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Financial Development in Kenya: a Dynamic Test of the Finance-led Growth Hypothesis

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  • N M Odhiambo

Abstract

This study examines the direction of causality between financial development and economic growth in Kenya using a dynamic Granger causality model. The study has been motivated by the current debate on the inter-temporal causal relationship between financial development and economic growth in developing countries. The thrust of this debate has been whether there exists a finance-led growth response or a growth-led finance response between the two variables. To this end the study uses three proxies of financial development against real GDP per capita (a proxy for economic growth). The empirical results reveal that, although the causality between financial development and economic growth in Kenya is sensitive to the choice of measure for financial development, on balance the demand following response tends to predominate. The study, therefore, concludes that the argument that financial development unambiguously leads to economic growth can only be taken with a pinch of salt.

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Bibliographic Info

Article provided by Economic Issues in its journal Economic Issues.

Volume (Year): 13 (2008)
Issue (Month): 2 (September)
Pages: 21-36

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Handle: RePEc:eis:articl:208odhiambo

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  1. Guilkey, David K & Salemi, Michael K, 1982. "Small Sample Properties of Three Tests for Granger-Causal Ordering in a Bivariate Stochastic System," The Review of Economics and Statistics, MIT Press, vol. 64(4), pages 668-80, November.
  2. Ross Levine & Norman Loayza & Thorsten Beck, 2002. "Financial Intermediation and Growth: Causality and Causes," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (S (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 2, pages 031-084 Central Bank of Chile.
  3. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
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  5. King, Robert G & Levine, Ross, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 717-37, August.
  6. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  7. Calderon, Cesar & Liu, Lin, 2003. "The direction of causality between financial development and economic growth," Journal of Development Economics, Elsevier, vol. 72(1), pages 321-334, October.
  8. Pierce, David A. & Haugh, Larry D., 1977. "Causality in temporal systems : Characterization and a survey," Journal of Econometrics, Elsevier, vol. 5(3), pages 265-293, May.
  9. Sims, Christopher A, 1972. "Money, Income, and Causality," American Economic Review, American Economic Association, vol. 62(4), pages 540-52, September.
  10. repec:ltr:wpaper:1996.08 is not listed on IDEAS
  11. Jonathan Temple, 1999. "The New Growth Evidence," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 112-156, March.
  12. Choe, Chongwoo & Moosa, Imad A., 1999. "Financial System and Economic Growth: The Korean Experience," World Development, Elsevier, vol. 27(6), pages 1069-1082, June.
  13. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  14. Shan, Jordan Z & Morris, Alan G & Sun, Fiona, 2001. "Financial Development and Economic Growth: An Egg-and-Chicken Problem?," Review of International Economics, Wiley Blackwell, vol. 9(3), pages 443-54, August.
  15. Hyoungsoo Zang & Young Chul Kim, 2007. "Does financial development precede growth? Robinson and Lucas might be right," Applied Economics Letters, Taylor & Francis Journals, vol. 14(1), pages 15-19.
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Cited by:
  1. Marcelo P. Dabos & Ernesto R. Gantman, 2010. "The Fading Link? A New Empirical Analysis of the Relationship Between Financial Development and Economic Growth," Working Papers 2010-013, Becker Friedman Institute for Research In Economics.

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