The Contribution of Financial Sector Development for Economic Growth in East Africa

Abstract

The study empirically analyses the contribution of Financial Sector Development to Economic Growth in East Africa over the period 1975-2014. A five variable dynamic panel Fully Modified Ordinary Least Squares FMOLS is employed to estimate the short-run and long-run parameters.The fluctuations of Financial Sector and Economic Growth are mainly explained by their shocks in the long run and the proportion in the variance slightly decreases over time while the accumulated response of Economic Growth to Financial Sector increases. The gain of this study, therefore, provides the Supply and Demand Leading Hypotheses; means Financial Sector accelerates and augments the economic growth and the Economic Growth enhances the Development of Financial Sector. The implications drawn from this study are the reforms in the Financial Sector; inclusiveness of Financial System and effective vigorously pursued expansionary monetary policy, which directs the economy, could be a comprehensive beneficial to the study countries.