The direction of possible causal relationship between financial development and economic growth in Namibia

Abstract

The study investigates the causal relationship between financial development and economic growth in Namibia. In order to test for the existence of long-run relationships between the variables, the study employs a cointegration and vector error correction model (VECM) technique. The Granger causality test was applied to the variables to test for the direction of causation between variables. The results show that there is a stable long-run relationship between financial development and economic growth. The Granger causality test indicates that the causality runs from economic growth to financial development. The results suggest that the real sector of the economy should be developed further in order to stimulate further development in the economy through policy interventions like industrial development to diversify the economic base, enhance the performance of small and medium enterprises, and improve the performance of the tourism sector, which has great potential for promoting growth.