The causal nexus between financial development and economic growth in Kenya

Abstract

This paper aims to reexamine the relationship between financial development and economic growth in Kenya over the period of 1971-2011. Since, financial sector plays a vital role in mobilizing and allocating savings into productive ventures, the core issue of this investigation remains important for developing economics. The examination is based on a Cobb-Douglas production augmented by incorporating financial development. A simulation based ARDL bounds testing and Gregory and Hansen's structural break cointegration approaches are being utilized in this study. Cointegration is being found between the series in the presence of a structural break in 1992. It is also being established that, in the long run, development of financial sector has positive impact on economic growth. Here remains an important policy implication for the concerned individuals of Kenya, that is, they may emphasize on financial development to ignite economic growth.

Economic growth, financial development and trade openness in Nigeria: An application of the ARDL bound testing approach

“…This is in line with the findings of Abu-Bader and Abu-Qarn (2008) who documented that no clear evidence exists to support the existence of any linkage between financial development proxy by M2 and economic growth for MENA economies. However, the findings contradict the results of Uddin et al (2013) who noted that a significant relationship existed between money supply as a percentage of RGDP and economic growth for Kenya. In terms of existence of a significant relationship, the results from our analysis contradict the findings of Odhiambo (2009) significant in the short run.…”

“…For instance, Uddin, Sjö, and Shahbaz (2013) used Cobb-Douglas production, simulation-based ARDL bound testing and Gregory and Hansen's structural break cointegration approaches to analysis data sourced from 1970 to 2011 on Kenya's economy and observed that in the long run, a positive relationship existed between financial development and economic growth. Their finding contradicts earlier work by Odhiambo (2009) who used Granger causality test and observed that money supply (M2) as a percentage of GDP exhibits a negative effect on economic growth for the same economy.…”

The effects of Internet usage, financial development and trade openness on economic growth in South Africa: A time series analysis

“…However, the overall literature supports a positive effect of financial development on long-run economic growth. Examples of some recent studies that support the positive effect of financial development on economic growth include: Hassan (2003), Hassan et al (2011), Khoutem et al (2014) and Uddin et al (2013). Hsueh et al (2013) report that financial development stimulates economic growth in Asian countries including China.…”

The effects of electricity consumption, economic growth, financial development and foreign direct investment on CO2 emissions in Kuwait

“…Then, this unit root test selects that time break which reduces the one-sided t-statistic to test c(=c-1)=1. Uddin et al (2013) suggested that conventional cointegration techniques do not provide reliable results when data are plagued with structural breaks. Therefore, this study…”