The Causal Relationship between Financial Development and Economic Growth in Tanzania 1980-2010

Mbellenge, Constantine Richard (2013) The Causal Relationship between Financial Development and Economic Growth in Tanzania 1980-2010. Masters thesis, The Open University of Tanzania.

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Abstract

The study determines the causal relationship between financial development and economic growth in Tanzania. In order to test for existence of long run relationship between the variables, the study employs a cointegration and vector error correction model (VECM) technique. Granger causality test was applied to the variables to test for the direction of causation between variables. The study uses annually data for the period of 1980 to 2010. Economic growth is proxied by gross domestic product (GDP), and financial development is proxied by ratio broadly money supply (M2) to nominal GDP; and credit to domestic private sectors to nominal GDP. The result shows that there is a stable long-run relationship between financial development and economic growth. The Granger causality test indicates that the causality runs from financial development to economic growth. The study suggest that the government need to develop more strategies that will further enhance the functioning of the financial system such as improvement of macroeconomics environment, remove of the remained element of financial repression, improvement of regulation and supervision of the local banks. Also the government should play a role of creating an enabling environment for development of financial private sectors to grow fast in order to promote a further economic growth.

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