N. V. Zacchaeus

  • v Kanali School of Engineering, Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya
  • N. V. Zacchaeus School of Business and Economics, Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya
Keywords: Financial sector development, economic growth; Vector autoregressive (VAR; Granger causality test, Kenya

Abstract

The study examined the relationship between financial sector development and economic growth in
Kenya using quarterly data from 1996 to 2016 in a Vector Auto Regressive (VAR) framework. The Granger
causality test results show unidirectional causality running from money supply (MS3), bank deposit
liabilities and private credit to economic growth. The test results also indicate that there is significant and
unidirectional causation running from foreign exchange market and stock market to economic growth.
The causation between financial sector development and economic growth in Kenya is actually sensitive
to the choice of measure for financial depth and, therefore financial development leads to economic
growth. In light of the above results, authorities should be concerned with implementation of key reforms
which are instrumental to both sectors for a well -developed financial market. In addition, proper
utilization of public funds and provision of support theories of growth for a well -functioning financial
market (or system) is greatly essential in promoting and accelerating economic development.

Published
2019-07-09