Abstract

This study investigated the link between financial development and economic growth in Togo for the period 1981-2010. The study employed Johansen’s cointegration and Granger causality testing procedure in the context of Vector Error Correction Method (VECM). The result shows a positively and statistically significant effect of financial development on economic growth in Togo and Granger causality test supports supply-leading view that comes from financial development to economic growth. This means that the causal relationship between financial development and economic growth in Togo is unique and is running from financial development to economic growth. The empirical results further confirm a unique cointegration relationship among real GDP per capita, financial development, inflation, primary completion rate, openness, foreign direct investment and real exchange rate. In addition, the variable primary completion rate, foreign direct investment and real exchange rate contribute positively to economic growth in Togo while inflation and openness discourage the economic growth in the Togo. The findings of the study call for the introduction of effective policy measures to deepen financial sector since financial development is an essential precondition for the positive impact of FDI on economic growth.

Key words: Financial development, economic growth, devaluation, Togo.