The Causal Relationship between Financial Development and Economic Performance in Tanzania

Abstract

The study employs cointegration, vector error correction model and Granger causality test to ascertain causation between financial development and economic performance in Tanzania. Economic performance is measured by the real GDP, whereas proxies for financial development are: the ratio of money supply to nominal GDP; and growth of credit to private sector. The results show that there is a stable long-run relationship between financial development and economic performance in Tanzania. Granger causality test indicates that the causality runs from financial development to economic performance.

Keywords: Growth, credit to private sector, money supply, financial development