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Financial development and economic growth: evidence from Niger

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par Oumarou Seydou
Xiamen University - Master of Economics Applied Finance 2012
  

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Financial Development and Economic Growth: Evidence

from Niger

Abstract

The relationship between financial development and economic growth is a controversial issue. For developing countries, empirical studies have provided mixed results. This study seeks to explore the relationship between financial development and economic growth in Niger from 1970 to 2010. We used two variables to proxy financial development namely; credit to the private sector to GDP denoted by CP and financial deepening denoted by FD. The economic growth is proxied by real GDP. In order to check this relationship a Vector Error Correction Model was carried out. Unit root test was conducted for stationarity, and all the series were found to be nonstationary at level. However their first differences were stationary at the same order. Additionally, Cointegration test was carried out, revealing that there was long run equilibrium relationship among the variables and economic growth. In case of the long run, financial deepening (FD) had positive impact on GDP however, credit to the private sector to GDP was found to hinder economic growth. Consequently, the authority in Niger should enact laws and policies to establish a central credit bureau linking all banks to limit defaults on loan payments. They should also build stronger and more diversified financial and banking sector by continuing with the liberalization policy so as to create competition among the banks. Finally, the populace should be sensitized and educated on the security of the banks against collapse in order to create confidence in citizens about the sustainability of the banking sector.

Keys Words: Financial Development; Economic Growth; Niger, Credit to private sector, Africa.

Table of Contents

Chapter 1 Introduction 1

1.1. Motivation 3

1.2. Scope of the Study 3

1.3 Brief overview of economic growth and financial sector Development in

Niger 3

1.3.1 Economic Growth 3

1.3.2 Financial Sector Development 4

1.4 Disposition 5

Chapter 2 Literature Review 6

2.1 Financial development: a factor for economic growth 6

2.2 Financial development: a less factor for economic growth 8

2.3 Financial liberalization and economic growth in the WAEMU countries 8

Chapter 3 Empirical Analysis 10

3.1 Data and Description of Variables 10

3.1.1 Data 10

3.1.2 Economic Growth Indicator 10

3.1.2 Financial Development Indicators 10

3.2 Unit root Test 14

3.2.1 ADF test 15

3.2.2 Test Results 16

3.3 Empirical results 16

3.3.1. Vector Autoregression (VAR) Lag Length 17

3.3.2. Cointegration Test 17

3.3.3. Cointegration results 18

3.3.4. Vector Error Correction Model (VECM) 19

Chapter 4 Conclusion and Policy Implications 23

4.1. Conclusion 23

4.2. Policy Implications 23

References 25

Appendix 28

Acknowledgment 33

Table of Figures

Figure 3.1: Trend of individual variables GDP, FD, and CP in log level 12

Figure 3.2: Log first differences of individual variables 13

List of Tables

Table 3.1 Descriptive statistic of the variables 14

Table 3.2 Descriptive statistic of the first difference of the Variables 14

Table 3.3 Unit root test of level 16

Table 3.4 Unit root test of first difference 16

Table 3.5 VAR lag order selection criteria 17

Table 3.7 Vector error correction estimates 20

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