Stock market development and economic growth in Tanzania: an ARDL and bound testing approach

Abstract

PurposeThe purpose of this paper is to contribute to empirical evidence by recognizing the importance of stock markets in the financial system and consequently its causality to economic growth and vice versa.Design/methodology/approachThe study used the autoregressive distribute lag model (ARDL) with bound testing procedures, the sample covered quarterly time-series data from 2001q1 to 2019q2 in Tanzania.FindingsThe results suggest that stock market development have both negative and positive causality for both short-run dynamics and long-run relationship with economic growth. Economic growth is found to only cause and relate negatively to liquidity both in the short-run and in the long-run. The results show predominantly a unidirectional causality flow from stock market development to economic growth and finds partial causality flow from economic growth to stock market development, as represented by stock market turnover which proxied liquidity.Originality/valueThe use of quarterly data to reflect more realistically the dynamics of the variables because yearly data may sometimes cover-up specific dynamics that may be useful for prediction and policy planning. The study uses indices to capture general aspects within the stock market against economic growth as an intuitive way to aggregate the stock market development effects.