Financial development and economic growth in Kenya; 1966-2012
The Kenya Vision 2030 places a lot of importance on the financial sector as a key driver of a sustained Economic growth by the year 2030. This notwithstanding, the economy has recorded dismal and inconsistent growth since independence. The financial development indicators on the other hand have recorded an upward trend. What remains to be seen is whether there is a relationship between the finance indicators and economic growth and their causality that will inform macroeconomic policy in Kenya. A number of cross country studies that included Kenya have found out that financial development plays a significant role on Economic growth. While others have found that the real sector stimulates the financial sector, for example previous studies on Kenya have shown demand-following response. Furthermore some have found that the relationship runs in both ways while others have found no relationship at all. The focus of these studies has been mainly to do cross country comparisons using the Vector Error Correction Models (VECM) and Panel data analysis which is indeed suitable for more than one country comparison; few researchers have done case studies of individual countries. Different econometric methods on the same sample during the same period have also yielded different results. The objective of this study is to determine the long-term relationship and the causal relationship between financial development and economic growth, using a recently developed model; the Autoregressive Distributed Lag (ARDL) based on the AK growth model. The sources of data will be World Development Indicators (WDI), various sources of statistical abstracts and International Financial Statistics (IFS).