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Financial structure and economic growth link in African countries: a panel cointegration analysis

Abdullahi D. Ahmed (Faculty of Commerce and Law, Central Queensland University, Rockhampton, Australia)
Abu N.M. Wahid (Department of Economics and Finance, Tennessee State University, Nashville, Tennessee, USA)

Journal of Economic Studies

ISSN: 0144-3585

Article publication date: 2 August 2011

Abstract

Purpose

This paper aims to use the newly developed panel data cointegration analysis and the dynamic time series modeling approach to examine the linkages between financial structure (market‐based vs bank‐based) and economic growth in African economies.

Design/methodology/approach

The research investigates the dynamic relationship between financial structure and economic growth in a panel of a group of seven African developing countries over the period of 1986‐2007. The paper uses various indicators/measures of financial structure and financial system, and employs the traditional time‐series analysis for causality as well as the newly developed panel unit root and cointegration techniques and estimated finance‐growth relationship using FMOLS for heterogeneous panel.

Findings

From the dynamic heterogeneous panel approach, the paper firstly finds that market‐based financial system is important for explaining output growth through enhancing efficiency and productivity. Second, the authors' empirical evidence supports the view that higher levels of banking system development are positively associated with capital accumulation growth and lead to faster rates of economic growth.

Originality/value

Panel cointegration, group mean panel FMOLS and country‐by‐country time series investigations indicate that the market‐based financial system is important for explaining output growth through enhancing efficiency and productivity, whereas the development of banking system is significantly associated with capital accumulation growth. Further results from the time‐series approach show evidence of unidirectional causality running from market‐oriented as well as bank‐oriented financial systems to economic growth.

Keywords

Citation

Ahmed, A.D. and Wahid, A.N.M. (2011), "Financial structure and economic growth link in African countries: a panel cointegration analysis", Journal of Economic Studies, Vol. 38 No. 3, pp. 331-357. https://doi.org/10.1108/01443581111152436

Publisher

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Emerald Group Publishing Limited

Copyright © 2011, Emerald Group Publishing Limited