Equity, Bonds, Institutional Debt and Economic Growth: Evidence from South Africa

We examine the finance-growth nexus in South Africa accounting for the role of bond markets, stock markets, and bank and non-bank financial intermediaries using a vector autoregressive technique. Extant empirical literature has largely accounted for only banks and stock markets, ignoring bond market and non-bank financial intermediaries. We find that bond market development affects economic growth in South Africa, and no similar effect is observed for the bank and non-bank financial intermediaries and the stock market. Our finding shows that examination of individual elements of the financial system is important in understanding the unique effect of each on growth. The observation that the bond market rather than stock market, bank and non-bank institutions promote economic growth in South Africa induces an intriguing question as to what unique roles bond markets play that the intermediaries and equity market are unable to play.