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The Finance-Growth Nexus, again: New Evidence from Kenya

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  • M Arayssi
  • A Fakih

Abstract

The primary objective of this paper is to shed further light on the connection between financial development and economic growth in Kenya over the period 1960-2013. A Cobb-Douglas production function, augmented by incorporating financial development and other factors, is used. This paper uses a vector autoregressive (VAR) model to determine the causal relationship between financial development and economic development. Three alternative production function representations are proposed: a basic model including financial development and inflation along with capital and labour, a variant adding foreign direct investment (FDI), and a third focusing on the interaction between financial development and FDI. The results show that financial development is a by-product of growth. The interaction between FDI and financial development is causing growth. There is bidirectional causality between growth and the labour force. Policy-makers in Kenya can obtain fruitful impacts of FDI to enhance growth by improving the role of financial development. They may also need to improve the quality of labour to sustain growth.

Suggested Citation

  • M Arayssi & A Fakih, 2017. "The Finance-Growth Nexus, again: New Evidence from Kenya," Economic Issues Journal Articles, Economic Issues, vol. 22(2), pages 33-59, September.
    • Handle: RePEc:eis:articl:217arayssi
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    Cited by:

    1. Abdoulganiour Almame Tinta & Salifou Ouedraogo & Noel Thiombiano, 2021. "Nexus between economic growth, financial development, and energy consumption in Sub‐Saharan African countries: A dynamic approach," Natural Resources Forum, Blackwell Publishing, vol. 45(4), pages 366-379, November.
    2. Manuel Ennes Ferreira & Jelson Serafim & João Dias, 2022. "Finance-Growth Nexus: Evidence from Angola," Working Papers REM 2022/0227, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    3. Nyasha Sheilla & Odhiambo Nicholas M., 2018. "Finance-Growth Nexus Revisited: Empirical Evidence from Six Countries," Scientific Annals of Economics and Business, Sciendo, vol. 65(3), pages 247-268, September.
    4. Olufemi A. Aluko & Muazu Ibrahim, 2020. "Institutions and the financial development–economic growth nexus in sub‐Saharan Africa," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 49(3), September.
    5. Guy Assaker & Wassim Shahin, 2022. "What Drives Faculty Publication Citations in the Business Field? Empirical Results from an AACSB Middle Eastern Institution," Publications, MDPI, vol. 10(4), pages 1-29, November.
    6. Kizito Uyi Ehigiamusoe & Mohamad Shaharudin Samsurijan, 2021. "What matters for finance‐growth nexus? A critical survey of macroeconomic stability, institutions, financial and economic development," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 5302-5320, October.
    7. Hakan Yilmazkuday, 2013. "Inflation Thresholds and Growth," International Economic Journal, Taylor & Francis Journals, vol. 27(1), pages 1-10, March.

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