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Economic Growth and Financial Sector Development: Long-Run Structural Break Cointegration and Short-Run Equilibrium Relationships in the East African Community

Muwanga Sebunya Gertrude ()

International Journal of Applied Economics, Finance and Accounting, 2021, vol. 9, issue 2, 48-62

Abstract: The EAC countries in a bid to boost economic growth (RGDP) and reduce poverty in the region, implemented several financial sector reforms, however, empirical findings have indicated that financial development (FSD) can have a positive, negative or no effect on economic growth. This study investigated this relationship for four EAC countries including Uganda, Kenya, Burundi and Rwanda using individual country Gregory-Hansen-Quandt-Andrews-Muwanga (GHQAM) cointegration procedure based on OLS/ FMOLS estimations. The findings indicate that in the long-run: i). a cointegration relationship exists between financial development and economic growth but it has not been stable for the periods covered; and ii). the elasticity of economic growth to financial development was zero before and after the break for Uganda and Burundi but ranged between 0.000 - 0.3208 and between 0.2178 - 0.3063 for Kenya and Rwanda, respectively, implying an inelastic relationship for all four countries. In the short-run, RGDP did not adjust to changes in FSD in Burundi while 46.36%, 46.3% and 40.67% to 67.47% of the adjustment of the former to changes in the later occurred in the short-run in Rwanda, Uganda and Kenya, respectively. These results signal the need to review and enhance the transmission mechanisms through which financial development affects economic growth and put in place a favourable environment to ensure positive and elastic effects on economic growth.

Keywords: Regime shifts; Economic growth; Financial development; Elasticity; Cointegration. (search for similar items in EconPapers)
Date: 2021
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