Finance-investment-growth nexus in South Africa: an ARDL-bounds testing procedure

In this paper we examine the dynamic causal relationship between financial development, investment and economic growth in South Africa-using the newly developed ARDL-Bounds testing procedure. Unlike the majority of the previous studies, we incorporate investment in the bivariate model between financial development and economic growth-thereby creating a simple trivariate causality model. In addition, we use three proxies of financial development, namely M2/ GDP, the ratio of private sector credit to GDP and the ratio of liquid liabilities to GDP in order to test the robustness of the results. Our results show that, on the whole, economic growth has a formidable influence on the financial sector development. The study also finds that there is a distinct unidirectional causal flow from economic growth to investment. Moreover, the study also finds that investment, which results from growth, Granger-causes financial development. The study, therefore, recommends that South Africa should intensify its pro-growth policies in order to bolster investment and financial development.