IDEAS home Printed from https://ideas.repec.org/a/eee/ecmode/v26y2009i6p1140-1146.html
   My bibliography  Save this article

Re-examining the financial development and economic growth nexus in Kenya

Author

Listed:
  • Wolde-Rufael, Yemane

Abstract

This paper re-examines the causal relationship between financial development and economic growth in Kenya for the period 1966-2005 within a quadvariate vector autoregressive (VAR) framework by including exports and imports as additional variables to the finance-economic growth nexus. We use four conventionally accepted proxies for financial development, namely money supply (M2), liquid liabilities (M3), domestic bank credit to the private sector and total domestic credit provided by the banking sector (all percent of GDP). Applying a modified version of the Granger causality test due to Toda and Yamamoto [Toda, H.Y. and Yamamoto, T., Statistical inference in vector autoregressions with possibly integrated process. Journal of Econometrics 1995; 66; 225-250], our empirical results suggest that in three out of the four measures of financial development we found evidence of a two-way Granger causality: (1) between domestic credit provided by the banking sector and economic growth; (2) between total domestic credit provided by the banking sector and economic growth, and (3) between liquid liabilities and economic growth. This implies that neither the supply-leading nor the demand-following hypotheses are supported in Kenya and that economic growth and financial development are jointly determined, or they complement each other. A major implication of our finding is that financial development promotes economic growth in Kenya and that policies at enhancing the development of the financial sector can help to spur economic growth.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:ecmode:v:26:y:2009:i:6:p:1140-1146
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0264-9993(09)00079-0
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Valerie R. Bencivenga & Bruce D. Smith, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 195-209.
    2. Baltagi, Badi H. & Demetriades, Panicos O. & Law, Siong Hook, 2009. "Financial development and openness: Evidence from panel data," Journal of Development Economics, Elsevier, vol. 89(2), pages 285-296, July.
    3. Peter Quartey & Frank Prah, 2008. "Financial Development and Economic Growth in Ghana: Is There a Causal Link?," The African Finance Journal, Africagrowth Institute, vol. 10(1), pages 28-54.
    4. Caporale, Guglielmo Maria & Pittis, Nikitas, 1999. " Efficient Estimation of Cointegrating Vectors and Testing for Causality in Vector Autoregressions," Journal of Economic Surveys, Wiley Blackwell, vol. 13(1), pages 1-35, February.
    5. Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October.
    6. Blackburn, Keith & Hung, Victor T Y, 1998. "A Theory of Growth, Financial Development and Trade," Economica, London School of Economics and Political Science, vol. 65(257), pages 107-124, February.
    7. Tsangyao Chang, 2002. "Financial development and economic growth in Mainland China: a note on testing demand-following or supply-leading hypothesis," Applied Economics Letters, Taylor & Francis Journals, vol. 9(13), pages 869-873.
    8. Suleiman Abu-Bader & Aamer S. Abu-Qarn, 2008. "Financial Development and Economic Growth: Empirical Evidence from Six MENA Countries," Review of Development Economics, Wiley Blackwell, vol. 12(4), pages 803-817, November.
    9. James B. Ang, 2008. "A Survey Of Recent Developments In The Literature Of Finance And Growth," Journal of Economic Surveys, Wiley Blackwell, pages 536-576.
    10. Greenwood, Jeremy & Smith, Bruce D., 1997. "Financial markets in development, and the development of financial markets," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 145-181, January.
    11. repec:kap:iaecre:v:14:y:2008:i:4:p:422-432 is not listed on IDEAS
    12. Luintel, Kul B. & Khan, Mosahid & Arestis, Philip & Theodoridis, Konstantinos, 2008. "Financial structure and economic growth," Journal of Development Economics, Elsevier, pages 181-200.
    13. Asli Demirgüç-Kunt & Ross Levine, 2008. "Finance, Financial Sector Policies, and Long-Run Growth," World Bank Publications, The World Bank, number 28021.
    14. Rajan, Raghuram G. & Zingales, Luigi, 2003. "The great reversals: the politics of financial development in the twentieth century," Journal of Financial Economics, Elsevier, vol. 69(1), pages 5-50, July.
    15. Roger Atindehou & Jean Pierre Gueyie & Edoh Kossi Amenounve, 2005. "Financial intermediation and economic growth: evidence from Western Africa," Applied Financial Economics, Taylor & Francis Journals, vol. 15(11), pages 777-790.
    16. Lutkepohl, Helmut, 1982. "Non-causality due to omitted variables," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 367-378, August.
    17. Zapata, Hector O & Rambaldi, Alicia N, 1997. "Monte Carlo Evidence on Cointegration and Causation," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(2), pages 285-298, May.
    18. De Gregorio, Jose & Guidotti, Pablo E., 1995. "Financial development and economic growth," World Development, Elsevier, pages 433-448.
    19. Nicholas Apergis & Ioannis Filippidis & Claire Economidou, 2007. "Financial Deepening and Economic Growth Linkages: A Panel Data Analysis," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 143(1), pages 179-198, April.
    20. John Loizides & George Vamvoukas, 2005. "Government expenditure and economic growth: Evidence from trivariate causality testing," Journal of Applied Economics, Universidad del CEMA, vol. 8, pages 125-152, May.
    21. Nicholas Odhiambo, 2007. "Supply‐leading versus Demand‐following Hypothesis: Empirical Evidence from Three SSA Countries," African Development Review, African Development Bank, vol. 19(2), pages 257-280.
    22. H. W. Singer, 1998. "Growth, Development and Trade," Books, Edward Elgar Publishing, number 1358, April.
    23. Khalifa Al-Yousif, Yousif, 2002. "Financial development and economic growth: Another look at the evidence from developing countries," Review of Financial Economics, Elsevier, vol. 11(2), pages 131-150.
    24. Huang, Yongfu & Temple, Jonathan, 2005. "Does External Trade Promote Financial Development?," CEPR Discussion Papers 5150, C.E.P.R. Discussion Papers.
    25. Tsangyao Chang & Steven Caudill, 2005. "Financial development and economic growth: the case of Taiwan," Applied Economics, Taylor & Francis Journals, vol. 37(12), pages 1329-1335.
    26. Arestis, Philip & Demetriades, Panicos O, 1997. "Financial Development and Economic Growth: Assessing the Evidence," Economic Journal, Royal Economic Society, vol. 107(442), pages 783-799, May.
    27. Odhiambo, Nicholas M., 2008. "Financial depth, savings and economic growth in Kenya: A dynamic causal linkage," Economic Modelling, Elsevier, vol. 25(4), pages 704-713, July.
    28. Beck, Thorsten & Fuchs, Michael, 2004. "Structural issues in the Kenyan financial system: improving competition and access," Policy Research Working Paper Series 3363, The World Bank.
    29. Christopoulos, Dimitris K. & Tsionas, Efthymios G., 2004. "Financial development and economic growth: evidence from panel unit root and cointegration tests," Journal of Development Economics, Elsevier, vol. 73(1), pages 55-74, February.
    30. Toda, Hiro Y. & Yamamoto, Taku, 1995. "Statistical inference in vector autoregressions with possibly integrated processes," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 225-250.
    31. Rati Ram, 1999. "Financial development and economic growth: Additional evidence," Journal of Development Studies, Taylor & Francis Journals, vol. 35(4), pages 164-174.
    32. Beck, Thorsten, 2008. "The econometrics of finance and growth," Policy Research Working Paper Series 4608, The World Bank.
    33. Beck, Thorsten, 2002. "Financial development and international trade: Is there a link?," Journal of International Economics, Elsevier, vol. 57(1), pages 107-131, June.
    34. N M Odhiambo, 2008. "Financial Development in Kenya: a Dynamic Test of the Finance-led Growth Hypothesis," Economic Issues Journal Articles, Economic Issues, vol. 13(2), pages 21-36, September.
    35. Siong Hook Law, 2008. "Does a Country's Openness to Trade and Capital Accounts Lead to Financial Development? Evidence from Malaysia ," Asian Economic Journal, East Asian Economic Association, vol. 22(2), pages 161-177, June.
    Full references (including those not matched with items on IDEAS)

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:26:y:2009:i:6:p:1140-1146. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/inca/30411 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.