The impact of bank and stock market developments on economic growth in Zimbabwe: 1988 to 2012

Abstract

The study examined the long run and short run relationship between bank and stock market developments and economic growth in Zimbabwe using annual data over the period 1988- 2012inclusive. Simple indices for bank development and for stock market development were constructed to measure developments in these sectors. The study used a financiallyaugmented production growth model and the ARDL approach was applied to test for the existence of the long run relationship while VECM was used to examine the short run dynamics. Granger causality was used to test the direction of the relationship and Microfit 5.0 to run the ARDL model. The results indicated the existence of a positive and statistically significant long run relationship between bank developments and economic growth which was consistent with other empirical studies. On the other hand stock market developments were found to have a negative and statistically significant impact on economic growth in the long run. In the short run the impact of bank developments were found to be negative but statistically insignificant while that of the stock market was positive and statistically significant. All in all banks were found to have a greater impact on economic growth than stock markets. The research results imply that the government must put in place long run and short run macroeconomic policies that will contain the negative effects of bank and stock market developments and bring about positive developments so as to realise growth. The major policy implication is that the government must seek to promote economic growth through a financially-based economic system than through a stock market based system and a stable economic environment coupled with strong institutions is critical for faster economic growth in Zimbabwe