous relationship with General government investment.

Keywords: Financial development index; Private investment; General government investment; Foreign direct investment; Panel VAR.

DOI: 10.7176/JESD/10-14-09

Publication date:July 31^st 2020