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The paper examined the empirical relationship between economic growth and financial
development (FD) in Tanzania over the period 1988–2012. The long-run and short-run
parameters were estimated by use the Augmented Dickey Fuller (ADF) statistics and
the Phillips-Perron (PP) approach for cointegration analysis. To determine the direction
of causality, Vector error correlation model shows there is long run causality but only
Domestic credit provided by banking sector had a short run and long run, Granger
causality analysis was done. Empirical findings indicate that there is stable long-run
relationship among variables; it was also found that financial development has a
significant positive effect on economic growth. The Granger causality tests showed that
there is bi-directional causality between financial development and economic growth in
Tanzania for the period under study (1988–2012). This result therefore, supports
financial development hypotheses. This means that financial development accelerates
and augments economic growth in Tanzania and that economic growth leads to
development of the financial sector in Tanzania. Thus, the government should
strengthen the reforms in the financial sector so as to attract investors and improve the
efficiency of all production activities in the country. At the same time, the government
should enhance macroeconomic policies; fiscal policies, policies that attract foreign
direct investment, and export promotion policies that on average lead to economic
growth should. |
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