Open AccessLife insurance, financial development and economic growth in South Africa: An application of the autoregressive distributed lag model
Author(s) -
Athenia Bongani Sibindi
Publication year - 2014
Publication title -
risk governance and control: financial markets and institutions
Language(s) - English
Resource type - Journals
eISSN - 2077-4303
pISSN - 2077-429X
DOI - 10.22495/rgcv4i4c1art2
Subject(s) - distributed lag , economics , life insurance , granger causality , cointegration , proxy (statistics) , financial intermediary , financial sector development , per capita , short run , monetary economics , broad money , econometrics , finance , actuarial science , interest rate , financial sector , population , demography , machine learning , sociology , computer science
The life insurance sector may contribute to economic growth by its very mechanism of savings mobilisation and thereby performing an intermediation role in the economy. This ensures that capital is provided to deficient units who are in need of capital to finance their working capital requirements and invest in technology thereby resulting in an increase in output. In this way, it could be argued that life insurance development spurs financial development. In this article we investigate the causal relationship between the life insurance sector, financial development and economic growth in South Africa for the period 1990 to 2012 by applying the ARDL bounds testing procedure. We make use of life insurance density as the proxy for life insurance development, real per capita growth domestic product as the proxy for economic growth and real broad money per capita as the proxy for financial development. We test for cointegration amongst the variables by applying the bounds test and then proceed to test for Granger causality based on the error correction model. Our results confirm that the variables are cointegrated and move in tandem to each other in the long-run. The results also indicate that the direction of causality runs from the economy to the life insurance sector in the short-run which is consistent with the “demand-following” insurance-growth hypothesis. There is also evidence of bidirectional Granger causality running from the economy to financial development and vice versa, both in the long-run and short-run. The results also reveal that life insurance complements financial development in bringing about economic growth further lending credence to the “complementarity” hypothesis.