Financial Development and Economic Growth: Kenya's Experience
Nicholas Odhiambo (The author of the article is currently doing a Ph.D.(Economics) degree by research at the Uni­versity of Stellenbosch, South Africa. )
Download Article | Published On 01/01/2002

Abstract

This paper takes a fresh look at the causal relationship between financial development and economic growth in Kenya. In this study, Hsiao's (1979, 1981} test procedure, which combines both Akaike's 1969) final prediction error and Granger (1969) causality test is used. Using two alternative variables as proxies for financial development and economic growth, the study finds a bi-directional causality pattern prevailing between monetization variable {M2/GDP) and real per capita income (y/N). However, when a similar test is performed between currency ratio variable (CC/Ml) and gross investment ratio (lnv/GDP), a distinct supply-leading response is found to be dominant. The study therefore, concludes that financial development has a first class positive impact on economic growth in Kenya, regardless of which variable is used as a proxy.

Keywords

Kenya, Financial development, Growth, Granger causality, final prediction error, and Hesiao's test

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