The impact of financial development on economic growth in Tanzania.
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Date
1998
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Publisher
University of Dar es Salaam
Abstract
This study investigates the extent to which financial development have influenced economic growth in Tanzania. The degree of financial development is proxied by the size of the financial system (overall financial depth - LLY and the size of financial intermediation - QLLY), the distribution of financial assets to the private sector (the share of private sector in total domestic credit - DCPT) and the repression of interest rates (DU Mr). The hypotheses hold that, LLY, QLLY, DCPT and DUMr influence the rate of growth (GYP), the efficiency of investment (EFF) and the volume of investment (INV). GYP gives the direct impact of financial development on economic growth while EFF and INV give the indirect impact. Several regressions were run using OLS technique and the results show that the proxies for the size of the financial system were negatively and significantly related to growth, except the lagged ALLY by two years which explained EFF positively. ALLY thus emerged as an important financial size indicator in Tanzania during the study period. The implication is that the extent of financial intermediation explains better the size of the financial system. The results also show that DCPT has a strong impact on economic growth. It was thus concluded that it matters a lot how financial assets are distributed and invested. Furthermore, the empirical results give support for the financial repression hypothesis. DUMr had a negative impact on growth. Reduction in the rate of inflation together with the existing interest rate liberalization were then recommended as a policy prescription for an efficient operation of financial intermediaries in order that they speed up the growth of the economy. Finally, the findings suggest that the main channel of transmission to growth is the efficiency of investment, rather than its volume.
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Keywords
Monetary policy, Tanzania
Citation
Mushi, F. A. (1998). The impact of financial development on economic growth in Tanzania. Master dissertation, University of Dar es Salaam. Available at (http://41.86.178.3/internetserver3.1.2/search.aspx?formtype=advanced)