Title: Nexus between financial innovation and economic growth in Lesotho: evidence from ARDL and nonlinear ARDL approaches

Authors: Moeti Damane; Lira Peter Sekantsi

Addresses: Research Department, Central Bank of Lesotho, P.O. Box 1184, Maseru 100, Lesotho ' National Payment System Division, Central Bank of Lesotho, P.O. Box 1184, Maseru 100, Lesotho

Abstract: This paper sets out to explore the relationship between financial innovation and economic growth in Lesotho using time series data spanning 1980-2016. The autoregressive distributed lag (ARDL) bounds testing approach is applied to gauge long-run cointegration while the nonlinear ARDL (NARDL) model is used to test validity of short and long-run symmetric effects of financial innovation on economic growth. Results of the bounds tests revealed existence of long-run cointegration between financial innovation and economic growth in Lesotho. Positive changes in financial innovation related positively with economic growth in the long-run but had a statistically insignificant impact in the short-run. Furthermore, negative changes in financial innovation were found to have no significant impact on Lesotho's economic growth in the short and long-run. The Government of Lesotho is recommended to foster greater financial innovation in the financial system to assist financial services expansion and efficient financial intermediation to support sustainable economic growth.

Keywords: Lesotho; financial innovation; economic growth; autoregressive distributed lag; ARDL; nonlinear ARDL; NARDL.

DOI: 10.1504/IJFIB.2021.114941

International Journal of Financial Innovation in Banking, 2021 Vol.3 No.1, pp.49 - 75

Received: 16 Nov 2019
Accepted: 06 Apr 2020

Published online: 07 May 2021 *

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