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The main purpose of this study is to examine the relationship between stock market development and economic growth in Tanzania. In doing so, the study seeks to unravel the short-run and long-run dynamics between stock markets and economic growth and establishing the nature of causality. The study used real GDP growth rate as the indicator of economic growth, as for the stock market, market capitalization, value of share traded and stock turnover ratio were used as the proxies of stock market development.
Time series data were employed to conduct this study, data from stock market and economic growth from the period of 1999 to 2017 were included in the analysis. Secondary data which were obtained from DSE, NBS, and world bank development data base, and then software for statistics and data science (STATA) was used to conduct the analysis. The relationship between stock market development and economic growth was examined by using Johansen test for cointegration under VECM. We also, conducted a causality test based on granger causality test to find the causality which exist between variables.
The study found that, there is a long-run relationship between stock market development and economic growth. While scrutinizing individual indicators of stock markets, stock market capitalization was found to have a significant positive relationship with economic growth, also the stock turnover ratio, a significant effect on the growth of economy was found. While for the value of shares traded, a negative relationship was found. In the analysis for the short run dynamics, stock markets do not have any impact on economic growth. The granger causality test showed a unidirectional causality running from stock market development proxies to economic growth.
So, the results of the study revealed that, stock market development has a long-run relationship with economic growth. The study recommends that, stock market (DSE) should be well developed, increase its trading activities so as to spur economic growth. Also, DSE should increase trainings and other educational programs to enhance public awareness on the importance of investing with stock markets. |
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