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Financial Sector Development–Economic Growth Nexus in Rwanda

In: Economic Integration, Currency Union, and Sustainable and Inclusive Growth in East Africa

Author

Listed:
  • Caleb Tamwesigire

    (University of Rwanda)

  • Thomas Bwire

    (Bank of Uganda)

  • Pascal Munyankindi

    (National Bank of Rwanda)

Abstract

This paper investigates the links between a number of relevant financial indicators and economic growth in Rwanda over the period 2006Q1–2014Q4. A triangulation of the Vector Error Correction Model (VECM) and Granger non-causality approaches and impulse response functions are employed to investigate the dynamic inter-relationship between various measures of financial sector development and economic growth and for addressing questions of the direction of causality between financial sector development and growth in the country. Empirical results suggest that broad money (M3)—a target metric that Rwandan monetary authorities use in influencing the level of economic activities in the economy—has a positive significant long-run correlation with GDP and that causality runs both ways. This confirms the existence of a nexus between financial sector development and economic growth in Rwanda. An impulse response analysis reveals that monetary policy actions in Rwanda are reactionary. The policy rate responds only in the fifth quarter when overheating in the economy following an initial shock in money supply has occurred. This suggests that to anchor expectations of economic agents and for maintaining monetary policy credibility, a forward looking monetary policy framework could be warranted.

Suggested Citation

  • Caleb Tamwesigire & Thomas Bwire & Pascal Munyankindi, 2016. "Financial Sector Development–Economic Growth Nexus in Rwanda," Advances in African Economic, Social and Political Development, in: Almas Heshmati (ed.), Economic Integration, Currency Union, and Sustainable and Inclusive Growth in East Africa, pages 57-76, Springer.
    • Handle: RePEc:spr:aaechp:978-3-319-30432-8_4
    DOI: 10.1007/978-3-319-30432-8_4
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