Nexus Between Capital Markets and Economic Growth in Frontier Economies Evidence From Sub-saharan Africa.

Abstract

The study was meant to establish the nexus between capital markets and economic growth. A panel of five countries was used for the analysis and the sample period was from 2005 to 2017. In order to determine the most suitable model, the study used the Hausman test and found the fixed effects to be the most suitable model. The study used market capitalization ratio measured as a ratio of market capitalization to GDP, turnover ratio, value traded ratio and number of listed securities as indicators of capital markets. Other control variables used in the study were inflation, foreign direct investment and trade openness. Findings revealed that market capitalization and the number of listed securities improved economic growth in the five countries. As for the control variables used, inflation was found to have a negative impact on the growth of the economy while foreign direct investment was found to have a positive effect on GDP. The study further estimated a panel Granger causality test to determine the direction of causation between the measures of capital markets and economic growth. The Panel Granger causality test found a unidirectional causality running from market capitalization to economic growth. The following policy implications were drawn from the study. Firstly, SSA governments should come up with policies that promote capital market development. Secondly, SSA governments should strive at promoting foreign direct inflows in their respective countries since it was found to spur growth, and at the same time keeping the inflation in check.