Date of Award


Degree Type


Degree Name

Master of Business


Faculty of Business and Public Management

First Advisor

Professor Dave Allen


Financial literature is replete with theoretical and empirical evidence suggesting financial development has a causal effect on economic growth. Yet there is no consensus on the finance-growth nexus. The direction of causality is still controversial In fact, classical economists argue that financial factors are neutral and hence cannot have real effects. Critics argue the traditional methods of identifying long run economic relationships fail to address the methodological conflict between equilibrium implied by theory and the disequilibria in the data. The rise of new representation techniques such as the General Methods of Moments (GMM) and vector autoregression [VAR] brought with them empirical flexibility, which facilitates the re-examination of several theories. VAR characterization permits the economic system to determine the behavior of macroeconomic variables simultaneously. The endogenous growth theoretical literature gives credibility to system-wide V AR financial models. This research is both critical (in its search for a common framework to inform debate on Zimbabwe) and positive (to the extent it undertakes an empirical investigation.) Empirically, the study examines the nature and intensity of links between financial intermediation and economic performance in a small developing economy. A Vector Autoregressive [VAR] framework is applied to model and estimate the temporal and dynamic relationships between financial aggregates and economic activity. Cointegration among the variables is examined to determine the degree of heterogeneity and coevolution. The general impulse response function [GIRF] and variance decomposition [VDC] analytical techniques are applied to throw light on the speed and direction of the causal links and the persistence of shocks over time. Branches of financial theory, e.g. agency risk, corporate governance and information asymmetry have taught us economic activity does not take place in a vacuum or perfect market. To put this research into perspective, the study critically examines the evolution of Zimbabwean institutional structures in search of a new conceptual framework with potential to inform debate. The works of Levine (1997, 1998) LaPorta, Lopez-de-Silanes, Shleifer and Vishny (1997, 1998, 2000), Beck, Levine and Loayza (2000), Kane (1981, 1983, 2000) Jensen and Meckling (1976) and Stiglitz (1989) give considerable prominence to governance and institutional design. Allen and Gale(1994, p10) emphasized that institutional settings underlie the process of financial innovation. In fact, Schumpeter (1954, p12) exalts history, statistics and "theory" as the three pillars of economic analysis. Stiglitz (1989, p199) agrees that particular localized historical events could have permanent effects. More recently, Beck, Demirgüç-Kunt and Levine (2001) summarized the theory and provided an empirical examination of the links between laws, politics and finance.