The Causal Relationship between Financial Development and Investment: a Review of Related Empirical Literature

Brian Muyambiri; Nicholas M. Odhiambo

doi:10.2478/cer-2018-0015

Authors

Brian Muyambiri Botswana Open University, Gaborone, Botswana
Nicholas M. Odhiambo University of South Africa, Pretoria, South Africa

DOI:

https://doi.org/10.2478/cer-2018-0015

Keywords:

Bank‑based financial development, Causality, Investment, Market‑based financial development

Abstract

This article reviews the theoretical and empirical literature on the causal relationship between financial development and investment. Based on the literature considered, it can be concluded that there is little consensus to date on the direction of causality between financial development and investment. The study concludes that most of the research done on the causal relationship between financial development and investment is highly skewed towards assessing the causal relationship between the bank‑based side of financial development, as compared to the market‑based side of financial development. Given the number of studies assessed, the causal relationship between financial development and investment appears to be inconclusive, at best. Moreover, the study shows that the relationship between these two macroeconomic variables seems to differ from country to country; it is dependent on the proxies used to measure the level of financial development, as well as the methodology employed.

Downloads

Download data is not yet available.

References

Ang, J. B. (2008), A survey of recent developments in the literature of finance and growth, ‘Journal of Economic Surveys’, Vol. 22, No. 3.
Google Scholar

Asongu, S. (2014), Linkages between investment flows and financial development: causality evidence from selected African countries, ‘African Journal of Economic and Management Studies’, Vol. 5, No. 3.
Google Scholar

Bagehot, W. (1873), Lombard street, 1962 edition, Richard D. Irwin, Homewood, IL.
Google Scholar

Boyd, J. H., and Prescott, E. C. (1986), Financial intermediary‑coalitions, ‘Journal of Economics Theory’, No. 38.
Google Scholar

Caporale, G. M., Howells, P., & Soliman, A. M. (2005), Endogenous growth models and stock market development: evidence from four countries, ‘Review of Development Economics’, Vol. 9, No. 2.
Google Scholar

Chaudhry, I. S. (2007), Financial liberalization and macroeconomic performance: empirical evidence from Pakistan, Available on http://www.gredeg.cnrs.fr/colloques/nfi/papers/PapierOnLine/Chaudry.pdf. Accessed 29 September 2015.
Google Scholar

Dawson, P. J. (2008), Financial development and economic growth in developing countries, ‘Progress in Development Studies’, No. 8.
Google Scholar

Hamdi, H., Hakimi, A., & Sbia, R. (2013), Multivariate Granger causality between financial development, investment and economic growth: evidence from Tunisia, ‘Journal of Quantitative Economics’, Vol. 11, No. 1 & 2.
Google Scholar

Hawkins, P. (2006), Financial access and financial stability, Online https://pdfs.semanticscholar.org/bcef/578a5779c73e5a201b209ccf52ccce6678db.pdf, Accessed 12 August 2016.
Google Scholar

Huang, Y. (2011), Private investment and financial development in a globalized world, ‘Empirical Economics’, Vol. 41, No. 1.
Google Scholar

King, R. G., and Levine, R. (1993), Finance and growth: Schumpeter might be right, ‘The Quarterly Journal Of Economics’.
Google Scholar

Levine, R. (1997), Financial development and economic growth: views and agenda, ‘Journal of Economic Literature’, No. 35.
Google Scholar

Lu, X., Fausten, D. K., and Smyth, R. (2007), Financial development, capital accumulation and productivity improvement: evidence from China, ‘Journal of Chinese Economic and Business Studies’, Vol. 5, No. 3.
Google Scholar

Majid, M. S.A. (2008), Does financial development matter for economic growth in Malaysia? an ARDL bound testing approach, ‘Journal of Economic Cooperation’, Vol. 29, No. 1.
Google Scholar

Marques, L. M., Fuinhas, J. A. & Marques, A. C., (2013), Does the stock market cause economic growth? Portuguese evidence of economic regime change, ‘Economic Modelling’, No. 32.
Google Scholar

McKinnon, Ronald I. (1973) Money and capital in economic development. Brookings Institute, Washington, DC.
Google Scholar

Muyambiri, B. and Odhiambo, N. M. (2017a), Financial development, savings and investment in South Africa: a dynamic causality test, ‘Global Economy Journal’, (published online Aheadof print 1 August). https://doi.org/10.1515/gej–2017–0042.
Google Scholar

Muyambiri, B. and Odhiambo, N. M. (2016), Financial development and investment dynamics in Mauritius: A trivariate Granger‑causality analysis, ‘UNISA Economic Research Working Paper Series’, WP15/2016. Available on http://uir.unisa.ac.za/bitstream/handle/10500/21161/UNISA%20Working%20Paper%2015%20Mauritius%20Causality.pdf?sequence=1. Accessed 12 August 2017.
Google Scholar

Muyambiri, B. and Odhiambo, N. M. (2017b), The causal relationship between financial development and investment in Botswana, ‘UNISA Economic Research Working Paper Series’, WP09/2017.Available on http://uir.unisa.ac.za/bitstream/handle/10500/22607/The%20casual%20relationship%20between%20financial%20development%20and%20investment%20in%20Botswana.pdf?sequence=1&isAllowed=y. Accessed 12 June 2017.
Google Scholar

Nazlioglu, S., Yalama, A., & Aslan, M. (2009), Financial development and investment: cointegration and causality analysis for the case of Turkey, ‘International Journal of Economic Perspectives’, Vol. 3, No. 2.
Google Scholar

Odhiambo, N. M. (2010), Finance‑investment‑growth nexus in South Africa: an ARDL‑bounds testing procedure, ‘Economic Change and Restructuring’, No. 43.
Google Scholar

Patrick, H. T. (1966), Financial development and economic growth in underdeveloped countries, ‘Economic development and Cultural change’, Vol. 14, No. 2.
Google Scholar

Robinson, J. (1952), The Rate of Interest, and Other Essays, Macmillan.
Google Scholar

Rousseau, P. L. (1999), Finance, investment, and growth in Meiji‑era Japan, ‘Japan and the World Economy’, Vol. 11, No. 2.
Google Scholar

Rousseau, P. L., & Vuthipadadorn, D. (2005), Finance, investment, and growth: time series evidence from 10 Asian economies, ‘Journal of Macroeconomics’, Vol. 27, No. 1.
Google Scholar

Shan, J. & Jianhong, Q. (2006), Does financial development lead ‘economic growth? the case of China, ‘Annals of Economics and Finance’, Vol. 7, No. 1.
Google Scholar

Shan, J. & Morris, A. (2002), Does financial development ‘lead’ economic growth? ‘International Review of Applied Economics’, Vol. 16, No. 2.
Google Scholar

Shan, J. Z., Morris, A. G. & Sun, F. (2001), Financial development and economic growth: an eggand‐chicken problem? ‘Review of international Economics’, Vol. 9, No. 3.
Google Scholar

Shaw, Edward S. (1973), Financial deepening in economic development. Oxford University Press, New York, NY.
Google Scholar

UNECA (United Nations Economic Commission for Africa) (2008), Theoretical Perspectives of Financial development and financial integration, [in:] Assessing Regional Integration in Africa (ARIAIII) – Towards Monetary and Financial Integration in Africa, United Nations Economic Commission for Africa, Addis Ababa, Available on www.mcli.co.za/mcli‑web/downloads/ARIA4/aria3/chap4.pdf. Accessed 12 August 2016.
Google Scholar

Xu, Z. (2000), Financial development, investment, and economic growth, ‘Economic Inquiry’, Vol. 38, No. 2.
Google Scholar