The Impact of financial development on investment in Botswana: an ARDL-Bounds testing approach

Abstract

This paper examines the impact of both bank-based and market-based financial development on investment in Botswana during the period 1976 – 2012, using the autoregressive distributed lag (ARDL) bounds testing approach. The study adopts a flexible accelerator model, which enhances the relationship between financial development and investment. In order to capture the breadth and depth of the financial sector in the study country, the study makes use of bank- and market-based financial development indices. These are constructed from an array of bank- and market-based financial development indicators. The empirical results of this study show that while bank-based financial development has both a long-run and short-run positive impact on investment in Botswana, market-based financial development has no significant impact on investment, either in the short run or in the long run.