In spite of the debate on the relationship between financial development and economic growth, most scholars agreed that financial development has the potential of accelerating economic growth. Levine and Zervos (1998), Beck et al. (2000) and Beck and Levine (2004) documented that financial development has positive and significant impact on economic growth. But as the economic grows and expands, more financial instruments and services would be demanded by economic agents thereby leading to the development of the financial sector. Evidence in this regards have been unearthed by Demetriades and Hussein (1996) and Ang and McKibbin (2007). Also, Adusei (2013) and Chortareas et al. (2015) have revealed the existence of bidirectional causal relationship between financial development and economic growth. Thus, as the financial system mobilize and allocate resources for investment with higher returns and reduces the costs of information, transaction and enforcement, economic growth would be stimulated. As the economy expands, consumers and investors would demand more financial services and institutions that would bring about innovations in the financial system in order to meet the increased demands, and ultimately financial development. Despite this, Kar et al. (2010) and Grassa and Gazdar (2014) still
135 found evidence to support the absence of any significant relationship between financial development and economic growth.
In Cote D‘Ivoire and Nigeria, empirical evidence on the relationship between financial development and economic growth are scanty with mixed and inconclusive results. For instance, Gries et al. (2009) used Granger Causality analysis to examine the causal relationship between financial development and economic growth in 16 African countries including Cote D‘Ivoire and Nigeria. While their study revealed a bidirectional relationship between financial development and economic growth in Nigeria, it found no causal relations between financial development and economic growth in Cote D‘Ivoire. Also, Menyah et al (2014) used panel causality to examine the causal relations between financial development and economic growth in 21 countries in Sub-Sahara Africa (Cote D‘Ivoire and Nigeria inclusive), and they found absence of any causality running from financial development to economic growth in Cote D‘Ivoire and Nigeria.
3. Methodology
The study examines the cointegration and causal relationship between financial development and economic growth in Cote D‘Ivoire and Nigeria using the Johansen cointegration and the Error Correction Model (ECM) procedure. The data covering the sample period of 1980-2014 are sourced from the World Development Indicators of the World Bank.
Following the standard model in the literature (Levine and Zervos, 1998; Levine et al., 2000; Christopoulos and Tsionas, 2004), we estimate ECM with the following two main equations on economic growth and financial development:
0 1 2 3 4 1 1 0 0 0 p m n o t t i t j t k t l t t i j k l
Y Y FDE GOV INF ECT
(1) 0 1 2 3 4 1 1 0 0 0 p m n o t t i t j t k t l t t i j k lFDE Y FDE GOV INF ECT
(2)where Y = economic growth proxy by real GDP per capita; FDE = financial development proxy by domestic credit to private sector as a ratio of GDP; GOV = government consumption expenditure as a ratio of GDP, INF = inflation rates. All variables are in natural logarithm.
4. Empirical Results
Before estimating the model, the study conducted unit root test to ascertain the stationarity of the data using both the Augmented Dickey Fuller (ADF) and the Philips-Perron (PP) tests. The results presented in Table 1 reveal that all variables are stationary at first difference in both countries except inflation rates that is stationary at level at 5 percent significance level.
Table 1: Unit Root Test Results
Augmented Dickey Fuller (ADF) Philip-Perron (PP)
Variables Level [I(0)] 1st Difference [I(1)] Level [I(0)] 1st Difference [I(1)]
Cote D‟Ivoire
Y -2.932 -3.092** -2.811 -3.092**
136 GOV -2.458 -5.899*** -2.430 -8.089*** INF -3.909*** -4.642*** -4.256*** -7.979*** Nigeria Y -0.078 -4.743*** -0.348 -4.739*** FDE -2.594 -5.107*** -2.431 -8.749*** GOV -3.226** -38.177*** -22.320*** -41.039*** INF -3.202** -5.992*** -3.108** -12.875***
Notes: *** and ** indicate statistically significant at 1% and 5% levels respectively
Since most of the variables are integrated at order one, the Johansen cointegration test can be applied to ascertain the existence of cointegration relationship between financial development and economic growth. The results presented in Table 2 indicate the presence of cointegration relationship between financial development and economic growth in Cote D‘Ivoire and Nigeria. Both the Trace and Max-Eigen statistics identify the existence of cointegrating vectors. This implies that financial development and economic growth have long-run relationship in both countries.
Table 2: Johansen Cointegration Test Results
Cote D‟Ivoire Nigeria
Trace Statistic Max-Eigen Statistic Trace Statistic Max-Eigen Statistic Hypothesized
No. of CE(s) Statistic 5% Critical Value Statistic 5% Critical Value Trace Statistic 5% Critical Value Statistic 5% Critical Value None 51.97** 47.85 25.38 27.58 84.68** 47.85 52.29** 27.58 At most 1 26.58 29.79 13.59 21.13 32.38** 29.79 18.72 21.13 At most 2 12.99 15.49 11.11 14.26 13.65 15.49 13.64 14.26 At most 3 1.87 3.84 1.87 3.84 0.006 3.84 0.006 3.84
Notes: ** indicates presence of cointegrating vectors.
The existence of cointegration relationship does not tell the direction of the causality. Therefore, we employ Error Correction Model to examine the Granger causality between financial development and economic growth. The long-run causality is supported by the statistical significance of the coefficient of the lagged error correction term [ECT(-1)]. The results presented in Table 3 reveal a long-run unidirectional causality from financial development to economic growth in Cote D‘Ivoire and a long-run unidirectional causality from economic growth to financial development in Nigeria. This result supports the supply- leading hypothesis in Cote D‘Ivoire whereas the demand-following hypothesis is supported in Nigeria.
Table 3: Granger Causality Tests Results
Cote D‟Ivoire Nigeria
Dependent Variable
Causal Flow F-Stat ECT t-Stat 2
R F-Stat ECT t-Stat 2 R Y FDEY 1.370 (0.504) -0.243 [-3.987] 0.593 0.363 (0.843) -0.001 [-0.653] 0.336 FDE YFDE 8.788** (0.012) 0.299 [1.429] 0.389 0.734 (0.693) -0.011 [-1.708] 0.314 Note: Figures in the parenthesis are probability values, while t-statistics are in squared brackets. Y=economic growth proxy by real GDP per capita; FDE= financial development proxy by domestic credit to private sector as a ratio of GDP.
137 Furthermore, a short-run causal relation runs from economic growth to financial development in Cote D‘Ivoire, whereas there is no evidence of short-run causality between financial development and economic growth in Nigeria. The finding for Nigeria is consistent with the finding of Menyah et al. (2014) that found supply-leading hypothesis but disagrees with Gries et al. (2009) that found evidence to support the demand-following hypothesis. Similarly, the finding for Cote D‘Ivoire refutes the finding of Gries et al. (2009) that found no causal relations between financial development and economic growth in Cote D‘Ivoire.
5. Conclusion
The study examines the cointegration and causal relationship between financial development and economic growth in Cote D‘Ivoire and Nigeria. Evidence from the study reveals the existence of long-run relationship between financial development and economic growth in both countries. It also reveals a long-run unidirectional causality from financial development to economic growth in Cote D‘Ivoire and a long-run unidirectional causality from economic growth to financial development in Nigeria. This implies that an increase in financial development would accelerate economic growth in Cote D‘Ivoire thereby supporting the supply-leading hypothesis. In the case of Nigeria, an increase in economic growth will increase financial development thereby supporting the demand-following hypothesis. Therefore, we recommend to strengthening the present reforms and policies in the financial sector in Cote D‘Ivoire that will further develop the sector and make it more growth- enhancing. As for Nigeria, it may be necessary to re-evaluate the financial sector policies and reforms with a view to repositioning the sector to accelerate economic growth.
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