Author(s): Kunofiwa Tsaurai, Weston Dzikiti
The study which is an extraction from a master’s degree dissertation examined the relationship between stock market, banking sector and economic growth in Zimbabwe using a Vector Error Correction Model (VECM) with time series data from 1988 to 2015. Most of the related studies separately explored the stock market-growth and banking sector-growth nexus unlike our study which investigated the three variables in a trivariate framework set up. The few previous empirical works which examined the stock market-economic growth and banking sector link in one study were quite narrowly focused in their choice of both banking sector and stock market proxies. The current study deviates from prior studies in that three banking sector development proxies (total financial sector credit, banking credit to private sector and broad money M3) and three stock market development proxies (stock market capitalization, value traded and turnover ratio) were employed to estimate both long and short run relationships between stock market, banking sector and economic growth in Zimbabwe. The results showed that a significant causal relationship from banking sector and stock market development to economic growth exists in the long run without any feedback effects. In the short run, a negative but statistically significant causal relationship runs from economic growth to banking sector and stock market development in Zimbabwe. Zimbabwean authorities are therefore urged to deepen their stock market and banking sector in order to ensure long term economic growth.