The impact of financial market development and financialisation on economic growth in South Africa
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Date
2017
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University of Zululand
Abstract
The issue of financialisation found its way through financial market developments in several economies including the South African economy, in the sense that foreign investors sought lucrative short-term investments in economies with relatively sophisticated financial markets that offered high positive interest rate differential in the debt markets and huge returns in the equity markets. The primary goal of this research study is to analyse, evaluate and identify the dynamic long run relationship between financial market development; financialisation and economic growth in South Africa over the period. Apart from determining the long run cointegrating relationship between financialisation, financial market development and economic growth the study wishes to also study the short run adjustments of the said variables due to disequilibria arising from the cointegrating relationship. To achieve these objectives various econometric approaches used include the co-integration analysis, the Vector Autoregressive (VAR) and the Vector Error Correction models (VECM), as well as the single equation methods such as the Fully Modified Ordinary Least Squares (FMOLS), the Dynamic Least Squares (DOLS) and the Canonical Cointegration Regression (CCR). The VAR/VECM analyses concluded that there is a plausible long-term cointegrating relationship between the variables as predicted by economic theory. Additionally, although there are some valid short run adjustment relationships, however, GDP growth in the short run have adjustment relationships contrary to expectations The single equation methods confirmed the finding of the Johansen (1991) VAR/VECM approach that financialisation has negative long run impact on economic growth while financial development has a positive impact as reflected by the signs of the coefficients of the respective proxies for financialisation and financial development in all the models estimated. Two proxies were used for financialisation which included bank credit extended to households and net purchases of financial asset by foreigners, while three proxies were employed for financial development which included stock market volume trade at the Johannesburg Securities Exchange, the broad money supply (M3) and bank credit. This is a first South African study to consider such a relationship incorporating the financialisation variable and is one of the very few global papers, of this kind, involving emerging markets.
Description
A thesis submitted to the Faculty of Commerce, Administration and Law in fulfillment of the requirements for the Degree of Master of Commerce (Economics) in the Department of Economics at the University of Zululand, 2017
Keywords
financial markets --financialisation --foreign investors --South African economy