Asymmetric cointegration and causality effects between financial development and economic growth in South Africa

Abstract

Purpose

The purpose of this paper is to investigate asymmetric cointegration and causality effects between financial development and economic growth for South African data spanning over the period of 1992-2013.

Design/methodology/approach

This study makes the use of the momentum threshold autoregressive (M-TAR) approach which allows for threshold error-correction (TEC) modeling and Granger causality analysis between the variables. In carrying out an empirical analysis, the author uses six measures of the financial development variables against gross domestic per capita, that is, three measures which proxy banking activity and another three proxies for stock market development.

Findings

The empirical results generally indicate an abrupt asymmetric cointegration relationship between banking activity and economic growth, on the one hand, and a smooth cointegration relationship between stock market activity and economic growth, on the other hand. Moreover, causality analysis generally reveals that while banking activity tends to Granger cause economic growth, stock market activity is, however, caused by economic growth increase.

Originality/value

This study contributes to the literature by examining asymmetries in the cointegration and causality relations by using both banking and stock market proxies against economic growth for the South African economy.

Citation

Phiri, A. (2015), "Asymmetric cointegration and causality effects between financial development and economic growth in South Africa", Studies in Economics and Finance, Vol. 32 No. 4, pp. 464-484. https://doi.org/10.1108/SEF-01-2014-0009