Abstract
The relationship between economic growth and financial development has attracted considerable research interest over the years, yet with little consensus. The question of whether strong economic performance is finance-led or growth-driven has been at the centre of the debate. The purpose of this study was to determine whether there was any relationship between financial development and economic growth in South Africa from 1992 to 2021. The vector autoregressive model (VAR), which was later changed into a vector error correction model (VECM), was used, given the nature of the research goals. The study used four different measures of financial development, including the ratio of total bank deposits to GDP (BD/GDP), the ratio of the broad money supply to GDP (M2/GDP), the ratio of bank assets to GDP (Assets/GDP) and the ratio of private sector credit to GDP (Pcre/GDP), in order to observe the effects of various aspects of financial development. The results of the Johansen cointegration test indicated that there was only one cointegrating equation or vector between indicators of financial development and GDP per capita. It was concluded from this that there is a stable long-term relationship between economic growth, as indicated by GDP per capita, and financial development variables, as indicated by M2/GDP, BD/GDP, Pcre/GDP, and Assets/GDP. Results of the VECM suggest that a short-run relationship exists between financial development and economic growth. The study also conducted a Granger causality test to ascertain the direction of causality between financial development and economic growth in South Africa because correlation does not in any way imply causation. The results demonstrated a unidirectional causal relationship between financial development and economic growth, with economic growth being a direct cause of financial development. This study might help South Africa and other African nations develop their financial development systems and economic growth structure over time.
Keywords
Financial development, vector error correction model (VECM), vector auto-regression (VAR) model, economic growth, South Africa, cointegration test, causality test.