Financial Development and Income in African Countries

This paper presents an empirical analysis of the relationship between financial system development and economic development. Using cointegration and vector autoregressive estimations on annual data from Africa, we examine the nature of the relationship between financial development and income. We find mixed results on both the short‐ and the long‐run relationships between the two variables. We find finance causing income, income causing finance, and bidirectional causality. The results indicate that neither the short‐run effects nor the long‐run relationship seem to linearly depend on the level of financial development or the stage of development.(JELE44, O16, G20)