What is it about?
This study investigates the causal relationship between financial development and investment in South Africa during the period from 1976 to 2014. The study incorporates both bank-based and market-based segments of financial sector development. In addition, composite indices for bank-based and market-based financial devel- opment indicators are used as explanatory variables. The study incorporates savings as an intermittent variable – thereby creating a simple trivariate Granger-causality model. Using the ARDL bounds testing approach to cointegration and the ECM-based Granger-causality test, the study finds a unidirectional causal flow from in- vestment to financial development, but only in the short run. In the long run, the study fails to find any causal relationship between financial development and investment. These results apply irrespective of whether bank- based or market-based financial development is used as a proxy for financial sector development. The findings of this study have important policy implications.
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Why is it important?
The study makes use of a new estimation procedure that works well with small samples, allows for country-specific variations to be captured and does not need a lot of pretesting of data to be employed. In addition, the study is one in a few that evaluates causality between both bank-based and market-based financial development, and investment.
Perspectives
I hope this article encourages in-depth research focus on the finance-investment nexus as this topic has been taken in most cases as a given but our studies(the authors of the article) have shown that the relationship is not standard across countries.
Brian Muyambiri
Botswana College of Distance and Open Learning
Read the Original
This page is a summary of: Financial Development, Savings and Investment in South Africa: A Dynamic Causality Test, January 2017, De Gruyter,
DOI: 10.1515/gej-2017-0042.
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