Finance-Growth Nexus Revisited: Empirical Evidence from Six Countries


  • Sheilla Nyasha
  • Nicholas M. Odhiambo



bank-based financial development, market-based financial development, economic growth, Granger-causality


This paper investigates the dynamic causal relationship between bank-based financial development and economic growth, and between market-based financial development and economic growth in six countries during the period from 1980 to 2012. The causal relationship was found to vary largely across countries and over time. In general, bank-based financial development seems to Granger-cause economic growth in the UK and only in the long run in Australia. However, there is a feedback loop in Brazil and Australia, but only in the short run for the latter. In Kenya, South Africa and USA, the results support the neutrality hypothesis. The study results further indicate short-run unidirectional causality from market-based financial development to economic growth in the USA. Evidence of the feedback loop was found in Kenya, while the demand-following hypothesis found support only in South Africa and Brazil. However, the neutrality view was supported in Australia and the UK.

JEL Codes - E02; G10; G21; O11


Abu-Bader, S., and Abu-Qarn, A. S., 2008. Financial development and economic growth: The Egyptian experience. Journal of Policy Modeling, 30(5), 887-898.

Adjasi, C. K. D., and Biekpe, N. B., 2006. Stock market development and economic growth: The case of selected African countries. African Development Review, 18(1), 144-161.

Akinboade, O. A., 1998. Financial development and economic growth in Botswana, a test for causality. Savings and Development, 3(22), 331-348.

Ang, J. B., and McKibbin, W. J., 2007. Financial liberalization, financial sector development and growth: Evidence from Malaysia. Journal of Development Economics, 84(1), 215-233.

Arac, A., and Ozcan, S. K., 2014. The Causality between financial development and economic growth: The case of Turkey. Journal of Economic Cooperation & Development, 35(3), 171-198.

Arayssi, M., and Fakih, A., 2017. The Finance-Growth Nexus, again: New Evidence from Kenya. Economic Issues, 22(2), 33-59.

Arestis, P., and Demetriades, P., 1997. Financial development and economic growth: Assessing the evidence. Economic Journal (London), 107(442), 783-799.

Athanasios, V., and Antonios, A., 2012. Stock market development and economic growth: An empirical analysis. American Journal of Economics and Business Administration, 4(2), 135-143.

Australian Bankers’ Association, 2013. History of Banks. from

Bagehot, W., 1873. Lombard Street (1962 Edition ed.). Homewood, IL: Irwin, RD.

Bank of International Settlement, 2012. Address by the Governor of the South African Reserve (1997) on financial sector reforms and their implications for the banking industry in South Africa. Retrieved from

Bayar, Y., Kaya, A., and Yildirim, M., 2014. Effects of stock market development on economic growth: Evidence from Turkey. International Journal of Financial Research, 5(1), 93-100.

Beck, T., 2002. Financial Development and International Trade: Is there a Link?'. Journal of International Economics, 57(1), 107-131.

Carp, L., 2012. Can stock market development boost economic growth? Empirical evidence from emerging markets in Central and Eastern Europe. Procedia Economics and Finance, 3, 438-444.

Central Bank of Brazil, 2009. Proceedings of the Brazilian Central Bank Forum for Financial Inclusion.

Cheng, S., 2012. Substitution or complementary effects between banking and stock markets: Evidence from financial openness in Taiwan. Journal of International Financial Markets, Institutions and Money, 22(3), 508-520.

Choong, C., Yusop, Z., Law, S., and Liew, V. K., 2005. Financial development and economic growth in Malaysia: The perspective of stock market. Investment Management and Financial Innovations, 4, 105-115.

Christopoulos, D. K., and Tsionas, E. G., 2004. Financial development and economic growth: Evidence from panel root and cointegration tests. Journal of Development Economics, 73(1), 55-74.

Deb, S. G., and Mukherjee, J., 2008. Does stock market development cause economic growth? A time-series analysis for the Indian economy. International Research Journal of Finance and Economics, 21, 142-149.

Demirguc-Kunt, A., and Levine, R., 2001. Bank-based and market-based financial systems: Cross-country comparisons. In A. Demirguc-Kunt and R. Levine (Eds.), Financial Structure and Economic Growth: A Cross- Country Comparison of Banks, Markets, and Development (pp. 81-140). Cambridge, MA: MIT Press.

Duasa, J., 2007. Determinants of Malaysian trade balance: An ARDL bounds testing approach. Journal of Economic Cooperation, 28(3), 21-40.

Enisan, A. A., and Egbetunde, T., 2010. Financial development and economic growth: The experience of 10 sub-Saharan African countries revisited. Journal of Economics and Business, 2(1), 17-28.

Enisan, A. A., and Olufisayo, A. O., 2009. Stock market development and economic growth: Evidence from seven sub-Sahara African countries. Journal of Economics and Business, 61(2), 162-171.

Federal Deposit Insurance Corporation, 2012. Various issues. from

Goldsmith, R. W., 1969. Financial Structure and Development. New Haven: Yale University Press.

Graff, M., 1999. Financial development and economic growth: A new empirical analysis. Dresden discussion paper series in Economics, 5(99).

Gurley, J. G., and Shaw, E. S., 1967. Financial Structure and Economic Development. Economic Development and Cultural Change, 15(3), 257-268.

Hondroyiannis, G., Lolos, S., and Papapetrou, E., 2005. Financial markets and economic growth in Greece, 1986-1999. Journal of International Financial Markets, Institutions and Money, 15(2), 173-188.

International Finance Corporation, 1991. Emerging Stock Markets Factbook 1991. from

International Monetary Fund, 2011. United Kingdom: Basel Core Principles for Effective Banking Supervision Detailed Assessment of Compliance. IMF Country Report, 11/233.

Jung, W. S., 1986. Financial development and economic growth: International evidence. Economic Development and Cultural Change, 34(2), 333-346.

Kenya, F. S. D., 2010. FSD Kenya Impact Assessment Summary Report. Nairobi.

King, R. G., and Levine, R., 1993. Finance and growth: Schumpeter might be right. The Quarterly Journal of Economics, 108(3), 717-737.

Loizides, J., and Vamvoukas, G., 2005. Government expenditure and economic growth: Evidence from trivariate causality testing. Journal of Applied Econometrics, 8(1), 125-152.

Lucas, R., 1988. On the mechanism of economic development. Journal of Monetary Economics, 22(1), 3-42.

Majid, M. S. A., 2008. Does financial development matter for economic growth in Malaysia? An ARDL bound testing approach. Journal of Economic Cooperation, 29(1), 61-82.

Marques, L. M., Fuinhas, J. A., and Marques, A. C., 2013. Does the stock market cause economic growth? Portuguese evidence of economic regime change. Economic Modelling, 32, 316-324.

McKinnon, R. I., 1973. Money and Capital in Economic Development. Washington: The Brookings Institution.

Narayan, P. K., and Smyth, R., 2004. Temporal causality and the dynamics of exports, human capital and real income in China. International Journal of Applied Economics, 1(1), 24-45.

Narayan, P. K., and Smyth, R., 2008. Energy consumption and real GDP in G7 Countries: New evidence from panel cointegration with structural breaks. Energy Economics, 30(5), 2331-2341.

Nyasha, S., and Odhiambo, N. M., 2015. Do banks and stock markets spur economic growth? Kenya's experience. International Journal of Sustainable Economy, 7(1), 54-65.

Odhiambo, N. M., 2004. Is financial development still a spur to economic growth? A causal evidence from South Africa. Savings and Development, 28(1), 47-62.

Odhiambo, N. M., 2008. Financial depth, savings and economic growth in Kenya: A dynamic causal linkage. Economic Modelling, 25(4), 704-713.

Odhiambo, N. M., 2009a. Finance-growth nexus and inflation dynamics in Kenya: An empirical investigation. Savings and Development, 33(1), 7-25.

Odhiambo, N. M., 2009b. Interest Rate Liberalization and Economic Growth in Zambia: A Dynamic Linkage. African Development Review, 21(3), 541-557.

Odhiambo, N. M., 2010. Energy consumption, prices and economic growth in three SSA countries: A comparative study. Energy Policy, 38(5), 2463-2469.

Osuala, A. E., Okereke, J. E., and Nwansi, G. U., 2013. Does stock market development promote economic growth in emerging markets? A causality evidence from Nigeria. World Review of Business Research, 3(4), 1-13.

Patrick, H. T., 1966. Financial development and economic growth in underdeveloped countries. Economic Development and Cultural Change, 14(1), 174-189.

Perron, P., 1997. Further evidence on breaking trend functions in macroeconomic variables. Journal of Econometrics, 80(2), 355-385.

Pesaran, M. H., and Shin, Y., 1999. An Autoregressive Distributed-Lag Modelling Approach to Cointegration Analysis. In S. Strøm (Ed.), Econometrics and Economic Theory in the 20th Century: The Ragnar Frisch Centennial Symposium (pp. 371-413). Cambridge: Cambridge University Press.

Pesaran, M. H., Shin, Y., and Smith, R., 2001. Bound testing approaches to the analysis of level relationship. Journal of Applied Econometrics, 16(3), 174-189.

Pradhan, R. P., Arvin, M. B., Bahmani, S., Hall, J. H., and Norman, N. R., 2017. Finance and growth: Evidence from the ARF countries. The Quarterly Review of Economics and Finance, 66(C), 136-148.

Robinson, J., 1952. The generalization of the general theory. In J. Robinson (Ed.), The Rate of Interest and Other Essays. London: MacMillan.

Romer, P. M., 1986. Increasing Returns and Long-Run Growth. Journal of Political Economy, 94(5), 1002-1037.

Schmidt-Hebbel, K., and Serven, L., 2002. Financial liberalisation, savings and growth. Paper presented at the Banco de Mexico Conference on macroeconomic Stability, Financial Markets and Economic Development, Mexico.

Shan, J. Z., and Jianhong, Q., 2006. Does financial development 'lead' economic growth? The case of China. Annals of Economics and Finance, 1, 231-250.

Shan, J. Z., and Morris, A. G., 2002. Does financial development 'Lead' economic growth. International Review of Applied Economics, 16(2), 153-168.

Shan, J. Z., Morris, A. G., and Sun, F., 2001. Financial development and economic growth: An egg and chicken problem? Review of International Economics, 9(3), 443-454.

Shaw, E. S., 1973. Financial Deepening in Economic Development. New York: Oxford University Press.

Sinha, D., and Macri, J., 2001. Financial development and economic growth: The case for eight Asian countries. Munich Personal RePEc Archive, 18297.

Solow, R. M., 1956. A Contribution to the Theory of Economic Growth. The Quarterly Journal of Economics, 70(1), 65-94.

Wood, A., 1993. Financial development and economic growth in Barbados: Causal evidence. Savings and Development, 17(4), 379-390.

World Bank, 2007. Brazil: The industry structure of banking services (Vol. 40076-BR): World Bank.

World Bank, 2014. World Bank DataBank. World Development Indicators. from

World Bank, 2015. World Bank DataBank. World Development Indicators. from




How to Cite

Nyasha, S., & M. Odhiambo, N. (2018). Finance-Growth Nexus Revisited: Empirical Evidence from Six Countries. Scientific Annals of Economics and Business, 65(3), 247–268.