Nonlinear Dynamics of the Financial–Growth Nexus in African Emerging Economies: The Case of a Macroprudential Policy Regime

Abstract

A panel data analysis of nonlinear financial growth dynamics in a macroprudential policy regime was conducted in a panel of 10 African emerging countries from 1983–2020, where it had been a non-prudential regime from 1983–1999 and a prudential regime from 2000–2020. The paper explored the validity of invented U-shape hypothesis in the prudential policy regime as well as the threshold level at which excessive finance boosts growth using the panel smooth transition regression (PSTR) model. The PSTR model was adopted due to its ability to address the problems of endogeneity and heterogeneity in a nonlinear framework. The results reveal evidence of a nonlinear effect between financial development and economic growth, where the minimum level of financial development is found to be 60.5% of GDP, above which financial development increases growth in African emerging countries. The findings confirmed a U-shaped relationship, contradicting the invented U-curve hypothesis. The focal policy recommendation is that the financial sector should be given adequate consideration and recognition by, for example, implementing appropriate financial reforms, developing a suitable investment portfolio, and keeping spending on technological investment in Africa’s emerging countries below the threshold. Again, caution is needed when introducing macroprudential policies at a low level of the financial system.

The Interaction Between Financial Development and Economic Growth: A Novel Application of Transfer Entropy and Nonlinear Approach in Algeria

“…We conclude that non-linear causality extends from (FD) to (EG) in Algeria, which is consistent with findings of Al Khatib (2023), Golder et al (2023), Azimi (2022), Zungu (2022), Mei et al (2022), and Ductor and Grechyna (2013). These Studies found a Nonlinear causality from (FD) to (EG).…”

“…Our results corroborate studies finding positive FD-EG links in developing countries (Abu-Bader & Abu-Qarn, 2008; Al khatib et al, 2022). However, the symmetric response conflicts with recent evidence of asymmetry in Africa (Chen et al, 2020; Zungu, 2022). Though nonlinear like Azimi (2022), our findings diverge from Ibrahim and Alagidede (2020) who uncovered asymmetric impacts in Ghana.…”

“…Azimi (2022) analyzed the asymmetric effects of finance indicators on EG in China using NARDL, revealing a significant long-run relationship between finance and EG, with capital and money market indicators affecting EG differently in both short and long runs. Likewise, Zungu (2022) presented evidence of a nonlinear relationship between FD and EG in a group of African economies, while Mei et al (2022) demonstrated that internet finance and rural finance contribute to rural EG in China. However, Arcand et al (2015) have argued that there may be a ''too much finance effect,'' while Ductor and Grechyna (2013) suggested that there is a nonlinear relationship between FD and EG.…”

The complexity of financial development and economic growth nexus in Syria: A nonlinear modelling approach with artificial neural networks and NARDL model

“…analyzed asymmetric China finance indicator effects using NARDL, showing capital and money markets differently affect short and long-run EG Ref. [ 7 ]. revealed nonlinear FD-EG relationships in African economies [ 8 ].…”

“…Positive shocks from FD enhance EG while negative shocks hinder it [ 5 ]. Different finance indicators like capital markets, money markets, internet finance, and rural finance have varying short and long-run effects on EG depending on context and period [ [6] , [7] , [8] ]. However, excessive or inefficient FD can negatively impact EG beyond a threshold by misallocating capital or diverting resources to unproductive uses [ [9] , [10] , [11] ].…”