Stock market development and economic growth: Evidence from Mauritius

In the recent past, with the phenomenal growth of equity markets, a burgeoning number of policy makers and researchers began to query about the possible impact that equity market development might have on economic growth. Indeed, an overwhelming number of studies have been carried out worldwide to investigate the links which might exist between stock market development and economic growth. As a result, this has strengthened the view that stock markets around the world play a key role in fueling a powerful and resilient economy. However, most of these studies have focused solely on developed countries and not on developing countries or small island developing economies like Mauritius. As such, since studies analyzing this link in the African region are rather scant, this paper endeavors to scrutinize the relationship between equity market development and economic growth in Mauritius. To this end, this paper analyzes the relationship between stock market development, banking development and economic growth in a unified framework using semi-annual data for the period 1988-2011, through a dynamic Vector Error Correction Model (VECM). The VECM is used extensively to determine the link between stock market development and economic growth while simultaneously allowing identification of any bi-directional and/or uni-directional causality between the variables of interest. Moreover, this model divulges both the direct and the indirect impacts, if any, which stock market development might have on economic growth. Possible determinants of stock market development and the effect of stock market development on the control variables are also analyzed through the VECM. The results suggest that stock market development does play an important role in generating gains in terms of economic growth in the long run in the island. In the short run however, stock market development fails to significantly boost economic growth in Mauritius. Moreover, stock market development is also seen to indirectly stimulate economic growth in the short run, through banking development. Interestingly, banking development is seen to have a positive impact on economic growth, both in the short run and in the long run. This indicates that banking development and stock market development both complement each other. As such, it is believed that further steps have to be taken to promote stock market development in the island, with the aim of boosting both the economy and the banking sector in the long run.