Acta Universitatis Danubius. Œconomica, Vol 10, No 2 (2014)

Abstract

This paper explores the relationship between financial development and economic growth in South Africa. It employs an Auto Regressive Distributed Lag bounds testing approach and the Vector Error Correction Model to examine this relationship. The starting point of the analysis emanates from the works of Goldsmith (1969) who set out to chart the evolution of financial structures as economies grow and develop and to establish the impact financial development has on growth. The Auto Regressive Distributed Lag results show the existence of a steady relationship between financial development indicators and economic growth and the existence of a long-run relationship among the variables. The Vector Error Correction Model approach has shown a long-run bidirectional relationship from financial development to economic growth, and the banking sector is the main driver for economic growth. The study indicates that the South African financial system plays an important role in the growth of the economy and the variables under study boosts the growth of the economy. The paper thus, contributes to the discussion on the linkages between financial development and economic growth in a growing economy such as South Africa, which is the most developed country with the most advanced financial sector in sub-Saharan Africa.