The finance–growth nexus: Does risk premium matter?

Abstract

The bounds testing approach to cointegration analysis is employed in this paper to examine whether the risk premium demanded by the banking sector moderates the finance–growth nexus with data (1970–2015) from South Africa. To the extent that the interaction between risk premium and financial development positively affects growth in the long run, we affirm that the risk premium demanded by the banking sector represents a significant channel through which financial development drives growth. The main policy implication of this finding is that financial liberalization that removes interest rates restrictions, allowing the banking sector to adequately price risk, is in the best interest of the South African economy.