Relationship between Financial Development and Economic Growth

Abstract

Purpose: The purpose of this study was to examine the causal relationship between financial development and economic growth in 12 SADC countries for the period 2008-2020. Materials and Methods: The study utilized panel data from 12 SADC member states for the period 2008-2020. This dataset was compiled from the World Bank database, Penn tables, and National Bureau of Statistics websites for the member states. The study employed the Autoregressive Distributed Lag Model (ARDL) to estimate the causal relationship between financial development and economic growth. Findings: The empirical results show that there is bi-directional causality between financial development and economic growth in the SADC region. The findings also suggest that while financial development positively correlates with economic growth in the long run, the short-run effects may vary, with factors such as physical capital accumulation and government expenditure playing significant roles. Trade openness, life expectancy and population growth were also found to have implications for economic growth in the SADC region, highlighting the complex nature of development dynamics. Implications to Theory, Practice and Policy: The presence of bidirectional causality between financial development and economic growth calls for coordinated economic and financial policies as both variables mutually influence each other's dynamics.