Abstract

The bootstrap approach to Toda-Yamamoto (1995) modified causality test is applied in a rolling window of fixed size onto Egyptian data during 1960-2016 to examine time-varying links between economic growth (EG) and bank-based financial development (BBFD). Full sample results indicated the existence of unidirectional causality running from BBFD to EG, however; instability tests revealed the presence of structural breaks. Given the misleading inferences made using the full sample, the rolling window procedure is applied. Bidirectional time-varying causality between EG and BBFD was detected. Reasons behind declining the fraction of credit provided to private business sector to GDP in recent years include, mainly, credit crunch and expansion of credit to the government and partially to economic slowdown. Adoption of fiscal reforms and promotion of innovative financial tools suitable for the needs of small and medium-sized enterprises is highly recommended to enhance the role of banking system in promoting economic growth.

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