SCHOOL OF POSTGRADUATE STUDIES

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©2024
Table of Contents
Abstract............................................................................................................... 5
CHAPTER ONE: INTRODUCTION AND BACKGROUND TO THE STUDY...7
1.0 Background to the study.........................................................................7
1.1 Statement of the Problem.......................................................................7
1.2 Study Objectives....................................................................................... 8
1.2.1 General Objective............................................................................... 8
1.2.2 Specific Objectives............................................................................. 8
1.3 Research Questions.................................................................................. 8
1.4 Significance of the Study.........................................................................8
1.5 Scope of the study.................................................................................... 8
CHAPTER TWO: LITERATURE REVIEW.........................................................9
2.0 Introduction.............................................................................................. 9
2.1 Theoretical Review................................................................................... 9
2.2 Empirical Review.................................................................................... 10
CHAPTER THREE: METHODOLOGY.............................................................12
3.0 Introduction............................................................................................ 12
3.1 Research Approach................................................................................ 12
3.2 Research Design..................................................................................... 12
3.3 Model Specification................................................................................ 12
Economic growth.......................................................................................... 12
Financial sector development.......................................................................12
Broad Money (% GDP).................................................................................. 13
Control Variables.......................................................................................... 13
Inflation......................................................................................................... 13
Government expenditure.............................................................................. 13
Openness of economy................................................................................... 13
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS........................14
4.0 Introduction............................................................................................ 14
4.1 Descriptive Statistics............................................................................. 15
4.2 Data Analysis Tests................................................................................ 15
4.2.1 Augmented Dickey Fuller Test.......................................................16
4.3.2 Lag Length........................................................................................ 17
4.3.3 Cointegration Test...........................................................................17
4.3.4 Vector Error Correction Model......................................................17
4.4 Post Diagnostic Tests............................................................................. 19
 4.4.1 Jarque Berra Test............................................................................. 19
[Link] LM Test........................................................................................... 19
4.4.3 Stability Test..................................................................................... 20
CHAPTER FIVE: DISCUSSION OF FINDINGS..............................................21
5.1 Introduction............................................................................................ 21
5.2 Discussion of Findings...........................................................................21
5.2.1 Financial Sector Development and Economic growth................21
5.2.2 Inflation and Economic growth......................................................22
5.2.3 Money Supply and Economic Growth............................................23
5.2.4 Government Spending and economic growth..............................24
5.2.5 Trade Openness and economic growth.........................................24
CHAPTER SIX: CONCLUSION AND RECOMMENDATIONS.......................26
6.1 Conclusion............................................................................................... 26
6.2 Recommendations.................................................................................. 26
i. Expand Financial Inclusion...................................................................26
ii. Improve Credit Access and Efficiency.................................................26
iii. Foster a competitive Financial Environment..................................26
iv. Enhance Financial Literacy................................................................27
v. Strengthen Regulatory Frameworks....................................................27
vi. Promote Long-term Investment........................................................27
vii. Support Innovation and Technology Adoption...............................27
viii. Ensure effective monetary policies...................................................27
6.3 Suggestions for further studies........................................................27
APPENDIX......................................................................................................... 28
Summary Statistics....................................................................................... 28
Cointegration Test Results..........................................................................29
Long run VECM............................................................................................. 30
Stability Test.................................................................................................. 31
Autocorrelation............................................................................................. 31
Normality Test............................................................................................... 32
Abstract
This study investigated the effects of Financial sector development on economic
growth in Zambia and further examined the effect of the variables inflation,
trade openness, broad money and Government Spending between 1990 and
2020. The Vector Error Correctional Model was also used to model the
relationship between explained variable (economic growth) and the explanatory
variable (Financial Sector development, Inflation, trade openness, broad money
and Government Spending).Using secondary time series data on Financial
Sector development, Inflation, trade openness, broad money, Government
Spending and Economic growth obtained from the World Bank Development
Indicators, the Zambia Revenue Authority (ZRA), and the Ministry of Finance
over a sample period of 31 years (1990 to 2020). The resulting variables were
regressed to show how Financial sector development affected Zambia's
economic growth. After a brief overview of the data, the data analysis tests,
including the unit root test, cointegration testing, lag length, and the Vector
Error Correction Model (VECM), were presented. Results from post-diagnostic
testing, such as the heteroscedasticity, autocorrelation, stability, and normality
tests, were also carried out. The results also highlighted that a short run
relationships existed among the other two variables namely, financial sector
development and economic growth. It has been shown that financial sector
development had a positive effect on the country’s economic growth in both the
short-run and long-run. On the other hand, Inflation, government spending and
Inflation exerted varying non-significant effects on economic growth in the short
run. The non-significant effects in the short-run are a sign of inadequate
institutional capacity and the lack of pass through effects in the financial sector.
On the other hand, short run model results for the variable broad money show a
positive effect on economic growth.

The long run results show that all the variables, Financial Sector development,
Inflation, Broad Money and government expenditure have significant long run
effects on economic growth with the exception of Trade Openness which has an
insignificant effect.
To enhance economic growth in Zambia policymakers should consider the
following recommendations. Government should develop policies to increase
access to banking and credit services for underserved segments of the
population, including rural communities and small businesses. Initiatives could
include promoting digital financial services and supporting microfinance
institutions to reach these groups.
Further, the study recommends that Government should streamline the credit
application processes and enhance credit information systems. Implement
measures to improve the availability of credit data and collateral registries,
which can help lenders assess creditworthiness more accurately and reduce
borrowing costs.
List of Tables
Table 1 Summary Statistics................................................................................ 17
Table 2 Stationarity at levels..............................................................................18
Table 3 Stationarity after differencing................................................................18
Table 4 Johansen Test......................................................................................... 19
Table 5 Shortrun Model results (economic growth-dependent variable)...........19
Table 6 Long run Model...................................................................................... 21
Table 7 LM Test Results...................................................................................... 22
List of Figures
Figure 1 Cusum Plot........................................................................................... 21

CHAPTER ONE: INTRODUCTION AND BACKGROUND TO THE STUDY

1.0 Background to the study
The relationship between financial sector development and economic growth
has received considerable attention from scholars and policy makers over the
years in both theoretical and empirical literature.
On the other extreme are those who suggest that financial system development
is anti-growth (Van Wijnberg, 1983, Buffie, 1984). Development in financial
system facilitates risk amelioration and efficient resource allocation; this may
reduce the rate of savings and risk, consequently leading to lower economic
growth (Levine, 2004). This follows, from the basic assertion that, where there
is high risk there is high return.
On the other hand, Lucas (1988) and Stern (1989) suggest that there is no
relationship between financial system development and economic growth.
According to Lucas (1988) finance is an ‘overstressed’ determinant of economic
growth. Therefore, any strategies aimed at promoting financial system
development would be a waste of resources, as it diverts attention from more
relevant policies such as labour and productivity improvement programs,
implementation of pro-investment tax reforms, encouragement of exports;
amongst others.
The other school of thought is that, the financial system develops in response to
improved economic growth. According to Robinson (1952) ‘where enterprise
leads finance follows. As an economy grows the financial sector responds to the
demands of the economy. A number of studies (Gurley and Shaw, 1955;
Goldsmith, 1969; Jung, 1986; Kar and Pentecost, 2000; Boulika and Trabelisi,
2004; Islam et al., 2004; Guryay et al., 2007) suggest a unidirectional causality
from growth to finance. Countries, whose economies grow faster, are forced to
devote more investment on improving the financial system, in order to stabilize
their economic environment (Padilla and Mayer, 2002).
1.1 Statement of the Problem
There has been several research that has investigated the impact of financial
sector development on economic growth around the world. Results from
different researchers using different models are inconclusive because they
reach different conclusions. Most studies suggest that there is a significantly
positive relationship between financial development and economic growth.
Hassan et al. 2011; Kabir et al. 2011; Lartey, 2010; Levine et al. 2000; King and
Levine, 1993 and Gupta, 1986 used different indicators of financial development
and concluded that there is a positive relationship between financial sector
development and economic growth. Other Scholars that found a positive
association between financial sector development and economic growth include
Calderon and Liu, (2003), Chang (2002) and Mazur and Alexander (2001)
On the contrary, Goldsmith (1969), Jung (1986) and Singh (1997) found a
negative relationship between financial development and economic growth.
The difference in conclusions shows that there is an unsettled debate of the
relationship between financial development and growth rate of an economy.
This
The quest to develop economies around the world called for investigation on the
role of finance on economic growth and to determine whether the financial
sector reform has yielded the desired results over the years.
1.2 Study Objectives
1.2.1 General Objective
The main objective of this study is to examine the role of financial sector
development on economic growth in Zambia
1.2.2 Specific Objectives
 To examine the effect of financial sector development on growth
 To assess the effect of Inflation on economic growth
 To investigate the impact of money supply (broad money) on economic
growth
 To analyze the effect of trade openness on economic growth
 To investigate the influence of government spending on economic growth
1.3 Research Questions
The research will address the following questions:
1. What is the impact of financial development on economic growth in
Zambia?
2. How does Inflation affect economic growth in Zambia?
3. To what extent does Money Supply affect economic growth in Zambia?
4. How does trade openness affect economic growth in Zambia?
5. What is the impact of government spending on economic growth in
Zambia?
1.4 Significance of the Study
This study is important as it examines the role that financial sector development
plays in economic development. It will also determine the trends that exist both
in financial sector development and in economic growth. The results of this
study will be important for policy makers to come up with the right financial
sector policies in order to promote economic development. This study will also
be of importance to future researchers as it will add to the already existing
literature on the topic
1.5 Scope of the study
This study examines the effect of financial development on economic growth in
zambia. Out of the 48 sub-Saharan Africa countries, 36 of them were used for
the analysis reason purely attributed to data availability over the study period
stated above
CHAPTER TWO: LITERATURE REVIEW
2.0 Introduction
This section delves into the existing literature on financial sector development
and economic growth. It starts with a theoretical overview, discussing
important theories from economic literature that relate to these concepts.
Following this, it covers empirical findings on the topic. The section concludes
with a conceptual framework designed to elucidate the connection between
financial sector development and economic growth.
2.1 Theoretical Review
The first argument was introduced by Schumpeter (1934) and developed by
McKinnon, (1973) and Shaw (1973). According to Schumpeter, finance has a
positive impact on economic growth by financing innovative ideas. This means
that the financial sector promotes economic growth through an increase in
savings and investment. To increase savings and investment, there is need to
liberalise the interest rates, as the real interest rate increases, the incentive to
save also increases. Gurley and Shaw (1955) carried out research on the role of
financial institutions in directing surplus units to deficit units to promote
growth. Bencivenga & Smith (1991) argued that financial intermediation affects
growth through investment, where banks mobilize and direct savings into
productive investment. King and Levine (1993) complemented this argument by
explaining the role of finance in growth through an endogenous growth model.
They argued that financial institutions help growth by screening potential
projects of entrepreneurs and, through financial intermediation, mobilize
finance to support the most productive economic activities and diversifying the
risk associated with these economic activities.
The second school of thought argues that it is economic growth rather than
financial development that leads to the emergence and development of the
financial sector. This view was introduced by Robinson (1952), who argued that
expansion in economic activities within an economy necessitates the presence
of financial institutions to provide services essential for economic growth.
Hence, growth leads, and finance follows.
The third standpoint sought to combine the two arguments above and
suggested the existence of a mutual relationship between finance and growth.
Patrick (1966) put forward the stages of a development hypothesis where
finance initially spurs economic growth, as suggested by the finance-leading or
supply hypothesis. As growth is enhanced through expansion in economic
activities, growth then supports finance, following the demand-leading
hypothesis. This position is supported by Greenwood & Jovanovic (1990) who
argued that there is an inextricable link between finance and growth. They
explained that at the initial stage of development, the inter-mediation function
played by finance promotes growth by encouraging a higher return on capital.
At a later stage, the resultant growth supports the expansion of the financial
structure. The final line of argument led by Lucas (1988) sought to suggest that
the role of finance in the growth process has been overstretched and, hence, the
impact of finance on growth is negligible.
2.2 Empirical Review
Goldsmith (1959) carried out a study in 35 countries to examine the relationship
between finance and economic growth. He made a pioneering contribution to
the empirical examination of the finance–growth nexus. Results from this study
indicate a positive correlation between financial sector and economic
development.
In a related study of 17 European countries over the period 1970–2013,
Mahmood and Rehman (2019) reported both bank and market indicators to
positively affect growth, but the impact of bank development was more
persistent relative to the stock market. In another study, Boadi et al. (2019),
using a sample of 60 countries, found support for the hypothesis that a market-
based financial system drives growth relative to the banking sector. Yet, some
found the impact of financial devel-opment on growth to vary based on income
levels (see, for instance, Bist & Read, 2018; Deidda & Fattouh, 2002; Kim et al.,
2012; Nguyen et al., 2019; Rahman et al., 2020; Sehgal et al., 2012). Sehgal et
al. (2012) disaggregated their samples into lower-, middle- and upper-income
countries. They found the banking sector to drive growth across the three
income groups, while the stock market only drives growth in the middle- and
upper-income countries. Similarly, Nguyen et al. (2019) identified the insurance
sector to positively affect growth across income groups with the stock market
only having a positive effect in middle- and upper-income countries. They
however established the effect of the banking sector on growth to be negative
across income groups, where they suggested that credit extended could have
been utilised on consumption instead of growth-enhancing projects.
Gregorio and Guidotti (1995) investigate the relationship between long run
growth and financial development proxied by ratio of bank credit to the private
sector to GDP. They find that the proxy correlates positively with growth though
with changing impact across countries. A negative correlation emerges in a
panel data for Latin America. This result they attribute to financial liberalization
in a poor regulatory environment. Gregorio and Guidotti conclude that the main
channel of transmission from financial development to growth is the efficiency
rather than the volume of investment
Hao (2006) examines how the development of financial intermediation
influences China’s economic growth. He posits that financial intermediation
development contributes to growth through two channels; first, the substitution
of loans for state budget appropriation and the mobilization of household
savings. Consequently, loan expansion does not contribute to growth if the
distribution is inefficient.
King and Levine (1993) found, in their investigation into 77 countries, spanning
the years 1960 to 1989, a statistically positive and significant connection
between development of the financial sector and increases in real per capita
capital stock, real per capita GDP, and gross national product. Additionally,
Beck and Levine (2005) used “generalized method of moments (GMM) and
averaged non-overlapping data” from 40 countries between 1976 and 1998;
they consequently established that stock market growth as well as banking
sector development showed increased economic expansion.
Saci, Giorgioni, and Holden’s (2009) research investigated signs of banking
sector development and the stock market. Their study shows that stock market
development indicators supports growth. Banking sector development, they
concluded, negatively affected financial growth where stock market
development indicators are involved. According to Leitão (2010), data gathered
between 1980 and 2006 showed a progressive connection between financial
development and economic growth for five BRICS and 27 European Union
countries. Similarly, by using “dynamic GMM models” (2010, p. 15) for 24
nominated African countries between 1981 and 2010, Adusei (2013) concluded
that a positive correlation between economic growth and financial development
existed. Additionally, by using “pairwise Granger causality tests”, the
researcher confirmed the suggestion of bidirectional causation among economic
growth and financial development (2010, p. 15).
Ncanywa and Mabusela (2019)” examined the effects financial sector growth on
economic development in five countries in sub-Saharan Africa. In the analysis,
“panel cointegration, variance decomposition, panel ARDL, and impulse
response” techniques were used (2019, p. 12). From the multiple cointegration
tests conducted, resultant findings indicated that there was an extended
connection between the two variables; however, one test - the Kao test - did not
find a correlating affiliation. ARDL tests conducted revealed that, over an
extended period, liquid liabilities and bank loans to private enterprises impact
economic growth positively. This lends credence to the supply-following
hypothesis, according to which financial sector development causes economic
growth. In other words, the growth of the economy will be positively affected by
bank loans extended to private enterprises and by liquid liabilities. In terms of
domestic savings, the findings indicated its influence on monetary growth is
ultimately negative. In the short term, however, opposite results were obtained
by gross domestic savings, which spurred on economic growth.
Aluko and Ajayi (2017) conducted a pragmatic study on the features that
determine the development of the banking sector in sub-Saharan African
nations using a system “GMM estimator” for estimation of the dynamic panel
model based on panel data. Furthermore, the study concluded that better
institutional conditions, density of the populace, and trade openness positively
influence the development of the banking sector by increasing its depth. In
addition, the banking sector's development was shown to be improved by the
law (quality of laws and legal origins), inflation, and religion, evidenced by an
increase in overall efficiency. Conversely, trade openness, income level, and
ethnic diversity have negative effects on the banking sector's development.

CHAPTER THREE: METHODOLOGY

3.0 Introduction
This section outlines the study's methodology, including the variables examined,
the population of interest, the geographic focus, the sample size, and the
approaches used for data collection and analysis.
3.1 Research Approach
The main objective of this research is to examine the role of financial sector
development in economic growth. The researcher took a quantitative research
approach to achieve this objective. This is because a quantitative approach is
the best approach to test hypotheses and to identify factors that influence the
outcome Creswell (2013). Quantitative approach specifies how and why the
variables are interrelated and why independent variable, influence or affect a
dependent variable which is economic growth. Quantitative approach is better
as it provides and explain cause and effect relation among variables. In time
series analysis, it is important to understand the behavior of variables, their
interactions and integrations over time.
3.2 Research Design
The research design describes the general approach that was adopted in the
research. This research is quantitative in nature and as such the researcher will
use the causal-comparative research design. This method will help the
researcher to examines the cause-effect relationships by determining how
financial sector development can influence economic growth. In other words, it
will help the researcher to discover the interaction between financial sector
development and economic growth in Zambia.
3.3 Model Specification
To investigate the role of financial sector development on economic growth, this
research adapts a simple model by Jose De Gregorio (1995). In the model the
financial development variable is included in an endogenous growth model. The
model shows how indicators of financial development through economic
relations turn to have an impact on economic growth. The equation below
shows the functional and econometric relationship between the variables of the
study.
Economic growth=f(financial development, macro−economic environment)
Economic growth (GDP) = α+ β1 Domestic credit to private sector t + β2M2 t +β3
Inflation t + β4 Government expenditure t+ β5 Trade openness t
Economic growth
The research uses Gross Domestic Product (GDP) growth rate as a measure of
economic growth, GDP is therefore the dependant variable. This is commonly
used as an indicator of economic growth by scholars. Jalil and Ma (2008)).
Financial sector development
Financial system development is determined by the value of financial assets as a
ratio of GDP, however data for some years is missing, the researcher uses 2
indicators of financial sector development : Domestic Credit to private sector
and Broad Money.
Domestic Credit to Private Sector (DCPVT): it is a very common measure of
allocative efficiency in the financial sector, as the financial system develops
allocative efficiency is expected to improve. It is used as a proxy to credit to
private sector (Jalil and Ma, 2008). Private credit as a ratio of GDP a true
indicator of volume of funds to the private sector and thus a good indicator of
financial intermediation (De Gregorio and Guidotti, 1995; Akinboade, 1998). In
addition credit to private sector creates productivity more than credit to public
sector (Akinboade, 1998). ATherefore it indicates development in financial
intermediation (Akinboade, 1998, Kar and Pentecost, 2000). Supply of credit to
the private sector indicates the quantity and quality of investment (Demetriades
and Hussein, 1996). According to Boulila and Trebelisi (2002), it is a good proxy
of financial sector development in developing countries.
Broad Money (% GDP)
Broad money is a category for measuring the amount of money circulating in
an economy. It is defined as the most inclusive method of calculating a given
country's money supply, and includes narrow money along with other assets
that can be easily converted into cash to buy goods and services, Liberto (2020).
Empirical analysis suggested that the effect of money supply on economic
growth is positive. This is based on previous studies made on the topic by
Ntezimana & Mulyungi (2020), (Abdulgafar & Olarinde, 2017), Aslam et al
(2011) and Babatunde et al (2011) have come to a conclusion that the
coefficient of broad money supply as percentage of GDP has a positive effect on
Economic growth.
Control Variables
Inflation
Inflation is a rise in prices, which can be translated as the decline of purchasing
power over time. The rate at which purchasing power drops can be reflected in
the average price increase of a basket of selected goods and services over some
period of time. The annual rate of inflation is the price of the total basket in a
given month compared with its price in the same month one year previously,
Fernando (2023).
Government expenditure
Government expenditure is the aggregate expenditure by local, state, and
national governments on goods and services, including salaries of public
employees, public infrastructure investments, welfare programs, and national
defense. This control variable captures the effect of government expenditure.
The choice of variable is inspired by the fundamental role of public expenditure
in spurring economic activities and development.
Government expenditure has positive and significant impact on economic
growth. Empirical literatures on the topic have indicated that there exists
positive relation between government expenditure and economic growth Poku
& Opoku (2022) and Al-Fawwaz, T. M. (2016)
Openness of economy
This expected to have a positive impact on growth (Yanikkaya, 2002; Andersen
and Babula, 2008; Johannes et al., 2011; Osei-Yeboah et al., 2012; Ahmadi and
Mohebbi, 2012) it is measured as the sum of exports and imports of goods and
services as a share of GDP. The smaller the country the more open it should be
to and if there is a high degree of protection the degree of openness will be
smaller (Rodriquez, 2000).
All variables were expressed in logarithm to smoothen the data, (thus were
changed to LGDP, LDCPVT, LLLY, LMKTCAP, LINFL, LRIR, LOPEN). To ensure
the variables used in the model are stationary, they were all tested for unit root
using the Augmented Dickey-Fuller (ADF) and Philips Perron (PP) test.
Therefore a lag one with first differencing was used, after which all variables
become stationary except for LRIR, which was non-stationary using ADF test
with no trend, However as alluded to above the results of PP test would be
considered to be more valid due to existence of break in variables, the results
were as presented below:

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS

4.0 Introduction
This section explored the connection between financial sector development and
economic growth in Zambia. Data on key economic indicators such as growth,
private sector credit, inflation, government spending, and trade openness were
obtained from sources like the World Bank Development Indicators, the Zambia
Revenue Authority (ZRA), and the Ministry of Finance, covering the period from
1990 to 2020. The analysis employed regression techniques to determine how
domestic credit to the private sector, as a measure of financial sector
development, influenced economic growth. After an initial overview of the
dataset, a range of econometric tests were applied, including unit root testing,
cointegration analysis, lag length determination, and the Vector Error
Correction Model (VECM). Additionally, post-diagnostic tests for
heteroscedasticity, autocorrelation, stability, and normality were carried out to
ensure robustness.
4.1 Descriptive Statistics
The table below summarizes statistical data from 1990 to 2020. During this
period, economic growth had an average rate of 4.11 percent, with the lowest
recorded at -8.63 percent and the highest at 10.29 percent. Government
expenditure (GE) averaged ZMW 21.75 billion, with a standard deviation of
ZMW 29.29 billion. Domestic credit to the private sector, expressed as a
percentage of GDP, ranged from a low of 11.35 percent to a peak of 84.81
percent in 2020. Broad money averaged ZMW 22.49 billion, with a standard
deviation of ZMW 30.06 billion. Inflation showed significant variation, ranging
between 6.43 percent and 183.31 percent throughout the period.
Table 1 Summary Statistics

Variable Mean Standard Min. Max.

Dev.

Growth 4.10999 3.994226 -8.625442 10.29822

Credit 21.60022 18.40854 11.3595 84.81197

Inflation 33.48548 44.59203 6.429397 183.312

Broad_Money 22.49102 30.06043 0.0247364 107.626

Trade_Openness 0.312689 0.8815488 -0.6451492 2.692283

Government Exp. 21.75329 29.29892 0.017 110

Number of Obs. 31

4.2 Data Analysis Tests

A set of preliminary diagnostic tests was performed to assess the model's
relevance and define its framework. The findings from these evaluations are
outlined in the tables below.
4.2.1 Augmented Dickey Fuller Test
The Augmented Dickey-Fuller (ADF) test was utilized to evaluate the
stationarity of the variables. Before performing this test, the lag length for each
variable was determined using the Akaike Information Criterion (AIC), as
detailed in the Appendix. The null hypothesis is rejected when the absolute
value of the ADF test statistic surpasses the critical value at the 5% significance
level.

Table 2 Stationarity at levels

Variable Test Critical Order of Intergration

Statistic Value

Growth 0.965 -3.592 I(0)

Credit -3.627 -3.584 -

Broad_Money -2.827 -3.588 -

Inflation -1.740 -3.584 -

Trade_Openness -5.953 -3.580 -

Government Exp. -4.827 -3.586 -

The table above summarizes the results of the Augmented Dickey-Fuller Test
performed at the level. The null hypothesis suggests that the variable is non-
stationary or contains a unit root, while the alternative hypothesis posits that
the variable is stationary or free from a unit root. The null hypothesis is rejected
if the absolute value of the test statistic is greater than the critical value. For all
model variables—excluding GDP growth, Broad Money, and Trade Openness—
the absolute values of the test statistics surpass the 5% critical thresholds of
3.586, 3.580, and 3.584, respectively. As a result, these variables were
identified as non-stationary at the level, necessitating differentiation and
subsequent cointegration testing.
Table 3 Stationarity after differencing

Variable Test Critical Order of Intergration

Statistic Value

Growth -9.216 -3.584 I(1)

Broad_Money -4.431 -3.580 -

Inflation -5.551 -3.584 -

Table 3 above outlines the results of the Augmented Dickey-Fuller Test. The null
hypothesis suggested that the model includes a unit root, while the alternative
hypothesis indicated its absence. For GDP growth, the null hypothesis of non-
stationarity is rejected because the absolute value of the test statistic (9.216)
exceeds the critical value at the 5% significance level. Similarly, the test
statistics for Broad Money and Inflation also exceed their respective critical
values (4.431 and 5.551). As a result, all variables were confirmed to be
stationary at the first difference.
4.3.2 Lag Length
The researcher began with a lag selection test before applying the Johansen
Test for cointegration analysis. The maximum permissible lag length for the
model was established using the Akaike Information Criterion, which indicated
a value of 4, as detailed in the Appendix. To ascertain the ideal lag length for
the short-term variables, the `ematrix list` command was utilized. The optimal
lag length for each independent variable is also documented in the Appendix.
4.3.3 Cointegration Test
To construct the Vector Error Correction Model (VECM), it is crucial to
determine the number of co-integrating relationships. Following the Akaike
Information Criterion’s suggestion of a lag length of 2, the Johansen
cointegration test was applied to identify these relationships. The trace
statistics reveal that there are 3 co-integrating relationships, as shown in the
fifth column of the appendix.
Table 4 Johansen Test

Maximum Rank Eigen Value Trace Statistic Critical Value

 (5%)

2 0.71213 40.4159 47.21

Source: Author, 2022

4.3.4 Vector Error Correction Model
The Vector Error Correction Model was utilized to investigate the interactions
between the independent variables—financial sector development, credit to the
private sector, inflation, government expenditure, and trade openness—and the
dependent variable, economic growth.
[Link] Short run Model
The table below displays the outcomes of the short-run model, with economic
growth as the dependent variable. All results are evaluated against a 5%
significance level.

Table 5 Shortrun Model results (economic growth-dependent variable)

Model Variable Coefficien Std. Z- Probabilit

t Error statistic y

Short Adj. - 0.118319 -4.18 0.000

run([Link] 0.4940642 2
)

[Link] 0.2891631 0.170725 1.69 0.090

5

[Link] 0.3005805 0.075741 3.97 0.000

2

[Link] 0.3326386 0.186001 1.79 0.074

7

LD.lnbroad_money 1.301527 0.422398 3.08 0.002

5

LD.lntrade_openes - 0.147804 -1.88 0.060

s 0.2777678 5

[Link] 0.0788899 0.347404 0.23 0.820

1

Constant - 0.118544 -0.33 0.742

0.0390697 2

Source: Author, 2022

At significance levels of 1%, 5%, and 10%, the lagged differenced variable for
economic growth ([Link]) is found to be statistically insignificant, as its
probability value of 0.2891631 surpasses the 0.05 threshold. Conversely, the
lagged differenced variable for Credit to the Private Sector ([Link]) is
statistically significant at the 5% level, with a probability value of 0.000. This
variable’s positive coefficient of 0.3005805 indicates that increased credit to the
private sector positively affects economic growth in the short term.
The lagged differenced variable for Inflation ([Link]), which has a
coefficient of 0.332, is not significant at the 5% level, with a probability value of
0.074 exceeding 0.05. In contrast, Broad Money shows a significant positive
association with GDP, with a coefficient of 1.302, suggesting that a 1% increase
in broad money leads to a 1.302% rise in economic growth.
Trade openness does not show significance at the 5% level, as its lagged
differenced variables have probability values greater than 0.05, indicating no
short-term impact on economic growth. Likewise, Government Expenditure
(lnGE) is also statistically insignificant at the 5% level, with a probability value
above 0.05, suggesting no significant effect on economic growth.
The adjustment coefficient of -0.4940642, which denotes the speed of
adjustment, is significant at the 5% level with a probability value of 0.000. This
negative and significant coefficient suggests that the model is converging
towards equilibrium, with deviations in economic growth expected to correct by
0.4940642% in the subsequent period.
[Link] Long run Model
The Vector Error Correction Model identifies a long-term connection between
economic growth and the independent variables: credit to the private sector,
inflation, broad money, trade openness, and government expenditure. The
findings demonstrate that credit, inflation, broad money, and trade openness
are all significantly and positively related to economic growth. Specifically, a 1%
rise in each of these variables results in corresponding increases in economic
growth of 3.11%, 2.975%, 7.167%, and 0.748%. Conversely, government
expenditure exerts a long-term negative effect of -5.89% on economic growth.
Additionally, trade openness is found to be statistically insignificant, with a p-
value exceeding 0.05.
Table 6 Long run Model

Model Variable Coefficie Standard Z-statistic P-Value

nt Error

Long lnCredit 3.113951 .5837878 5.33 0.000

run([Link])

lnInflation 2.975096 .7465582 3.99 0.000

Lnbroad_mon 7.167805 1.329749 5.39 0.000

ey

Lntrade_open .7485816 .5554432 1.35 0.178

ess

lnGE -5.898681 1.317047 -4.48 0.000

4.4 Post Diagnostic Tests
The model underwent three additional post-diagnostic assessments: stability,
normality, and autocorrelation tests.
4.4.1 Jarque Berra Test

The Jarque-Bera test was employed to evaluate the normality of the model.

Variable Chi-Square DF Probability

D_lnGDPG 1.428 2 0.48957

D_lnCredit 2.691 2 0.26040

D_lnInflation 1.534 2 0.46449

D_lnBroad_Money 1.551 2 0.46047

D_lnTrade_Openness 2.045 2 0.35962

D_lnGE 12.981 2 0.00152

All 22.230 12 0.35022

The results from the model indicate that GE does not adhere to a normal
distribution due to its probability value falling below 0.05. Conversely, the
variables lnGDPG, lnCredit, lnInflation, lnbroadmoney, and lnto are normally
distributed, as their probability values exceed 0.05, thus affirming the null
hypothesis of normality for these variables. Collectively, the results challenge
the assumption that the residuals are normally distributed.
[Link] LM Test
Autocorrelation in the model was assessed using the LM test. The null
hypothesis is considered rejected if the test statistic is lower than the critical
value or if the p-value is less than or equal to 0.05, based on the criteria
established by the test.
Table 7 LM Test Results

Lag Order Chi-Square DF P-Value

1 60.4143 36 0.0660

2 28.0346 36 0.8259

As indicated in the table above, the probability values for the first and second
lag orders (0.06265 and 0.19674) are both above 0.05. Therefore, the
hypothesis that no autocorrelation exists in the data remains unchallenged.
4.4.3 Stability Test
The graph below reveals that all Eigenvalues are contained within the unit
circle, with no values appearing as outliers. This arrangement within the unit
circle validates the correct specification of our model. Thus, the Vector Error
Correction Model fulfills the criteria for stability.
Figure 1 Cusum Plot
 Imaginary

-.5

-1
.5
1

0
Roots of the companion matrix

-1 -.5 0 .5 1
Real
The VECM specification imposes 5 unit moduli

CHAPTER FIVE: DISCUSSION OF FINDINGS

5.1 Introduction
This research explored how financial sector development, particularly credit to
the private sector, influences economic growth. It also assessed the impact of
Inflation, Money Supply, Trade Openness, and Government Spending (GE) from
1990 to 2020. The Vector Error Correction Model was utilized to analyze the
relationship between economic growth (the dependent variable) and the
independent variables (credit, inflation, money supply, trade openness, and
government expenditure). Detailed interpretations and discussions of the
empirical results are provided below.

5.2 Discussion of Findings

5.2.1 Financial Sector Development and Economic growth
Domestic credit to the private sector bolsters economic growth by offering vital
capital for business investment and expansion. Levine (2005) highlights that
credit access enables companies to enhance productivity and increase
operational scale, thus stimulating economic growth. Similarly, King and Levine
(1993) argue that credit improves resource allocation, thereby enhancing
economic efficiency. Chileshe and Shawa (2017) observe that in Zambia, sectors
like agriculture, mining, and manufacturing reap significant benefits from
domestic credit, which subsequently drives economic growth. However, they
also caution that high interest rates and limited credit access can diminish
these benefits, underscoring the importance of financial reforms and stability
for optimizing growth.
Empirical data from 1990 to 2020 reveals that financial inclusion positively
affects economic growth in both the short and long terms, with financial sector
development effects quantified at 0.30058 and 3.113951, respectively. This
finding is in line with prior research, which generally indicates that financial
inclusion has either a positive or neutral effect on economic growth. Loayza et
al. (2000), for instance, provide robust evidence of a strong association between
financial development, particularly domestic credit to the private sector, and
economic growth. Their research suggests that nations with higher credit
availability to the private sector experience accelerated growth due to
increased investment and business activity.
Similarly, King and Levine (1993), in their study “Finance and Growth:
Schumpeter Might Be Right,” find a positive correlation between financial
development, including credit to the private sector, and economic growth. Their
work underscores that credit enhances resource allocation, resulting in more
efficient and productive economies.
The analysis fulfills the study's main objective by demonstrating a positive
relationship between financial sector development and economic growth. The
initial hypothesis, which posited no significant relationship between financial
sector development and economic growth, was rejected based on the observed
positive short-term and long-term effects.
5.2.2 Inflation and Economic growth
The interplay between inflation and economic growth is intricate and has been
extensively explored in economic research. Moderate inflation can spur
economic growth by encouraging higher spending and investment, as
individuals are more inclined to spend rather than save when anticipating rising
future prices. However, high or erratic inflation can be detrimental. Fischer
(1993) points out that elevated inflation diminishes the purchasing power of
money, introduces uncertainty, and disrupts economic decision-making, which
can constrain investment and impede growth. Similarly, Barro (1995) finds that
high inflation hampers economic growth by increasing inflationary distortions
and reducing capital accumulation efficiency. Conversely, a stable and low
inflation rate is generally linked to positive economic outcomes, supporting
economic stability and confidence. Gali and Gertler (1999) also support this
view, indicating that low inflation creates a favorable environment for
investment and growth by minimizing uncertainty and preserving the value of
money. While moderate inflation may support economic activity, high inflation
usually has adverse effects on growth due to its impact on economic stability
and investment efficiency.

The study's results indicate that inflation has a negative but statistically
insignificant effect on economic growth in the short term, while its long-term
effect is both positive and significant in Zambia. This contrasts with the findings
of Erkin et al. (1988), who reported a negative correlation between inflation and
economic growth. They argued that inflation leads to increased public
expenditure on fewer goods and decreases investment, as individuals focus on
essential purchases. They also observed that inflation tends to remain stable
over extended periods unless influenced by other macroeconomic conditions.

Furthermore, the study's long-term findings diverge from Barro's (1991) results,
which identified a significant negative effect of inflation on economic growth.
Barro's research suggested a non-linear relationship, where a 1% reduction in
inflation could boost output by 0.5% to 2.5%.

The second objective of the study was to determine the relationship between
inflation and economic growth. The analysis confirmed that inflation has a non-
significant short-term impact but a significant positive long-term effect on real
economic growth, leading to the rejection of the null hypothesis which proposed
no significant relationship between inflation and economic growth.

5.2.3 Money Supply and Economic Growth

The impact of money supply on economic growth is a contentious issue in
economic literature. An increase in money supply can stimulate economic
growth by boosting liquidity, which encourages both spending and investment.
According to Friedman and Schwartz (1963), an expansionary monetary policy
that increases money supply can enhance economic activity by lowering interest
rates and making borrowing more affordable, thus fostering both investment
and consumption. Similarly, Romer and Romer (1994) find that higher money
supply can promote short-term economic growth by raising aggregate demand.
However, the long-term effects can be more intricate. Excessive growth in the
money supply might lead to inflationary pressures, which, as Fisher (1922)
describes in the Quantity Theory of Money, can erode purchasing power and
induce economic instability. Barro (1997) notes that while moderate increases
in the money supply might support economic growth, sustained high growth can
result in significant inflation, which can impede long-term economic growth by
introducing uncertainty and distorting economic decisions. Thus, while money
supply growth can positively affect economic growth in the short term, its
overall impact depends on the broader monetary policy context and its balance
with inflationary pressures.
The study reveals a positive correlation between money supply and economic
growth in both the short and long term. This is consistent with Moyo’s (2019)
findings, which used time series data from 1985 to 2015 to analyze the effects
of monetary policy on Zambia’s economic development. Moyo discovered a long-
term relationship between the variables, indicating that while money supply has
a minor effect on economic growth, inflation and currency exchange rates play a
more significant role. Similarly, Ajayi and Aluko (2015) found that fiscal and
monetary policies positively influenced output growth, with monetary policies
having a more pronounced effect compared to fiscal policies, and government
expenditure often having a negative impact on economic growth.
In conclusion, the analysis satisfies the third specific objective of determining
the relationship between broad money and economic growth. The results
demonstrate a positive relationship in both the short and long term, leading to
the rejection of the null hypothesis that there is no significant relationship
between money supply (broad money) and economic growth.
5.2.4 Government Spending and economic growth
The findings of this study reveal a non-significant positive effect of government
expenditure on GDP growth in the short term, while a significant negative
relationship is observed in the long term. These results are supported by the
Vector Error Correction Model (VECM). This contrasts with the work of Nworji
et al. (2012), which utilized data from 1970 to 2009 to show that government
spending positively influences Nigerian GDP growth.
In alignment with the study's results, Morrisey and Kweka (2000) found that
government expenditure negatively impacted economic growth in Tanzania
between 1965 and 1996, which mirrors the findings of this model.
The long-term results demonstrate a significant negative correlation between
government spending and GDP growth, differing from Muyaba's (2016) study.
Muyaba, examining Zambia from 1991 to 2015, found that public investment
positively impacts economic growth in both the short and long term, as
supported by the Granger causality test.
Overall, the study's objective was to explore the effects of government
expenditure on Zambia's economic growth from 1990 to 2020. The analysis
confirms a significant negative long-term relationship, leading to the rejection
of the null hypothesis that there is no significant link between government
spending and economic growth.
5.2.5 Trade Openness and economic growth
Trade openness is often linked to positive economic growth, a relationship
extensively documented in economic research. Sachs and Warner (1995) argue
that open trade policies help accelerate economic growth by expanding market
access, fostering competition, and improving resource allocation. They suggest
that such openness enables countries to capitalize on their comparative
advantages, adopt new technologies, and enhance productivity. Frankel and
Romer (1999) similarly find that trade openness boosts growth by broadening
investment opportunities and disseminating technological advancements.
Rodríguez and Rodrik (2001) emphasize that trade openness is especially
advantageous for developing nations, aiding their global economic integration,
attracting foreign investments, and speeding up industrialization. Nonetheless,
the positive impacts of trade openness can be moderated by national economic
policies and institutional quality.
The results of this study show that trade openness has a short-term negative but
statistically insignificant effect on economic growth, with a similar non-
significant impact in the long term. These findings align with Trejos and
Barboza (2015), who studied trade openness and economic growth in Asian
economies from 1950 to 2010. They found that while increased trade openness
contributed to higher productivity, it was not a critical driver of overall
economic performance.
Conversely, Chang et al. (2009) discovered that the benefits of trade openness
on economic growth are contingent upon the presence of complementary
policies. Their research, covering 22 industrialized countries, 21 Latin American
and Caribbean countries, 12 Asian countries, 18 Sub-Saharan African countries,
and 9 Middle Eastern and North African countries from 1960 to 2000,
highlighted that significant growth benefits from trade openness are seen in
countries with flexible labor markets, developed financial systems, educated
workforces, macroeconomic stability, good governance, and strong
infrastructure. They noted that the positive effects of trade openness have
become more pronounced with the adoption of supportive policies in recent
years.
In addition, Lee and Gordon's study on South Korea from 1970 to 1997 showed
a negative relationship between tax revenues and GDP growth, with higher
corporate tax rates linked to lower future growth.
 Overall, this study did not meet its fifth objective of establishing a significant
relationship between trade openness and economic growth. The findings
indicate that trade openness does not significantly impact economic growth in
either the short or long term, thus the null hypothesis of no significant
relationship between trade openness and economic growth remains valid.

CHAPTER SIX: CONCLUSION AND RECOMMENDATIONS

6.1 Conclusion
This study investigated how financial sector development impacts economic
growth in Zambia from 1990 to 2020. The findings indicate that financial sector
development positively influences economic growth in both the short and long
terms. In contrast, trade openness showed a negative but statistically
insignificant effect on economic growth in the short term, while broad money,
inflation, and government spending were positively and significantly related to
growth, with the exception of inflation, which was not significant.

Over the long term, financial sector development (particularly credit), trade
openness, inflation, government spending, and broad money all demonstrated
significant positive effects on economic growth. Nevertheless, trade openness
did not show a significant impact in the long term. The limited effectiveness of
trade openness suggests that the Zambian government should focus on
improving customs efficiency and reducing trade barriers to facilitate smoother
and more cost-effective international trade. Enhancing logistics and
infrastructure is also crucial for improving trade efficiency.

6.2 Recommendations
To boost economic growth in Zambia, policymakers should explore and
implement the following recommendations:
i. Expand Financial Inclusion
The government should craft policies to improve banking and credit access for
marginalized groups, such as rural populations and small enterprises. This
 could involve advancing digital financial services and bolstering microfinance
institutions to better serve these underserved areas.
ii. Improve Credit Access and Efficiency
The government should simplify the credit application procedures and improve
credit information systems. By enhancing access to credit data and collateral
registries, lenders can better evaluate creditworthiness, which may lead to
lower borrowing costs.
iii. Foster a competitive Financial Environment
The Zambian government should foster the growth of new financial institutions
and boost competition in the sector. This can result in superior financial
products, reduced interest rates, and more innovative solutions, which would
advantage both businesses and consumers.
iv. Enhance Financial Literacy
The government ought to invest in financial education initiatives to enhance the
knowledge of financial products and services for both businesses and
individuals. Improved financial literacy can result in more prudent borrowing
and investment choices.
v. Strengthen Regulatory Frameworks
Zambian policymakers should establish rigorous regulatory and supervisory
frameworks to maintain the stability and reliability of the financial sector.
Strong regulations can avert financial crises, enhance investor trust, and create
a more stable environment for economic activities.
vi. Promote Long-term Investment
The government should craft policies that encourage sustained investments in
critical areas like agriculture, manufacturing, and technology. This can be
accomplished by offering tax breaks, grants, or subsidies to motivate businesses
to focus on growth and innovation.
vii. Support Innovation and Technology Adoption
The Zambian government ought to promote the integration of cutting-edge
technologies in the financial sector, including fintech solutions, to enhance
access to financial services and optimize the efficiency of financial transactions.
viii. Ensure effective monetary policies
Policymakers should craft monetary policies that harmonize credit growth with
inflation control to foster a stable economic climate that encourages investment
and expansion. Ensuring stable interest rates and predictable inflation can
create a more dependable lending atmosphere.
6.3 Suggestions for further studies
Despite the methodological robustness of this study, two notable limitations
should be addressed. First, the small sample size of 31 years, due to limited
data points for some variables, could impact the study’s comprehensiveness.
The study did, however, account for biases from omitted variables. Second, the
reliance on annual time series data led to a loss of precision in parameter
estimates when lagged variables were included. Future research could mitigate
this issue by utilizing quarterly or monthly data, though such datasets are rarely
available in Zambia. Therefore, it is advisable to replicate this study when new
data is accessible to enable comparative analysis and enhance the findings.

APPENDIX
Summary Statistics
. sum growth credit inflation broad_money trade_openness ge

Variable Obs Mean Std. Dev. Min Max

growth 31 4.10999 3.994226 -8.625442 10.29822

credit 31 21.60022 18.40854 11.3595 84.81197
inflation 31 33.48548 44.59203 6.429397 183.312
broad_money 31 22.49102 30.06043 .0247364 107.626
trade_open~s 31 .312689 .8815488 -.6451492 2.692283

ge 31 21.75329 29.29892 .017 110

Cointegration Test Results
. varsoc lngdp lncredit lninflation lnbroad_money lnto lnge

Selection-order criteria
Sample: 1994 - 2020 Number of obs = 27

lag LL LR df p FPE AIC HQIC SBIC

0 -109.283 .000206 8.53949 8.62512 8.82746

1 -3.35927 211.85 36 0.000 1.2e-06 3.35995 3.95933 5.37569
2 35.2119 77.142 36 0.000 1.6e-06 3.16949 4.28264 6.91302
3 122.243 174.06 36 0.000 1.7e-07 -.610592 1.01632 4.86072
4 2236.39 4228.3* 36 0.000 1.4e-71* -154.547* -152.406* -147.348*

Endogenous: lngdp lncredit lninflation lnbroad_money lnto lnge

Exogenous: _cons

. vecrank lngdp lncredit lninflation lnbroad_money lnto lnge

Johansen tests for cointegration

Trend: constant Number of obs = 29
Sample: 1992 - 2020 Lags = 2

5%
maximum trace critical
rank parms LL eigenvalue statistic value
0 42 -62.956355 . 125.3933 94.15
1 53 -38.523576 0.81456 76.5277 68.52
2 62 -20.467688 0.71213 40.4159* 47.21
3 69 -10.882146 0.48370 21.2448 29.68
4 74 -3.1826768 0.41198 5.8459 15.41
5 77 -.50075133 0.16886 0.4821 3.76
6 78 -.25972337 0.01649

Short run VECM Regression Results

. vec lngdp lncredit lninflation lnbroad_money lnto lnge, trend(constant)

Vector error-correction model

Sample: 1992 - 2020 Number of obs = 29

AIC = 6.311971
Log likelihood = -38.52358 HQIC = 7.09458
Det(Sigma_ml) = 5.74e-07 SBIC = 8.810822

Equation Parms RMSE R-sq chi2 P>chi2

D_lngdp 8 .35498 0.7655 68.55361 0.0000

D_lncredit 8 .797985 0.5227 22.99376 0.0034
D_lninflation 8 .343039 0.5063 21.53888 0.0058
D_lnbroad_money 8 .261841 0.6406 37.43196 0.0000
D_lnto 8 .642183 0.4589 17.80663 0.0227
D_lnge 8 .303092 0.6525 39.43213 0.0000

Coef. Std. Err. z P>|z| [95% Conf. Interval]

D_lngdp
_ce1
L1. -.4940642 .1183192 -4.18 0.000 -.7259657 -.2621628

lngdp
LD. .2891631 .1707255 1.69 0.090 -.0454528 .623779

lncredit
LD. .3005805 .0757412 3.97 0.000 .1521305 .4490304

lninflation
LD. .3326386 .1860017 1.79 0.074 -.0319181 .6971953

lnbroad_money
LD. 1.301527 .4223985 3.08 0.002 .4736415 2.129413

lnto
LD. -.2777678 .1478045 -1.88 0.060 -.5674594 .0119238

lnge
LD. .0788899 .3474041 0.23 0.820 -.6020095 .7597894

_cons -.0390697 .1185442 -0.33 0.742 -.271412 .1932727

Long run VECM

Cointegrating equations

Equation Parms chi2 P>chi2

_ce1 5 93.58425 0.0000

Identification: beta is exactly identified

Johansen normalization restriction imposed

beta Coef. Std. Err. z P>|z| [95% Conf. Interval]

_ce1
lngrowth 1 . . . . .
lncredit 3.113951 .5837878 5.33 0.000 1.969748 4.258154
lninflation 2.975096 .7465582 3.99 0.000 1.511869 4.438324
lnbroad_money 7.167805 1.329749 5.39 0.000 4.561546 9.774065
lntrade_openness .7485816 .5554432 1.35 0.178 -.3400671 1.83723
lnge -5.898681 1.317047 -4.48 0.000 -8.480046 -3.317316
_cons -19.88118 . . . . .
Stability Test

. //Stability test
. vecstable

Eigenvalue stability condition

Eigenvalue Modulus

1 1
1 1
1 1
1 1
1 1
-.5271323 + .3296785i .621737
-.5271323 - .3296785i .621737
.2782869 + .4108263i .496207
.2782869 - .4108263i .496207
-.3348546 .334855
.1223459 .122346
-.09608318 .096083

The VECM specification imposes 5 unit moduli.

. vecstable,graph

Eigenvalue stability condition

Eigenvalue Modulus

1 1
1 1
1 1
1 1
1 1
-.5271323 + .3296785i .621737
-.5271323 - .3296785i .621737
.2782869 + .4108263i .496207
.2782869 - .4108263i .496207
-.3348546 .334855
.1223459 .122346
-.09608318 .096083

The VECM specification imposes 5 unit moduli.

Autocorrelation
.
. //Autocorrelation test
. veclmar

Lagrange-multiplier test

lag chi2 df Prob > chi2

1 60.4143 36 0.00660
2 28.0346 36 0.82597

H0: no autocorrelation at lag order

Normality Test
. //Normality test
. vecnorm, jbera

Jarque-Bera test

Equation chi2 df Prob > chi2

D_lngdp 1.428 2 0.48957

D_lncredit 2.691 2 0.26040
D_lninflation 1.534 2 0.46449
D_lnbroad_money 1.551 2 0.46047
D_lnto 2.045 2 0.35962
D_lnge 12.981 2 0.00152
ALL 22.230 12 0.03502