The Impact of Financial Development on Economic Growth in Zimbabwe: Comparative Analysis of Stock Markets and Commercial Banks

Abstract

The purpose of this paper is to examine the relationship between financial development—bank and stock market—and economic growth in Zimbabwe. Using data during the period from 2005 to 2013, the study employed a VECM for the short run Controls variables. This offers a possibility of applying VAR in order to use integrated multivariate time series and avoid spurious regression as the interest rates appear to have long run positive impact on economic growth. This means that banking sector performs better than the stock markets if the interest rate is positively related to economic growth. The findings suggest a positive relationship between efficient stock market and economic growth both in short run and long run. Interest rates have a negative effect, while market capitalisation has a positive effect on growth. It is concluded that financial sector is important in the process of sustainable economic development in Zimbabwe.