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Financial depth, savings and economic growth in Kenya: A dynamic causal linkage

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  • Odhiambo, Nicholas M.

Abstract

The debate on the direction of causality between financial development and economic growth has been on-going since the 19th century. However, the majority of the previous studies on this subject have concentrated mainly on the use of the bi-variate causality test and may, therefore, suffer from the omission-of-variable bias. In addition, some of these studies have used cross-sectional data, which may not satisfactorily address country-specific issues. To this end, the current study attempts to examine the dynamic causal relationship between financial depth and economic growth in Kenya by including savings as an intermitting variable--thereby creating a simple tri-variate causality model. Using the cointegration and error-correction techniques, the empirical results of this study reveal that there is a distinct uni-directional causal flow from economic growth to financial development. The results also reveal that economic growth Granger causes savings, while savings drive the development of the financial sector in Kenya. The study, therefore, warns that any argument that financial development unambiguously leads to economic growth should be treated with extreme caution.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 25 (2008)
Issue (Month): 4 (July)
Pages: 704-713

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Handle: RePEc:eee:ecmode:v:25:y:2008:i:4:p:704-713

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Web page: http://www.elsevier.com/locate/inca/30411

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References

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Citations

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Cited by:
  1. Odhiambo, Nicholas M., 2009. "Energy consumption and economic growth nexus in Tanzania: An ARDL bounds testing approach," Energy Policy, Elsevier, vol. 37(2), pages 617-622, February.
  2. Rudra P. Pradhan, 2011. "Financial Development, Growth and Stock Market Development: The Trilateral Analysis in India," Journal of Quantitative Economics, The Indian Econometric Society, vol. 9(1), pages 134-145.
  3. Odhiambo, Nicholas M., 2010. "Energy consumption, prices and economic growth in three SSA countries: A comparative study," Energy Policy, Elsevier, vol. 38(5), pages 2463-2469, May.
  4. Simplice A, Asongu, 2012. "Linkages between investment flows and financial development: causality evidence from selected African countries," MPRA Paper 38719, University Library of Munich, Germany.
  5. Nicholas M. Odhiambo, 2010. "Financial deepening and poverty reduction in Zambia: an empirical investigation," International Journal of Social Economics, Emerald Group Publishing, vol. 37(1), pages 41-53, January.
  6. Wolde-Rufael, Yemane, 2009. "Re-examining the financial development and economic growth nexus in Kenya," Economic Modelling, Elsevier, vol. 26(6), pages 1140-1146, November.

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