FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH IN UGANDA (1985-2015)
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Date
2019-04
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Kampala International University
Abstract
The debate on the long-run relationship between financial development and economic growth has been comprehensively growing since 1980s in theoretical and empirical literature. The existing literature provides conflicting views of this relationship. For this reason, the purpose of this study is therefore to empirically investigate the direction of causality between finance and growth in the context of Uganda using World Development Indicators (WDI) data from 1985-2015. This study adopts the neoclassical growth model in the analysis of the relationship between financial development and economic growth. The study also used modern multivariate cointegration technique. The study results reveal the supply leading hypothesis to hold for the case of Uganda. The study results show that financial development has stimulated economic growth that the economy has been experiencing in the past decade. The results support the McKinnon-Shaw hypothesis, which suggests that removal of distortions in the financial sector stimulates economic growth. In Uganda, there have been financial sector reforms since 1992. These factors help to explain the positive relationship between financial development and economic growth in the country. The study also uses a dummy variable to examine the effect of financial sector reforms. The coefficient of the dummy variable is positive and significant, implying that the changes induced by the liberalization of the economy had a positive impact on real economic growth in Uganda. The results indicate that a number of other policy reforms which have been implemented largely fiscal and trade policy reforms have been equally responsible for the impressive growth rates. This therefore implies that financial sector development must be supplemented with other policies aimed at removing some structural bottlenecks that characterize developing economies, Uganda in particular. The results have great relevance in the monetary and overall policy formulation in Uganda. The contribution to knowledge is that as the causality between private credit by deposit money bank and other financial institutions to the GDP growth rate have long-run relationship in which the both variables are supplementary to each other; it is advisable for the decision makers of the country to exert an effort to enhance both variables for the benefit of the community at large.
Description
A RESEARCH THESIS SUBMITTED TO THE COLLEGE OF ECONOMICS AND MANAGEMENT IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF THE AWARD OF MASTER OF ECONOMIC POLICY AND PLANNING OF KAMPALA INTERNATIONAL
UNIVERSITY KAMPALA, UGANDA APRIL,
Keywords
FINANCIAL DEVELOPMENT, ECONOMIC GROWTH, Uganda