The finance–growth nexus: Does risk premium matter?

Abstract

The bounds testing approach to cointegration analysis is employed in this paper to examine whether the risk premium demanded by the banking sector moderates the finance–growth nexus with data (1970–2015) from South Africa. To the extent that the interaction between risk premium and financial development positively affects growth in the long run, we affirm that the risk premium demanded by the banking sector represents a significant channel through which financial development drives growth. The main policy implication of this finding is that financial liberalization that removes interest rates restrictions, allowing the banking sector to adequately price risk, is in the best interest of the South African economy.

Finance-institution-growth trilogy: time-series insights from South Africa

“…This stance stands against the theoretical proposition of "more finance, more growth" (Levine, 2003) and supports the recent suggestion of "better finance, more growth" (Adusei, 2019;Law et al, 2018a;. It suggests that an economy is better financed when efficient and effective institutions are in place to ensure proper allocation of resources to productive activities of the real sector so as to produce growth benefits.…”

“…Similarly, the cross-sectional data cannot sufficiently address country-specific matters (Ali et al, 2016;Sehrawat and Giri, 2015;Odhiambo, 2009 and2010). This supports the position that the relationship between FD and economic growth cannot be generalized across countries as economic policies tend to be country-specific, and their success depend on the efficiency of institutions that implement them (Adusei, 2019; The financegrowth nexus in South Africa Kutan et al, 2017;Ali et al, 2016;Sehrawat and Giri, 2015;Odhiambo, 2010;Al-Yousif, 2002;Demetriades and Hussein, 1996). Therefore, this study fills the lacuna in the extant literature by uncovering the mediating role of institutional quality in influencing the way FD impacts on economic growth within the context of country-specific framework.…”

“…The theoretical and empirical studies have continued to discuss the relative importance of financial sector development in economic growth process (Adusei, 2019;Shi et al, 2019;Alexiou et al, 2018). Financial market provides the needed stimulus to ginger the activities in the real sector by facilitating and allocating resources to finance viable investment and entrepreneurial activities with high rate of returns (Olaniyi and Oladeji, 2020;Rahman et al, 2020;Giri and Bansod, 2019;Ang, 2008;Pagano, 1993).…”

Finance-growth nexus in sub-Saharan Africa

“…6.Other mediating factors have been explored in recent empirical literature. Dombi and Grigoriadis (2020) investigate the role of ancestral institutions and historical legacies in the finance-growth relationship in post-Soviet countries, while Adusei (2019) investigates the role of the risk premium in the finance-growth link, using data from South Africa.…”

Revisiting the finance‐growth nexus: A socioeconomic approach

“…Specifically, one strand of literature supports the evidence of strong positive linear effects (see for example Asteriou and Spanos, 2019;Adusei, 2019;Caporale et al, 2015;Loayza and Ranciere, 2006;Ketteni et al, 2007;McCaig and Stengos, 2005;Levine et al, 2000), while other studies by using threshold techniques claim that the relationship between financial development and economic growth is nonlinear (see among others Samargandi et al, 2015;Cecchetti and Kharroubi, 2012;Rioja and Valev 2004a,b;Deidda and Fattouh, 2002). Both approaches have important limitations since the former studies impose a specific functional form, while the latter techniques are sensitive to the threshold variable chosen (endogeneity issues).…”