Investment dynamics in Mauritius: Does financial development matter?

Abstract

This paper examines the impact of both bank-based and market-based financial development on investment in Mauritius between 1976 and 2014. Two models that are based on a flexible accelerator investment model are employed to evaluate the relationship between investment and financial development. One model postulates that both bank-based financial development and market-based financial development enhance the response of investment to an increase in the demand for output. The other model contends that there is no such enhancement for either type of financial development on investment. The study makes use of the ARDL bounds testing approach. For both tested models, results indicate that bank-based financial development has only a negative direct effect on investment in the long run. In contrast, market-based financial development is found to have a positive accelerator-enhancing effect on investment in the shortrun. Implications are that, for Mauritius, only market-based financial development enhances the response of investment to an increase in the demand for output, while bank-based financial development has a negative direct effect on investment in the long run.