Stock market development and economic growth in Tanzania: an ARDL and bound testing approach

Abstract

Purpose The purpose of this paper is to contribute to empirical evidence by recognizing the importance of stock markets in the financial system and consequently its causality to economic growth and vice versa. Design/methodology/approach The study used the autoregressive distribute lag model (ARDL) with bound testing procedures, the sample covered quarterly time-series data from 2001q1 to 2019q2 in Tanzania. Findings The results suggest that stock market development have both negative and positive causality for both short-run dynamics and long-run relationship with economic growth. Economic growth is found to only cause and relate negatively to liquidity both in the short-run and in the long-run. The results show predominantly a unidirectional causality flow from stock market development to economic growth and finds partial causality flow from economic growth to stock market development, as represented by stock market turnover which proxied liquidity. Originality/value The use of quarterly data to reflect more realistically the dynamics of the variables because yearly data may sometimes cover-up specific dynamics that may be useful for prediction and policy planning. The study uses indices to capture general aspects within the stock market against economic growth as an intuitive way to aggregate the stock market development effects.

Stock market and economic growth nexus in Ghana

“…Another study in africa by Kapaya (2020) on the causality of the stock market on economic growth using the ARDL approach. Secondary quarterly data was obtained covering 2001 to 2019 from Tanzania.…”

“…This has cause most African countries to implement. Other empirical studies such as Shahbaz et al (2008), Asante et al (2011), Kapaya (2020) also believed that stock market impact economic growth. King and Levine (1993), Demirgue-Kunt and Maksimovic (1998), Levine, Loayza and Beck (2002), Ahmad and Malik (2009), Derk (2020), showed that broader, deeper financial markets are strongly associated with economic growth, Despite the numerous benefits associated with stock market, Singh (1997) believed that stock market do not impact economic growth but rather such a market hamper economic growth due to their susceptibility to market failure, which is often showed in the uncertain nature of stock market in many developing countries.…”

Stock Market Development and Economic Growth in SADC Region

“…The majority of countries in Africa adopted financial sector reforms to liberalise their financial systems as well as to enhance their non-bank financial institutions and capital markets (Kapaya, 2020;Osaseri and Osamwonyi, 2019;Qamruzzaman and Wei, 2018;Naik and Padhi, 2015). The rationale behind the reforms was the desire to expand financial intermediation through non-bank financial institutions and stock markets so as achieve sustained economic growth.…”

“…These are stock market development-led economic growth, economic growth-led stock market hypothesis, the feedback effect and the neutrality hypothesis. Kapaya (2020) studied the causal relationship between stock markets and economic growth in Tanzania. The study applied the Autoregressive Distribute Lag Model (ARDL) with bound testing procedures.…”

“…The contentious issue emanating from the debate on nexus between stock market development and economic growth centres around the direction of causality between stock market development and economic growth (Kapaya, 2020;Osaseri and Osamwonyi, 2019;Qamruzzaman and Wei, 2018;Maposa and Muma, 2017;Popoola et al, 2017;Tsaurai, 2016). The view that stock market developments drive economic growth is based on the understanding that development on the stock market feeds into consumption and investment decisions made by individuals and firms (Maposa and Muma, 2017;Popoola et al, 2017).…”