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2008 AEC - Financial Development - Economic Growth Nexus: Empirical Evidence from Uganda


This paper investigates the finance-growth nexus in Uganda during the period 1970- 2005. A generic growth model is estimated using modern multivariate cointegration technique developed in Johansen (1988) and applied in Johansen and Juselius (1990). This was complemented by Granger Causality test to establish whether financial development is supply-leading or demand-following. The study results reveal the supplyleading hypothesis to hold for the case of Uganda. The study results also show that financial development is a necessary but not a sufficient condition for stimulating economic growth that the economy has been experiencing in the past decade. 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 registered since 1992. 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.

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