The Mediation Role of Financial Development in the Growth Effect of Financial Sector Reform: The Case of Tanzania
The objective of this paper is to examine the role of financial development as a mediator between financial sector reform and economic growth connection in a developing economy. The empirical strategy is to make use of predominantly time series data on macroeconomic variables over the period 1967-2006. The linkages are empirically explored using a system of equations supplemented by co-integration analysis and Granger causality tests. Findings from the study support the view that reforming the financial sector leads to economic growth and that the growth-impact of financial sector reform is borne through financial development. The study establish that the causal chain: Financial Sector Reform? Financial Development ? Economic Growth is a true contention for a developing economy. Findings from the study suggest two important policy implications. On one hand the study findings imply that financial repressive policies necessarily constitute an impediment to the development of the financial sector and thus reforming the financial sector in Tanzania was undoubtedly justifiable. On the other hand, the findings suggest that it is important to have appropriate policies aimed at developing the real and the financial sectors simultaneously.