The purpose of this paper is to examine the inter‐temporal causal relationship between financial sector development and poverty reduction in Zambia. The paper attempts to answer one critical question: does financial sector development in Zambia lead to poverty reduction?
The paper uses the newly developed autoregressive distributed lag‐bounds testing procedure, which has numerous advantages, especially when the sample size is small. In addition, the paper uses three proxies of financial development, namely broad money supply (M2/GDP), domestic credit to the private sector as a ratio of gross domestic product (DCP/GDP) and domestic money bank assets (DMBA), against private per capita consumption, a proxy for poverty reduction.
When the broad money supply ratio (M2/GDP) is used as a proxy for financial sector development, poverty reduction seems to cause the development of the financial sector. However, when the DCP and the DMBA are used, financial development seems to cause poverty reduction, and not the other way round.
The empirical results of this paper show that the causal relationship between financial development and poverty reduction is sensitive to the choice of proxy used for financial development.
This paper is the first of its kind to empirically examine the causal relationship between financial deepening and poverty reduction in Zambia using modern econometrics techniques.
