Financial Development and Economic Growth in Tanzania: A Dynamic Casualty Test

This study investigates empirically the role of financial development on economic growth in Tanzania. Unlike many previous studies, the study uses three proxies of financial development against real GDP per capita (a proxy for economic growth). Using the Johansen-Juselius cointegration method and vector error-correction mechanism, the empirical results of this study, taken together, reveal a bidirectional casuality between financial development and economic growth in Tanzania - although a supply-leading response tends to predominate. When the ratio of broad money to GDP (M2/GDP) is used, a distinct supply-leading response is found to prevail. However, when the ratio of currency to narrow definition of money (CC/M1) and the ratio of bank claims on the private sector to GDP (DCP/GDP) are used, a bi-directional causality evidence seems to prevail. The study therefore recommends that the current financial development in Tanzania be developed further in order to make the economy more monetised.