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.