The causality between financial development and economic growth: case of Algeria

Abstract

This paper aims to investigate the direction of causality between financial development and economic growth in Algeria over the period 1980-2018 using Toda and Yamamoto (1995) approach for Granger non-Causality test in the context of VAR model. The study was carried out using two indicators to proxy the level of financial development. The first proxy is the monetization ratio (M2/GDP) as an indicator of the financial depth or size of the financial development intermediaries sector. The second proxy is financial intermediation ratio expressed by the credit to private sector as percentage of GDP. While, the GDP per capita growth was used as measure of economic growth. The results suggest unidirectional causality relationship running from the economic growth to the financial sector as explained by the broad money to GDP. Nevertheless, the findings suggest noncausality between credits to private sector to GDP and economic growth