Financial Development and Economic Growth in Kenya: An Empirical Analysis 1980–2011
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Date
2014
Authors
Onuonga, S.M.
Journal Title
Journal ISSN
Volume Title
Publisher
Canadian Center of Science and Education
Abstract
The paper examined the empirical relationship between economic growth and financial development (FD) in
Kenya over the period 1980–2011. The long-run and short-run parameters were estimated by use of
autoregressive distributed lag (ARDL) bounds testing approach for co integration analysis. To determine the
direction of causality, Granger causality analysis was done. Empirical findings indicate that there is stable
long-run relationship among, financial development, trade openness and economic growth in Kenya. It also finds
that financial development has a significant positive effect on economic growth. The magnitudes of the ECT
coefficients suggest that the speed of adjustment in each of the estimated model is very high. The Granger
causality tests showed that there is bi-directional causality between financial development and economic growth
in Kenya for the period under study (1980–2011). This result therefore, supports both the supply leading, and
demand following hypotheses. This means that financial development accelerates and augments economic
growth in Kenya and that economic growth leads to development of the financial sector in Kenya. Thus, the
government should strengthen the reforms in the financial sector so as to attract investors and improve the
efficiency of all production activities in the country. At the same time, the government should enhance
macroeconomic policies; fiscal policies, policies that attract foreign direct investment, and export promotion
policies that on average lead to economic growth should
Description
doi:10.5539/ijef.v6n7p226
Keywords
financial development, economic growth, ARDL bounds test, cointegration, granger causality, Kenya
Citation
International Journal of Economics and Finance; Vol. 6, No. 7; 2014