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

Authors

  • Muwanga Sebunya Gertrude Department of Policy and Development Economics, School of Economics, College of Business and Management, Makerere University, Uganda.

DOI:

https://doi.org/10.33094/8.2017.2021.92.48.62

Keywords:

Regime shifts, Economic growth, Financial development, Elasticity, Cointegration.

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.

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Published

02-03-2021

How to Cite

Gertrude, M. S. (2021). Economic Growth and Financial Sector Development: Long-Run Structural Break Cointegration and Short-Run Equilibrium Relationships in the East African Community. International Journal of Applied Economics, Finance and Accounting, 9(2), 48–62. https://doi.org/10.33094/8.2017.2021.92.48.62

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