Impact of financial development on economic growth in Uganda

Abstract

This study provides the empirical findings on the relationship between financial development and economic growth in Uganda from 1980 to 2016. From a methodological perspective, the study used the Bivariate Autoregressive (VAR) framework especially the Granger-causality test and innovation accounting (impulse response functions and variance decomposition). Empirical results demonstrated both a short and a long-run relationship between both financial development and economic growth. For financial deepening, the causality runs from financial deepening to economic growth and for financial sophistication, the causality is bi-directional but positive. The study further seeks to verify the impact of financial sophistication and deepening on Real GDP of Uganda. The study results support the hypothesis by McKinnon-Shaw which actually suggests that removal of distortions in the financial sector stimulates economic growth.